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Cost of living

Economic growth and poverty

Analysis suggests that without additional actions, economic growth will not be enough to reduce poverty levels.

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11 minutes

1. Introduction

A strong economy can increase wages and employment but will not in itself reduce poverty. Analysis suggests that without additional actions, poverty and deep poverty will remain broadly flat between late 2024 and the end of 2028, even if the UK has the highest gross domestic product (GDP) per capita growth in the Group of Seven (G7).

2. Scenarios we are looking at

The 3 main scenarios we have looked at all focus on changes in poverty levels between October 2024 and October 2028, conditional on different growth assumptions. These take the Office for Budget Responsibility’s (OBR) Economic and fiscal outlook forecasts as their inputs wherever possible (see Annex 1 for detailed source notes), varying these to create a central and 2 more positive scenarios.

The main scenarios are:

  • Central: this uses OBR’s central forecasts for inflation, earnings, employment and housing costs.
  • Strong economy: this uses higher earnings and employment forecasts, and central forecasts for inflation and housing costs.
  • Very high employment and growth: this uses the higher earnings growth forecast, with central forecasts for inflation and housing costs, and assumes Labour’s ambition of an 80% working-age employment rate is met in 2028. This scenario is also consistent with UK GDP per capita growth being the highest amongst the G7 nations over the same period, in line with the Government’s primary macroeconomic objective, as is the strong economy scenario.

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.

Note that these are modelled conditional scenarios. They present a necessarily simplified view of the future, are heavily reliant on the forecast variables that are entered into the model and are 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.

3. Economic growth and poverty

Our analysis suggests that without policy changes, poverty (relative poverty, after housing costs using the usual 60% of median income poverty line) is likely to remain largely unaffected by economic growth. In a strong economy with working-age employment at 80%, poverty is likely to drop by only around 100,000 to 200,000 people by 2028 compared to the central scenario, remaining at around 14.5 million in total. 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 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).

A similar picture is seen for deep poverty, which uses a poverty line set at 50% of median household income, adjusted for family size and composition. This sees small increases in both the central and high growth scenarios, and poverty unchanged in the very high employment and growth scenario.

Poverty is made up of a higher proportion of pensioners and a lower proportion of working-age individuals in the very high employment and growth scenario compared to the central scenario. This is expected given employment increases predominantly benefit working-age adults. The child poverty picture is similar to the overall poverty picture, with little difference across the scenarios (see figure 2). It is at the highest level in the strong economy scenario.

Behind this broadly static picture across the 3 scenarios are differing distributions of income growth. As expected, there is better income growth in the 2 more positive scenarios. The central and strong economy scenarios both see inequality rising slightly across household income deciles, with higher income deciles mostly seeing higher income growth, albeit the latter sees real income rise significantly across the entire distribution.

Both the weak and the very high employment and growth scenarios show an inequality-lessening trend, with lower deciles seeing higher income growth than higher deciles. The experiences of these 2 scenarios are very different, though: in the weak economy scenario, the top 6 deciles see falling incomes even in cash terms, whereas in the very high employment and growth scenario, all deciles see an average growth rate of over 4% per year (see figure 3).

(Note: Decile 1 is excluded from this chart, as it is strongly affected by the employment part of the forecast, with very large income growth in that decile in the 2 positive scenarios, a similar growth to decile 2 in the central scenario, and a large reduction in income in the weak economy scenario.)

For absolute poverty to fall, it is necessary for incomes in low-income households to grow faster than inflation. The higher the growth, the larger the reduction. In the weak economy scenario, inflation averages 3.8% a year over the period October 2024 to October 2028, so all incomes are falling and we would expect rising absolute poverty. In the other scenarios, inflation averages 1.8%, so we would expect absolute poverty to fall under the very high employment and growth scenario and the strong economy scenario, and possibly to rise slightly under the central scenario.

4. Conclusion

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. This means that while a growing economy will see average incomes and living standards rise, the level of material and social exclusion for those on low incomes compared to everyone else is unlikely to change. Even when accompanied by very high employment, which does benefit lower-income households more, poverty and deep poverty remains broadly flat between October 2024 and October 2028. 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.

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