Executive Summary

The UK is in the middle of a remarkable real income shock, as inflation tops 9 per cent, its highest since the early 1980s, and the Government has responded with over £30 billion of direct support for households. But we must also assess how households were positioned going into this crisis (and the Covid-19 pandemic before it), and look to the medium-term future – where this income hit only adds to the need for a sustained period of strong, progressive income growth. As our Economy 2030 Inquiry is exploring, the 2020s are an important decade in which the UK must grapple with numerous challenges and seek to improve living standards, particularly for low-to-middle income households. This report – the latest in our long-running annual series – therefore sets out the key lessons we should learn from historic trends in UK incomes as well as from comparisons with other countries. In work to follow later this year, we will assess the immediate future for household incomes, and discuss the Chancellor’s options in his autumn Budget.

Key Findings

• Between 1961 and 2004-05, typical household incomes for non-pensioners grew by 2.3 per cent a year on average. Between 2004-05 and 2019-20, however, that growth slowed to just 0.7 per cent. Even more starkly, the typical incomes of the poorest fifth of the population were no higher on the eve of the pandemic than they were back in 2004-05.
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• Across European countries, only households in Greece and Cyprus saw a worse performance between 2007 and 2018 than the UK. By 2018, typical incomes were notably higher than those in the UK in Ireland (by 6 per cent), France (10 per cent) and Germany (19 per cent).
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• Inequality has remained high. The ten most unequal years on record have all happened since the turn of the century, and five of them were between 2013-14 and 2019-20. Internationally, in a wide range of rich nations, the top 10 per cent’s share of total disposable income is considerably lower than it is in the UK: in Ireland the top 10 per cent’s share is 5 percentage points lower, and in Australia it is 4 percentage points lower.
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• Groups with the lowest typical incomes pre-Covid-19 included social and private renters (37 and 24 per cent below the overall median), children (20 per cent below in the case of under 5s) and single parents (35 per cent below). The richest groups include mortgagors (27 per cent above the overall median), couples without children (33 per cent), 55-to-60-year-olds (19 per cent) and those in the South East of England (12 per cent).
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• Historically, typical incomes, pay and productivity have generally moved in lockstep. And across countries, the correlation between levels of pay and household income is very strong: the UK lags internationally on hourly pay (adjusted for purchasing power) just as it does for household incomes. From 1971 to 2008, hourly productivity growth accounted for over 100 per cent of growth in GDP per capita, with average hours falling.
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• The proportion of working-age families with no household earnings fell by 6 percentage points between 1994-95 and 2019-20. This trend helped to keep household-level earnings inequality flat over the same period, in the face of rising earnings inequality among working families.
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• The lack of an automatic link between entitlement to benefits and earnings puts upwards pressure on inequality and relative poverty, and means there is no guarantee that the poorest will share in income growth. The basic unemployment benefit was equivalent to 28 per cent of average earnings in 1972-73, but this had halved to 14 per cent by 2019-20, and in 2022-23 is likely to average 13 per cent.
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• Although average direct tax rates are rising, the UK stands out compared to our international peers in how low direct tax rates are for most of the income distribution. Other taxes, such as Council Tax and VAT, have risen over time, though the latter also has a low effective rate compared to our peers.
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• Rents are typically a larger share of renters’ incomes in the UK than in most other rich nations. Across all households, between 2003-04 and 2008-09 the average ratio of housing costs to incomes rose from 16 to 19 per cent – which for an individual household is equivalent to a hit to incomes after housing costs of 4 per cent – but this has reversed between 2008-09 and 2019-20.
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• The UK has committed to progressive growth through the international Sustainable Development Goals. A practical interpretation of these would be to reduce the absolute poverty rate (after housing costs) to under half its 2015-16 level by 2029-30, and to increase the income share of the bottom 40 per cent (which has been fairly stable at around 17 per cent over the past three decades).

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