The UK has faced almost 10 years of falling living standards. Projections say poverty and inequality are on the rise. And there is still a huge hole in the public finances which limits, for now, the scope for public spending to bring solutions. So it is easy to be gloomy. But too often politicians sound as if they no longer believe that government can rise to these challenges.
This report shows there is hope. It presents the findings of a quantitative assessment of the prospects for living standards and inequality over the coming years, using new modelling based on projections from the Office for Budget Responsibility (OBR) and the Office for National Statistics (ONS). The research shows that plausible and affordable government intervention can make a massive difference to the living standards of typical households and to future levels of poverty. But it also reveals that inaction will lead to stagnant living standards and a huge rise in poverty and inequality.
The implications of 15 years of flat incomes for low income families are hard to contemplate. Stagnant incomes would mean there would be no chance of reducing the number of families who are really struggling to make ends meet. Emergency food banks would move from being a temporary phenomenon of the economic crisis to an entrenched feature of British life. And people in rented accommodation would see their living standards fall the most, as an ever higher slice of their incomes would have to go towards housing costs before any other bills were paid. Although this report focuses on statistical analysis, no one should be under any illusions of the human consequences of our projections.
But political choices rather than unstoppable economic forces will determine the extent of inequality in 2030. We know there will be more years of very difficult fiscal decisions for whoever is elected in May 2015. But in this study we have raised our eyes to the horizon and asked what could be achieved over 15 years, from the start of the 2015–2020 parliament. Small purposeful steps, year after year, can transform the prospects for low and middle income families. So politicians must make the fight against inequality a priority from the very start of the new parliament.
The report presents a strategy for boosting living standards, preventing inequality from rising and making significant inroads into the incidence poverty. The strategy begins with ‘predistribution’ interventions to improve market outcomes. These include measures to significantly increase employment, tackle low pay and reduce wage differentials. Our modelling shows that these reforms are important but they are not enough: they slow the pace at which inequality will grow, but no more.
The second stage of our strategy is to recycle the considerable fiscal gains arising from predistribution back to low and mid income families. Higher employment and better pay equates to increased tax receipts and reduced benefit payments. We found that recycling these gains back to families has a far greater indirect effect on household incomes than the direct effects of predistribution on market outcomes. Indeed our projections suggest that plausible improvements to employment and to low earnings could generate sufficient sums to make huge strides towards the eradication of child poverty.
Our modelling also reveals the price of inaction by demonstrating how unchanged policy is not neutral in its effect. For without a change of course, inequality will rise. If this happens the living standards of people in the bottom half of the income distribution will stagnate, while in the top half they will increase. So government action is needed just to prevent the gap from widening, let alone to reduce poverty and inequality.
Worse still, the next parliament could bring policies that accelerate the rise of inequality. For example, the Conservative party has proposed £7bn in tax cuts (targeted overwhelmingly at the top half of the income distribution) and £12bn of social security cuts (which will mainly affect the bottom half of the distribution). The Liberal Democrats have proposed cutting £4bn from social security and Labour have not ruled cuts out. In our modelling we have not considered any of the changes proposed after 2015 – our projection is based on policy as it now stands. But if inaction is bad, a new package of regressive policy interventions would be a whole lot worse.