Placing households at the centre of the economy

The UK is on course for a second lost decade in living standards in a row. Post tax earnings today (Q1 2024) are £1,870 a year (Q1 2024 prices) lower for the average working family than they were in Q1 2021. If current economic forecasts hold, they will remain £1,340 lower by Q1 2029. Meanwhile, the cost of a basket of essential goods and services (excluding housing) for the average family is currently £270 a year more expensive (Q1 2024 prices) than it was at the beginning of 2021, and although this is expected to improve over the coming years, essentials will remain less affordable relative to post tax earnings until 2028.

This paper sets out unprecedented detail into what the latest OBR forecasts being handed to the Chancellor ahead of the March Budget may mean for individual families. The approach uses national surveys, administrative data and the latest macroeconomic forecasts to produce micro-simulated effects at the household level, taking into account changes in the economy and policy across time. The work is also supplemented with new polling analysis which sheds light on what the public is most concerned about with regards to the economy, and the extent to which they hold government responsible.

For households, the economic outlook is bleak. The modelled implications for families also map closely onto what the public are currently most worried about. Specifically, we find that:

• The cost of a basket of essential goods and services for the average family is currently £270 a year more expensive today (Q1 2024) than it was at the beginning of 2021 and worry about the cost of essentials is the number one economic concern for the public.
• Relative to wider prices in the economy, the price of essentials is set to fall in real terms over the remainder of the decade to below 2021 levels. But because household post-tax earnings and benefits will remain below 2021 levels for the entirety of the 2020s after adjusting for inflation, the affordability of essentials for the average family will remain below 2021 levels for several years to come. The exceptionally weak recovery in post-tax earnings is partly a function of wider economic stagnation and partly a consequence of rising taxes on labour income.
• Housing costs are rising especially fast relative to both earnings and wider prices, and by the beginning of 2029 the average family will have seen their housing costs rise by nearly £1700 a year in real terms compared with the beginning of 2021. When excluding those who own their home outright, our polling also found that more people rank housing as a top concern than the NHS.
• While family finances are being squeezed, public services also fail to escape this second decade of stagnation. We find that real terms annual spending per head on the NHS is not set to recover 2022/23 levels until 2026/27, but over the same period spending on services outside the NHS is projected to still be £430 lower (2023/24 prices) by 2026/27. This is caused by planned cuts to public spending that are effectively being used to pay for tax cuts, despite a far higher proportion of the public being ‘very worried’ or ‘fairly worried’ about funding for the NHS (76%) and non-NHS public services (71%), compared with concern for tax on earnings (44%).

Without a decisive intervention from policy makers, the 2020s are set to be a second decade without a recovery in living standards. In fact, by the end of the 2020s, many families will be and feel poorer than they did at the start.  But this could be turned around with the right political will. There is a desperate need for immediate measures to support living standards at the coming Budget. But beyond that, the country must start to build the foundations for a much stronger social settlement that can provide proper economic security to families both now and for the long-term.

This should start with a commitment to an Essentials Guarantee in Universal Credit, to ensure everyone has a protected minimum amount of support to afford life’s essentials. It would also mean reform to the housing market to ensure more affordable and secure tenures are available where they are needed most. It would mean a redesign of employment services with an emphasis away from monitoring and compliance and towards engagement and supporting people back into the right type of work. And finally, a rethink of our care infrastructure so that parents have access to the right kind of childcare that allows them to work if they want to, as well as proper financial support for people who need to temporarily step away from work to help care for a loved one.

In this current moment, politicians of all parties should be prioritising a sustained recovery in living standards for people who need it most, and setting out how they will rebuild the kind of lasting economic security that can prevent current levels of suffering from ever happening again. It is perhaps an ambitious agenda, but given the level and urgency of need, anything short of this on the 6 March should be considered a failure.

Erratum 

Following the original publication of this report, a model parameter error and computation error were discovered which affected the findings for post-tax earnings and per capita public spending on the NHS and non-NHS public services. This was corrected in the briefing on 6 March 2024. The correction does not affect the narrative or conclusions and all other figures in this report remain unchanged.

Like a grim game of ‘higher or lower’, February was the month that confirmed whether the UK economy had already entered a technical recession. The answer was it had (ONS, 2024a), but this should not have come as a surprise. After adjusting for population growth, the economy had already failed to grow for nearly two years (ONS, 2024a).

In terms of average living standards, that means the country has been in recession since the start of 2022. But for millions of people who have not even seen their living standards move with the average, the pain has been far, far longer in the making. Long before aggregate statistics caught up with the country’s predicament earlier this month, much of the damage to people’s lives had already been done. The latest poverty estimates put more than 14 million people living below the threshold, including more than 4 million children (JRF, 2024). At least 7.3 million families are going without essentials, such as sufficient food, basic toiletries and hot water (Stirling et al., 2023). And the latest estimates showed that nearly 4 million people experienced destitution in 2022, meaning they were unable to meet the basic physical needs of staying warm, dry, clean and fed (Fitzpatrick et al., 2023).

But irrespective of where people are on the income distribution, families across the country are feeling the squeeze from three sides: high and rising prices that are still yet to settle at their 2% target (ONS, 2024b); elevated interest rates that are still feeding through to mortgages and loans (Bank of England); and a precarious labour market, with jobs still at risk as spending and investment in the wider economy continues to slow.

This is also not a one off. It follows an accumulation of economic pain across a decade or more. Real earnings today are barely above those in 2005, and are not set to recover 2008 levels until 2028 (Resolution Foundation, 2023). Since 2010, only the richest 5% of households have seen their real income grow well beyond 10% (Corlett, 2023). Investment in the UK’s future – both from the private and public sector – has lagged other advanced economies for the entire century so far (World Bank). And over half a million more people are currently out of work due to long-term health issues compared with the pre-Covid norm (Institute for Employment Studies, 2024).

It is against this backdrop of economic insecurity – both at the level of households but also the country as a whole – that the Government will deliver its 2024 Budget on the 6 March. But now, less than 12 months out from an election, it will also be these issues that condition the economic reality for voters when they finally go to the polls.

This briefing

The ‘lived experience’ of an economy is often talked about but seldom pinned down. In a year when the economic cycle and political cycle appear to each be at an inflection point at the same time, JRF is building a new programme of work with the goal of better understanding both how macroeconomic trends are impacting families from across society, but also how individuals anticipate the economy will affect their lives, and who they hold responsible for the consequences.

This work involves a combination of bespoke polling analysis alongside new microsimulation modelling that converts macroeconomic forecasts into estimated household-level effects. Each set of analysis, the polling and the modelling, examine 4 routes through which the direct economic resources of families can be affected - personal income, the price of goods and services, taxation, and public services. These 4 areas are in turn broken down into a total of 11 sub categories, as set out in Table 1 below.

We used the same categories to explore both public preferences and opinions as well as modelled economic impacts. On the polling side, we worked with YouGov to ask a UK representative sample of 4,737 people a number of questions, including to what extent they are worried about their personal circumstances over the next 12 months with respect to each category, and to what extent they hold government responsible for these areas of economic resource. The survey took place 1-5 February, and a full description of our methodology can be found in Appendix 1.

On the modelling side, we used a mixture of microsimulation approaches (including making use of IPPR tax-benefit model) and data sources (including national population surveys, government administrative data and official macroeconomic forecasts). We created a modelled time series for each of the categories in Table 1. Outside of our analysis on public services, the modelling is conducted at the level of households, taking into account both macroeconomic variables such as earnings growth, inflation and interest rates as well as policy variables such the schedules for tax and benefits. Much of this modelling allows for detailed distributional presentations of the data, including by income or household demographics. A full description of our methodology can be found in Appendix 2.

The polling shows that the top concerns for the public are the cost of essentials, public services (both the NHS and non-NHS services respectively) and housing (see Figures 1 and 2 below) and these findings are remarkably consistent across different sections of society.

The current moment is one of an enduring living standards crisis. Material hardship is already at unprecedented levels, and high interest rates and labour market fragility continue to add further pressure. The fact this is the economic backdrop in an election year only makes it more dangerous. Between now and when the public go to the polls, politicians will naturally place a higher premium on electoral calculations than on lasting solutions to what is a series of national crises.

For the current Government, that likely means a continued focus on tax cuts. Observed behaviour would suggest this is unlikely to be done in a way that is well targeted, either in terms of addressing inequities in tax treatment between labour income and capital income, or in terms of channelling support through the tax system to where it is needed most to address the cost of living crisis. In truth, outside of taper rates in the benefit system, the structure of the UK tax system is not conducive to distributing support efficiently to people in hardship: the more in need you are of support, the less tax (if any) you are likely to be paying on your financial transactions. Worse still, observed behaviour (as well as stated intention) tells us that the Government is willing to effectively pay for further tax cuts by putting public services on an even less sustainable footing. To paraphrase the chair of the Office for Budget Responsibility, it is true that much of these spending cuts are likely to be a ‘fiction’, given they are undeliverable in practice (The Guardian, 2023). But even unrealistic plans today can set the course for tomorrow.

For the opposition, defending a large polling lead makes them less  likely to attempt to create new momentum on policy solutions – from benefit adequacy, to service delivery, or to market reform. That means precious time and oxygen are lost to the ideas debate, and with it the impetus and pressure for immediate and effective action. We can ill afford this as a nation. Inaction now will come at a high price for people living at the sharp end of the crisis, both today and in the future.

Optimism should come from the fact that many of these challenges are ultimately political in nature, as opposed to insurmountable economic realities. With the right political will, they could be turned around at the coming Budget. Such a Budget would need to have two clear priorities.[i]

First, there is a need to ramp up immediate targeted welfare for families, through existing channels of support. This should include things like: a commitment to retaining and strengthening the Household Support Fund, enabling households to afford their housing costs by ensuring Local Housing Allowance and Support for Mortgage Interest are adequate and work as intended and perhaps most important of all, protecting spending per head on public services in real-terms.

Second, we must start to build the foundations for a much stronger social settlement that can provide proper economic security to families both now and for the long-term. This would mean rejuvenated effort and attention from all political parties on areas like strengthening Universal Credit (UC). This should start with commitment to an Essentials Guarantee in UC, to ensure everyone has a protected minimum amount of support to afford life’s essentials. It would also mean reform to the housing market to ensure more affordable and secure tenures are available where they are needed most. It would mean a redesign of employment services with an emphasis away from monitoring and compliance and towards engagement and supporting people back into the right type of work. And finally, a rethink of our care infrastructure so that parents have access to the right kind of childcare that allows them to work if they want to, as well as proper financial support for people who need to temporarily step away from work to help care for a loved one.

Focusing political energy and policy innovation at lasting solutions is needed now to prevent the situation getting worse. Government needs to chart a course for a sustained recovery in living standards for people who need it most, and to rebuild the kind of lasting economic security in the UK that can prevent such levels of suffering from ever happening again. It is perhaps an ambitious agenda, but given the level and urgency of need, anything short of this on the 6 March should be considered a failure.

Further detail on polling methodology

We commissioned public attitudes polling from YouGov. All public attitudes figures, unless otherwise stated, are from YouGov Plc. The total sample size was 4,737 UK adults. Field work was undertaken between 1-5 February 2024. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+). The analysis of these figures is JRF’s own.

The questions asked were:

1. Which of the following, if any, do you think are the most important issues facing the UK today? Please rank up to 3:

• health
• immigration and asylum
• crime
• the economy
• tax
• pensions
• education
• family life and childcare
• housing
• the environment
• Britain leaving the EU
• transport
• welfare benefits
• defence and security.

2. Thinking about your personal circumstances over the next 12 months, how worried are you, if at all, about each of the following:

• the cost of your housing - rent, mortgage or council tax
• the price of essentials other than housing - food, home heating, basic household goods, utility bills
• the price of non-essentials - meals out, holidays, activities
• how much tax you pay on things you buy - VAT, alcohol duty, fuel duty
• your income from work before tax - your annual salary or your hourly pay
• how much tax you pay on earnings from work - income tax, national insurance
• your income from benefits - universal credit, state pensions
• your income before tax from other sources - private pensions, rental income, capital gains
• how much tax you pay on your investments and profits - capital gains tax, corporation tax and inheritance tax
• the amount of funding for the NHS
• the amount of funding for other public services e.g. police, education, adult social care, refuse collection.

Response options:

• very worried
• fairly worried
• not very worried
• not at all worried
• not applicable
• don’t know.

3. Thinking again about your personal circumstances, which of the following are you most concerned about in the next 12 months? Please select up to 3:

• the cost of your housing - rent, mortgage or council tax
• the price of essentials other than housing - food, home heating, basic household goods, utility bills
• the price of non-essentials - meals out, holidays, activities
• how much tax you pay on things you buy - VAT, alcohol duty, fuel duty
• your income from work before tax - your annual salary or your hourly pay
• how much tax you pay on earnings from work - income tax, national insurance
• your income from benefits - universal credit, state pensions
• your income before tax from other sources - private pensions, rental income, capital gains
• how much tax you pay on your investments and profits - capital gains tax, corporation tax and inheritance tax
• the amount of funding for the NHS
• the amount of funding for other public services - police, education, adult social care, refuse collection.

4. How much responsibility, if any, do you think the UK government has for making changes in each of the following areas:

• the cost of your housing - rent, mortgage or council tax
• the price of essentials other than housing - food, home heating, basic household goods, utility bills
• the price of non-essentials - meals out, holidays, activities
• how much tax you pay on things you buy - VAT, alcohol duty, fuel duty
• your income from work before tax - your annual salary or your hourly pay
• how much tax you pay on earnings from work - income tax, national insurance
• your income from benefits - universal credit, state pensions
• your income before tax from other sources - private pensions, rental income, capital gains
• how much tax you pay on your investments and profits - capital gains tax, corporation tax and inheritance tax
• the amount of funding for the NHS
• the amount of funding for other public services - police, education, adult social care, refuse collection.

Response options:

• complete responsibility
• most of the responsibility
• some of the responsibility
• no responsibility at all
• don’t know.

Further detail on modelling methodology

The modelling analysis in this report uses three main methodologies

• Method 1 (income tax and housing) – forecasts generated using 2021/22 survey data (FRS) and the IPPR Tax-Benefit Model.
• Method 2 (essential and non-essential household spending) – forecasts generated using 2021/22 survey data (LCF) combined with OBR data on drivers of inflation.
• Method 3 (NHS and public services funding) – forecasts taken from HMT, OBR and using ONS population projection data.

Notes on Method 1

This analysis uses the Family Resources Survey (2021/22) and the IPPR Tax-Benefit Model to project household income, housing, and tax expenditure for February of each forecast year. The model takes the base survey data to a given month (February in this instance) and then applies inflation and the known or anticipated tax and benefit policy regimes to project household incomes and tax liabilities in future years.

The IPPR Tax-Benefit Model uses OBR projections of CPI and AWE to uprate 2021/22 survey data to future years. At the time of publishing, the latest OBR estimates of these were published in November 2023. To bring them further up to date we calculated the ratio difference between the Bank of England’s November and February forecasts, and applied the same ratio to the OBR forecast.

All projected household income and expenditure is converted into 2024 Q1 prices (unless explicitly stated otherwise) for which we use the same adjusted CPI.

Notes on Method 2

This analysis starts with the Living Costs and Food survey (2021/22) where we look at spend on essentials and non-essentials for that year, with essential categories matching up those in JRF and the Trussell Trust’s campaign for an Essentials Guarantee in Universal Credit. We then apply the relevant published CPI sub-indices to the essentials costs and use the residual from the combination of this and rents to deduce inflation in non-essentials. This allows us to look at price changes for 2021/22 to the latest published data, covering January 2024. To project these values forward we use OBR analysis of which components drive changes in inflation, as shown in Chart 2.4 of their November 2023 Economic and Fiscal Outlook (Office for Budget Responsibility, 2023).

Because we have based our initial spending estimates on Living Costs and Food figures and inconsistencies between the share of essential and non-essential spend on the LCF and those parts of the CPI index making up those categories, weighted changes in spend on essentials, non-essentials and rents derived in this way will differ from overall forecast CPI.

Note also that our recommended Standard Allowance benefit amounts are based on separate calculations looking mainly at expenditure of singles and couples without children at the bottom of the income distribution, rather than overall averages presented here. Movements in the price of essentials in this paper are indicative of likely trends in the Essentials Guarantee level going forward, but will not match it exactly.

Notes on Method 3

We use HMT’s outturn and plans for day-to-day spending by departments (resource departmental expenditure limits, RDEL) published in the Autumn Statement 2022 and 2023 which splits NHS expenditure from other public services. We then apply the published assumption of an annual 3.6% increase in NHS funding during the forecast period, and derive funding of other public services from the OBR’s forecast for RDEL from November 2023. We convert total expenditure to a per capita annual amount by applying the ONS’s latest population forecast.

We start our projections from 2022/23 in order to reduce the influence of the additional covid spending in both the NHS and other public services in 2020/21 and 2021/22.

Funding for the NHS and public services is taken to 2023/24 prices using the OBR’s GDP deflator index from November 2023.

Notes on categories

Income from work is any income earned through employment including self-employment. In the period between March 2020 and September 2021 when some workers were furloughed, total earnings reflect the actual money they received, not their original salaries, and income from the furlough scheme is treated as earnings. Some workers were still furloughed during  the FRS survey data collection period, and these workers have been ‘unfurloughed’ in the model for future forecast periods.

Other income is predominantly made up of income from dividends, savings interest, and private pensions but also includes income from a range of other sources including (but not limited to) royalties, child maintenance, grants, private insurance payments, and statutory pay. A full list of categories is available on request.

Income Tax is calculated for each household and then separated into ‘earnings tax’ and ‘other tax’ based on the following criteria:

• Other tax is any tax paid on income treated by the dividend or savings tax thresholds and allowances, plus any other income tax paid by non-earning households. 
• Earnings tax is any income tax paid by households with employee or self-employment income, excluding dividend or savings tax.

This means that some income tax will be allocated incorrectly (for example, working households that contain pensioners, will have any tax paid on private pensions allocated to ‘earnings tax’). Our hope is to improve on this methodology in future data releases in order to reduce the level of misallocation.

Housing costs include rent, mortgage payments, council tax, water payments, ground rents and service charges. For some of the analysis we have excluded households who own their housing outright and the small number who are classified as ‘rent free’ from the calculated average. It is explicit in the report where we have done this. Where we have calculated housing costs as a proportion of income, we take income as unequivalised household income before housing costs are subtracted. We base our deciles on equivalised household income after housing costs.

Income from benefits includes all cash payments received directly to households from local or national government. This includes means-tested benefits (e.g. Universal Credit), non-means tested benefits (e.g. Personal Independence Allowance, Child Benefit, Winter Fuel Allowance), the state pension, and additional ‘one off’ payments (the cost of living payments). A notable exclusion is the  £400 energy payment made to all households in 2022/23. Wage-supplements made via the furlough scheme in 2021 have been included in the ‘earned income’ category.

Expenditure on essentials includes items we consider to be non-negotiable household spending (except housing costs). These include food, utilities, clothing, household goods, personal care, banking and insurance, transport, and communications. While the categories fit the criteria of ‘essential’, we don’t attempt to make any judgement on spending choices within those categories. For example, while food is an essential category of expenditure, we don’t claim that a household’s weekly spend on food was all strictly essential. For more information on JRF and the Trussell Trust’s essentials basket see Guarantee our Essentials: reforming Universal Credit to ensure we can all afford the essentials in hard times (Joseph Rowntree Foundation and Trussell Trust, 2024).

Expenditure on other ‘non-essential’ items is calculated by removing housing and essential expenditure from total household spending. Inevitably for some households this category will include expenditure they deem to be ‘essential’.

Funding for NHS and other Public Services includes all expenditure (excluding depreciation).

Note on data sources

Family Resources Survey 2021/22: Housing, Earnings, Other income, Income Tax, Benefits

Living Costs and Food Survey 2021/22: Cost of essentials and non-essentials

NHS and other Public Services funding uses:

• Table 3.4 - OBR Autumn 2023 Economic and fiscal outlook supplementary tables: expenditure
• Table 2.1 - HMT (November 2023) Autumn Statement 2023
• Table 2.1 - HMT (November 2022) Autumn Statement 2022 ONS population projections

(ONS, 2024c)

Bank of England Bank Rate history and data | Bank of England Database

Corlett, A (2023) The Living Standards Outlook - Summer 2023 Update

Department for Energy Security and Net Zero (2024) Energy Price Guarantee

Fitzpatrick, S. Bramley, G. Blenkinsopp, J. Wood, J. Sosenko, F. Littlewood, M. Johnsen, S. Watts, B. Treanor, M. McIntyre, J (2020) Destitution in the UK 2020

HM Treasury (2023) Autumn Statement 2023

House of Commons Library (2022a) September 2022 fiscal statement: A summary

House of Commons Library (2022b) Health and Social Care Levy (Repeal) Bill 2022-23

Institute for Employment Studies (2024) Labour Market Statistics, February 2024

Joseph Rowntree Foundation (2024) UK Poverty 2024 

Joseph Rowntree Foundation and Trussell Trust (2024) Guarantee our Essentials: reforming Universal Credit to ensure we can all afford the essentials in hard times

OECD Revenue Statistics - OECD countries: Comparative tables

Office for Budget Responsibility (2022) May 2022 cost of living support package

Office for Budget Responsibility (2023) Economic and fiscal outlook – November 2023

ONS (2023) Classification review of the Energy Price Guarantee Pre-Payment Meter Discount

ONS (2024a) GDP first quarterly estimate, UK: October to December 2023

ONS (2024b) CPIH ANNUAL RATE 00: ALL ITEMS 2015=100

ONS (2024c) National population projections: 2021-based interim

Resolution Foundation (2023) A pre-election Statement

Stirling, A. Johnson-Hunter, M. Earwaker, R. (2023). Autumn Statement 2023: Addressing an evolving crisis

The Guardian (2023) Head of OBR says lack of budget details led to ‘work of fiction’ forecasts last year | Tax and spending | The Guardian

The World Bank World Development Indicators

[1] Some of the policy directions referred to here speak to the UK Government in their role as it relates to England only. Clearly it will be for the devolved administrations in Wales, Northern Ireland and Scotland to react, within their powers, to public demand for change in areas like housing, care and local crisis support.