Economic and employment growth alone will not be enough to reduce poverty levels

A strong economy can increase wages and employment but will not in itself reduce poverty. This new analysis, updating work from September 2024 with new Office for Budget Responsibility (OBR) and Bank of England forecasts, suggests that without additional action from the Government, poverty and deep poverty will remain broadly flat between January 2025 and January 2029, and may well increase unless economic growth is accompanied by employment growth. The picture for child poverty is equally bleak with no progress against the Government’s headline poverty measure under any scenario for Gross Domestic Product (GDP) or employment growth. This does differ by nation of the UK though, where the Scottish Government’s Child Payment and commitment to reverse the 2-child limit from 2026 may start to drive a diverging picture, with child poverty falling in Scotland while rising for the rest of the United Kingdom.

The 3 main scenarios we have looked at all focus on changes in poverty levels between January 2025 and January 2029, conditional on different growth assumptions. These take the OBR Economic and Fiscal Outlook forecasts as their inputs wherever possible (see Annex 1 for detailed source notes), and varies these to create a central scenario and 2 more positive scenarios, which are described below.

The main scenarios are:

• Central: this uses OBR’s final central forecasts for inflation, earnings, employment and housing costs, including policies introduced in the October Budget.
• Strong economy: this uses higher earnings and employment forecasts, a low interest rate and mortgage scenario, and central forecasts for inflation and rents.
• Very high employment and growth: This scenario is consistent with the Government’s target for UK GDP per capita growth being the highest amongst the G7 nations over the period, and the Government’s target for an 80% employment rate for people aged between 16 and 64. It uses the higher earnings growth forecast, a low interest rate and mortgage scenario, with central forecasts for inflation and rents.

We have also looked at one more negative scenario:

• Weak economy: this uses a forecast with higher inflation, lower earnings growth, lower employment and higher housing costs compared to the central scenario.

Positive and negative inputs into the scenarios are all based on published ranges in OBR, Bank of England and HM Treasury forecasts, and are detailed in Annex 1.

Note that these are modelled conditional scenarios. They present a series of necessarily simplified views of the future and are heavily reliant on the forecast variables that are available at the time of our research. They are therefore a guide to what might happen in the future without further policy changes, rather than a forecast. We do, however, believe this work is useful to consider the extent to which growth can tackle poverty and improve living standards, without further policy changes.

Our analysis suggests that without further policy changes, headline poverty (relative poverty, after housing costs using the usual 60% of median income poverty line) is likely to remain largely unaffected by economic growth. Poverty is likely to remain well above 14 million throughout the remainder of the 2020s. In a strong economy with employment for 16-64 year-olds at 80%, poverty is likely to be only around 200,000 lower compared with the central scenario, resting at around 14.6 million people in 2029. Without the significant employment rate boost in the very high employment and growth scenario, a strong economy is even more unlikely to reduce poverty. There is even a risk of a small rise compared to 2025, as incomes in the middle continue to pull away from the incomes of people lower down the income distribution, because of the higher contribution of earnings to their incomes (see Figure 1).

Without a deliberate shift in redistributive policy across housing, wider costs and incomes, business-as-usual economic growth in the UK is likely to benefit higher-income households more than lower-income ones, and the gap between the middle and the bottom – relative poverty – is likely to remain broadly unchanged at best. This means that, while a faster growing economy would see average incomes and living standards rise, the experience of people with low incomes in how they feel materially or socially excluded compared to everyone else is unlikely to change. Even when accompanied by very high employment, which does improve the living standards of lower-income households more, poverty and deep poverty remains broadly flat between January 2025 and January 2029. This analysis therefore shows the need for a specific policy focus on the living standards and economic security of lower-income households if poverty is to be reduced.

Model: this analysis uses the Family Resources Survey 2022/23 and the Institute for Public Policy Research (IPPR) tax and benefit model, version v02_73, which includes the withdrawal of the Winter Fuel Payment from winter 2024 and all other modellable policy changes as at the end of 2024. Population size and demographic characteristics (such as the age distribution) have been kept constant during the forecast period. All scenario analysis corresponds to January of the relevant year. This means poverty levels here cannot be directly compared to Department of Work and Pensions (DWP) poverty statistics which cover the whole of a financial year. Moving from a 2022/23 financial year base to a January 2023 base increases overall poverty by 400,000 people.

Variability: modelling these scenarios involved moving people in and out of work on a semi-random basis (by age). The changes to household incomes were therefore influenced by the individual circumstances of the people affected. This meant that over 5 model runs the poverty rate fluctuated by about 200,000 to 400,000 for each scenario. The results presented in this paper take an average of the 5 runs for each scenario.

Economic levers: the modelling makes changes to the following economic indices:

• inflation as measured by the Consumer Prices Index (CPI) (used for benefit uprating and the pension triple lock)
• employment rate
• average weekly earnings (used for projecting wages, self-employment income, the pension triple lock and investment/unearned income).

Housing costs: the modelling looks at:

• mortgage interest
• local authority rents
• registered social landlord rents
• private rented sector rents.

A further economic variable, GDP per capita, is considered in our assessment of the implications for growth for each scenario.

We have taken the forecasts in the OBR’s Economic and Fiscal Outlook report for October 2024 as the main source of our central, weak and strong economy conditional scenarios, assigning values to each economic variable for each of the 3 scenarios based on the best data sources we could find. A different methodology has been applied to the fourth very high growth economy, where we have looked at what the impact of an employment rate of 80% for people aged 16-64 would be, as well as its implications in terms of GDP per capita growth.

Central scenario

In our central scenario, the variables input into the model are from the following sources:

• CPI inflation: from the OBR’s Chart 2.10 in their October 2024 Economic and Fiscal Outlook report. By the end of the period, this is at the Bank of England target rate. Over the whole period, prices grow by around the same level as the median of independent forecasts published by HM Treasury, but slightly faster than an extrapolation of the Bank of England’s November 2024 Monetary Policy Report forecast.
• Employment: from the OBR’s Chart 2.12 in their October 2024 Economic and Fiscal Outlook report. The associated unemployment rate is slightly more optimistic than the median of independent forecasters and the Bank of England’s forecast.
• Earnings growth: from the OBR’s Chart 2.13 in their October 2024 Economic and Fiscal Outlook report. OBR earnings growth forecasts are somewhat lower than forecasts from independent forecasters.
• Mortgage interest payments growth: from the OBR’s Detailed Forecast for the Economy: Table 1.7 accompanying their October 2024 Economic and Fiscal Outlook report. This shows a falling rate of growth mortgage payments over the period, likely due to the composition of fixed terms in the market, as higher interest rates feed through to all mortgages.
• Growth in private rents: from the OBR’s Detailed Forecast for the Economy: Table 1.7 accompanying their October 2024 Economic and Fiscal Outlook report.
• Growth in local authority and Registered Social Landlords (RSL) rents: from OBR’s Detailed Forecast for the Economy: Table 1.19 accompanying their October 2024 Economic and Fiscal Outlook report.

Strong economy scenario

In our strong economy scenario, the variables input into the model are from the following sources:

• CPI inflation: same as central scenario.
• Employment: this applies the uncertainty around the Bank of England unemployment forecasts to OBR central estimates of unemployment, keeping inactivity rates at the OBR’s central estimate. We have done this because the OBR does not publish uncertainty levels around this projection. A value has been chosen such that the implied probability of the outturn being lower than this is 80%. Employment reaches 61% of the adult population by January 2029, which is still below its pre-pandemic peak.
• Earnings growth: this is the highest forecast of any of the independent forecasters in HM Treasury’s November issue of Forecasts for the UK Economy: A Comparison of Independent Forecasts.
• Mortgage interest payments growth: in this scenario, interest rates have fallen faster than in the central scenario, with mortgage rates being reduced by the difference between the October 2024 forecast and the lowest forecast value since March forecast as shown in Chart 2.1 of OBR’s October 2024 Economic and Fiscal Outlook report.
• Growth in private rents: same as central scenario.
• Growth in local authority and RSL rents: same as central scenario.

Very high employment and growth scenario

In our very high employment and growth scenario, the variables input into the model are from the following sources:

• CPI inflation: same as central scenario.
• Employment: this assumes that Labour’s 80% 16-64 employment rate ambition is met in January 2029. Note, this implies an overall employment rate of around 63.7%, around 2ppt higher than the pre-pandemic peak.
• Earnings growth: same as strong economy scenario.
• Mortgage interest payments growth: same as central scenario.
• Growth in private rents: same as central scenario.
• Growth in local authority and RSL rents: same as central scenario.

Weak economy scenario

• CPI inflation: this uses the OBR’s uncertainty estimates for CPI inflation as shown in Chart 2.10 of the OBR’s Economic and Fiscal Outlook for October 2024. A value has been chosen such that the probability of the outturn being lower than this is 80%.
• Employment: this applies the uncertainty around the Bank of England unemployment forecasts to OBR central estimates of unemployment, keeping inactivity rates as at the OBR’s central estimate. A value has been chosen such that the implied probability of the outturn being higher than this is 80%. Employment falls to 58.8% of the adult population by January 2029, similar to levels seen during the Great Recession or during the coronavirus pandemic.
• Earnings growth: we have used the minimum of the lowest independent forecaster and OBR in each quarter.
• Mortgage interest payments growth: we have increased the mortgage interest payments growth in the OBR’s Detailed Forecast for the Economy, Table 1.7, by the difference between the October 2024 Bank Rate forecast and the highest forecast over the period as shown in Chart 2.1 of the OBR’s Economic and Fiscal Outlook for October 2024.
• Growth in private rents: we have increased the private rents growth in the OBR’s Detailed Forecast for the Economy, Table 1.7, by the difference between the central and high inflation rates shown in Chart 2.10 of the OBR’s Economic and Fiscal Outlook for October 2024. A value has been chosen such that the probability of the outturn being lower than this is 80%.
• Growth in local authority and RSL rents: we have increased the social rents growth in OBR’s Detailed Forecast for the Economy, Table 1.19, by the difference between the central and high inflation rate shown in Chart 2.10 of OBR’s Economic and Fiscal Outlook for October 2024. A value has been chosen such that the probability of the outturn being lower than this is 80%.

To examine what these scenarios would imply in terms of real GDP per capita growth, we have looked at what the implied growth would be using the employment and earnings growth scenarios, holding the labour share constant as forecast by Table 1.6 of the OBR’s Detailed Forecast for the Economy.

Using OBR forecasts for the GDP deflator, real GDP per capita growth in the central scenario averages 1.3% per year under the central scenario (cumulative growth of 5.1% over the 4 years), 3.4% per year under the strong growth scenario, and 4.1% per year in the very high employment and growth scenario. Using International Monetary Fund forecasts for the GDP deflator, the highest rates of per capita growth in the G7 over the period will be in the United States (real GDP per capita growth of 1.6% per year, cumulative growth of 6.8%), so either of the stronger growth scenarios would mean the UK’s GDP per capita growth would very likely be the highest in the G7, even if the UK labour share increases, as would be more likely in each of these scenarios. We have also assumed no interaction between increased employment and higher wage growth and changes in inflation or the GDP deflator, which again is likely to occur, but again is unlikely to change our conclusions about the highest GDP growth in the G7.