Growing inequality across Britain has left millions of families exposed to the cost-of-living crisis

Today, the Office for National Statistics (ONS) published their data on household incomes and inequality for 2021-22; this is the first source of official data on household incomes for that year. 2021-22 was an eventful year. It began with the UK emerging out of major restrictions on everyday life, but by October 2021, all Covid-19 pandemic support measures had come to an end. Inflation began to rise towards the end of 2021 before the invasion of Ukraine in February 2022 caused energy prices and inflation to skyrocket.

Median incomes fell slightly

Median incomes for non-retired households in 2021-22 were slightly lower than in 2020-21 in real terms, falling by 0.3 per cent, or around £100, as the chart below shows. What is hidden by these annual averages is that it was a year of two halves: in the first half of the year, many workers were protected from facing unemployment by the furlough scheme (1.1 million workers were still furloughed at the end of the scheme), and low-income households had their incomes boosted by the £20 a week addition to Universal Credit. Both these measures were withdrawn in October 2021, just as the rising cost of living started to put pressure on family budgets.

But growth looked very different across the distribution, with low-income households seeing incomes fall, and incomes rising at the top of the income distribution

But the small change in median income hides a clear pattern across the distribution. As the chart below shows, real-terms incomes among low-income households fell in 2021-22, by 4 per cent, or around £600. Although the Universal Credit taper rate was reduced from 63 per cent to 55 per cent in December 2021, and work allowances were increased by £500 a year, these changes only benefitted in-work households receiving benefits. Previous Resolution Foundation analysis has shown that three-quarters of households receiving Universal Credit were worse off as a result of these combined changes. However, ONS data shows that it is change in original income that is driving a larger proportion of the disposable income change for the bottom of the income distribution, with original income and cash benefits driving 2.5 percentage points and 1.7 percentage points respectively of the mean equivalised disposable income change for the bottom income quintile.

But, while incomes fell at the bottom of the distribution, higher-income households saw growing incomes. This can be attributed to rising income from earnings: according to the ONS, the richest fifth saw a 7.8 per cent increase in wages, while the poorest fifth saw a 7.5 per cent fall in wages.

This means that, in real-terms, disposable incomes for the poorest fifth of households in 2021-22 are set to be essentially the same as they were in 2004-05, 17 years earlier. Zero growth in living standards for the poorest households over 17 years is clearly not evidence of a successful economic strategy that delivers economic growth and reduces income inequality.

Inequality rose following the removal of pandemic support

During the first year of the pandemic, inequality as measured by the Gini coefficient fell to its lowest level since 2011-12, driven by government support to protect incomes during the crisis, which targeted low-income households and prevented high unemployment. But inequality rose in 2021-22, as incomes at the bottom of the distribution fell and incomes at the top of the distribution rose. The Gini coefficient rose to 35.7 per cent, its highest level since 2018-19 – highlighted in the chart below.

2021-22 was a transition year from the pandemic into a cost-of-living crisis; the worst is yet to come

Today’s data release shows the position household incomes were in preceding the cost-of-living crisis – with high-income households having recovered from their hit in the previous year, and low-income households facing falling incomes due to the removal of pandemic support measures. But our analysis shows that in the two years following the period covered by this data release, households will have faced a bleak couple of years as a result of the cost-of-living crisis – which we discussed in our Living Standards Outlook published earlier this month.