When it comes to living standards, geography matters

A slowdown in economic growth and the recent return of the pay squeeze has focused attention once again on the extent to which absolute living standard improvements have stalled across UK households since the financial crisis of 2008.

But the distribution of gains and losses matters too – especially in the context of a vote for Brexit that reportedly exposed the frustrations of the ‘left behind’, and a general election campaign in which the main contenders are campaigning ‘For the many, not the few’ and for ‘Mainstream Britain’.

With that in mind, it’s worth reflecting on the latest estimates for disposable income across different parts of the UK that the ONS published this morning. The National Accounts-based release represents a cruder measure of living standards than large-scale household datasets such as the Family Resources Survey, which capture people’s actual lived experiences. Nevertheless, it provides a good overview of the extent to which recent economic growth has been spread across different parts of the country.

As the chart below shows, looking across the 173 NUTS3 areas (principally individual counties and unitary authorities), the spread in income per person is very wide. In 2015, average income of £52,300 in Kensington, Chelsea, Hammersmith and Fulham contrasts with an average of just £12,780 in Nottingham. What’s also striking is the extent to which incomes in the very richest area appears far more volatile than elsewhere in the distribution.

The growing income gap between the richest and poorest areas in the UK depicted in the chart above, implies that geographic inequality is rising. That would contrast with what we know about flat or falling inequality on broader (non-geographically separated) income measures. Of course, it could be that the gap is simply reflecting the fluctuating fortunes of Kensington and Chelsea (which is almost always the richest area of Britain). But as the next chart shows, geographic inequality has risen post-crisis even when we drop down to an 80/20 ratio (comparing the area four-fifths of the way up the distribution with the one that sits one-fifth of the way up). Indeed, it rose by 1 per cent between 2007 and 2015, even as the overall 80/20 ratio (that is, the ratio that applies across all UK households irrespective of their area of residence) fell by 5 per cent.

The precise scale of this post-crisis increase in geographic inequality depends on the measurement you use. But whatever part of the distribution we focus on, the post-crisis picture looks consistently worse than the headline change in income inequality suggests. When it comes to living standards, geography matters.

Based on current plans for taxes and benefits and prospects for the economy, we’ve projected that over the coming years household income inequality is set to rise at its fastest rate since the last Thatcher administration. Tackling that challenge should be the policy priority for whoever forms the next government.

But today’s figures remind us that while a focus on strong economic growth is desirable, it’s not enough if the living standards boost it delivers is confined to London, the South East and a few other cities. For reasons of both equity and efficiency, it’s vital that the next government pursues strong, shared growth that reaches households in areas throughout Britain.