Government right to put rising living standards at the heart of its agenda

The Government’s new targets of raising Real Household Disposable Income (RHDI) and GDP per person over the Parliament at both a national and regional level is a welcome move that should focus minds across Whitehall about the need to raise household living standards.

However, with the national RHDI milestone having been hit in every parliament since 1955, and GDP per person at the national and regional level hit in all bar two, they are not so much stretch targets as the absolute bare minimum for any functioning Government, the Resolution Foundation said in response to the Prime Minister’s Plan for Change speech.

In his speech today, the Prime Minister altered the focus of his economic mission, with raising RHDI and GDP per capita supplanting the ‘fastest GDP growth in the G7’ as its central milestones. This is a sensible move says the Foundation, as the UK Government has more agency over domestically focused targets than international comparative ones.

And while higher growth and rising incomes are complements, rather than substitutes – GDP per capita and RHDI have tracked each other closely in recent decades – economic growth only really matters to people when they see it in higher disposable incomes.

Recent history suggests why raising RHDI needs to be a priority. In the 16 years running up to the 2008 financial crisis, RHDI increased by 2.3 per cent a year, on average. However, in the 16 years since, growth has slipped down to 0.6 per cent, as Britain has become a stagnation nation.

Over the last Parliament, RHDI rose by just 0.3 per cent a year – a post-1955 low (which may yet be revised down even further in light of recent migration data revisions). Worryingly, the OBR currently forecast RHDI to rise by just 0.5 per cent a year over the current Parliament.

GDP per capita has risen across almost every Parliament since 1955, bar the 2005-10 and 2019-2024 parliaments (when it fell by 0.2 per cent and 0.1 per cent respectively).

Securing higher GDP per capita across every region of the UK is more challenging, says the Foundation, as it has only been hit in three of the last six parliaments. Its analysis shows that it fell across multiple regions in 2005-10, in the West Midlands in 2017-19, and while data is not yet available for the last Parliament it is highly likely to have fallen in multiple regions again given weak national growth.

The Foundation adds that time-lags and the poor quality of regional economic data will make it hard to judge whether this milestone is reached.

Furthermore, as RHDI and GDP per capita are aggregate measures of economy-wide growth, they say nothing about who is gaining from growth. The Government must ensure that increases in RHDI reach low-and-middle-income households, and don’t just flow to richer households. It notes that poorer families saw their incomes fall over the last Parliament.

Mike Brewer, Interim Chief Executive of the Resolution Foundation, said:

“Economic growth only really matters to people if it raises their living standards, so the Government is right to put this at the heart of its economic agenda. The new milestone should focus minds across Whitehall on the need to boost household incomes.

“This need to boost living standards is urgent. In the period before the financial crisis, strong shared growth resulted in household incomes roughly doubling over a generation. But since 2008, GDP and income growth have tailed off as Britain has become a stagnation nation.

“But these new milestones are not very stretching. The Government will need to absolutely smash them if they are to truly end stagnation across Britain.”