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The UK is facing two lost decades on living standards

The writer is a fellow at the Joseph Rowntree Foundation and a contributing editor at Prospect magazine

It is not quite true to say that we’ve never been here before. For most of human history, living standards did not advance in a way visible to the naked eye. Historians guesstimate English gross domestic product per head at £1,198 in 1448 and £1,236 in 1664, a cumulative advance of only 3 per cent over eight or nine generations. Sons and daughters tilled the soil, collected the firewood and took their chances with the elements in the same way as their parents had before them. Things slipped backwards almost as often as life got easier.

Andrew Bailey might be wishing he could take refuge in pre-industrial history. The governor of the Bank of England drew fire after he forecast that this year would bring the sharpest hit to post-tax incomes on record, tightened the squeeze on mortgaged households by raising interest rates, and then suggested to the BBC that he wanted to get inside the heads of workers to discourage them from pushing for pay awards that would keep pace with rocketing prices. The “painful” anti-inflationary “need”, he explained, was for a “moderation of wage rises”.

Bailey’s difficulty is that over the eight or nine generations that followed the industrial revolution the expectation that living standards would rise rather than fall became entrenched. Incremental advances worked a slow magic: with 2 per cent annual rises, incomes double every 35 years, and quadruple over a 70-year lifespan. Occasional hard times would put a rock in the road, but accelerated progress would follow. As the perks of the consumer society — from dishwashers to city-breaks — proliferated in previously unimaginable ways, every generation did better than the last, and the banished privations of elderly relatives became the stuff of family legend.

That was the world as we had come to know it until the 2000s. Then came the financial crisis, and a sudden drop in real wages. At first, it seemed like a bigger than average rock in the road, something we could steer around once the cancelled shifts of the recession gave way to overtime in the recovery. As the 2010s ground on, that faith began to falter as pay remained on the floor. Ahead of the 2015 election, plunging oil prices took the edge off, blunting the effectiveness of the “cost of living crisis” charge levelled by Ed Miliband’s Labour. But his analysis was premature rather than wrong. By 2017, fact-checkers were broadly confirming trade union claims about the worst decade for wages since the Napoleonic wars.

The picture has since moved too rapidly to read: a brief spell of improvement gave way to the wage-cutting chaos of Covid, and then a robust bounceback, which only last autumn emboldened Boris Johnson to boast that “after years of stagnation — more than a decade — wages are going up”. But in truth rising prices, especially for fuel, were already biting into pay packets. Now, with one immediate National Insurance hit pending, and another on employers, which is liable to be passed on to staff over the following years, Bailey’s dark prognosis is hard to dispute. We are no longer looking at one but two lost decades on living standards.

What to do? Well, on the evidence of the government’s scattergun compensation for rising fuel costs, their answer seems to be: panic. Interestingly, though, the experience of one of the few societies to have endured anything similar is that there is no need. After the 1980s, Japan went from being one of the world’s fastest growers to a society of permanent stagnation: through the Nineties and noughties economic advancement slowed to a crawl. And yet society did not break down, indeed for most of the past 30 years the traditionally dominant Liberal Democratic party has kept control of the premiership.

The roots of our own great stagnation lie in stalled productivity, something which — despite the bullish tone of this week’s prospectus for “levelling-up” less-productive regions — is easier to diagnose than treat. Smart investments can make a difference, and so potentially could institutional changes around wage bargaining. But not overnight.

The more urgent task is to target relief on the most pressing needs. An instrument to deliver that exists in the form of the social security system, a channel the government made scant use of this week. In a world of unstable prices, the peg between the safety net and inflation needs to be fixed. Currently it operates with a lag, rising only 0.5 per cent last April and it will inch up just 3.1 per cent this spring, with inflation set to be more than double that.

For the luckier among us, stalling living standards are a gloomy reality, but one we can take the time to address with care. Those facing a choice between dangerous cold and unsustainable debt do not have that luxury. For them, panic is inevitable, and there is no answer but emergency relief.

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