Britain is currently witnessing a brief recovery in living standards as inflation declines while wage increases remain strong. But this improvement is not expected to last, with longer-range forecasts predicting the majority of income growth will come in this year alone. As rent and mortgage costs begin to outpace wage rises, many families could find themselves struggling once again, with hundreds of thousands more falling into poverty.
In 1942 a social economist called William Beveridge published a report that was to be the foundation of the welfare state. His vision was defeat of the five giants of idleness, ignorance, disease, squalor and want. He argued that in a civilised society, everyone should be protected from destitution.
Roll on 80 years and the Labour party unveils its own five missions for the country to give Britain “its future back” with a “decade of renewal”. While promising to kickstart economic growth maybe the key to unlocking improvements in living standards, many cannot wait. Already 4.3m children are living in poverty. That is 30% of all children in the UK and the majority have at least one parent in paid work. Meanwhile at the other end of the age spectrum 2.1m pensioners are living in poverty after housing costs. And those heading to retirement (aged 60-64) are the group with the highest level of relative poverty.
The bleak outlook
The Resolution Foundation’s Living Standards Outlook 2024 highlights that
without action from Government, 400,000 more children could fall below the poverty line.
The report provides an assessment of incomes, poverty and inequality as things stand in 2024-25. It offers projections up to 2029-30 using economic forecasts and policy assumptions inherited by the new Government.
They find that real median household incomes are projected to grow by a healthy 3% this year. But on current economic forecasts and policy assumptions, this recovery is set to peter out, with incomes forecast to grow by just 2% in total over the next five years.
As the main parties argue over the real state of the new Government’s economic inheritance, the Living Standards Outlook 2024 focuses on what could happen to incomes and poverty over the course of the Parliament. In a nutshell living standards for middle-income households is weak. It is even worse for poorer households. The report predicts that they will gain less from wage rises this year, and will lose more should benefit cuts currently assumed in the fiscal forecasts be rolled out. So poverty and inequality will likely rise. Unless there are policy changes.
A bit of optimism
The Foundation says that these forecasts are bleak, but are not set in stone.
“This troubling outlook highlights the need for the new Government to beat the forecasts that they have inherited,” says Alex Clegg, Economist at the Resolution Foundation. “A new economic strategy that delivers stronger growth, coupled with the reversal of damaging benefit policies set by the previous Government, could still make this a Parliament of fast-rising living standards and falling poverty.”
The report sets out three approaches Keir Starmer’s government could take to improve the outlook for incomes and help address poverty.
First, real annual wage growth being one percentage point higher from 2025-26 onwards would boost typical income growth for non-pensioner households from 5% over the Parliament to a respectable 8%. The transformative impact of higher earnings growth highlights the need to deliver stronger productivity-based economic growth.
Second, removing the two-child limit, benefit cap and Local Housing Allowance freeze from 2025 onwards would lift 600,000 children out of poverty overnight. The total cost would be around £3.5 billion in 2025-26, but rising over the Parliament. However the Resolution Foundation cautions that while these policy reversals would be hugely welcome, after the initial drop relative poverty rates would rise again.
So to prevent this increase the report sets out a third approach. Namely that working-age benefits are up-rated annually by wages rather than prices from 2025. This additional policy, costing around £9 billion a year by the end of the Parliament, would stabilise child poverty rates at a lower level than in the previous Parliament. That is if it is combined with removal of the two-child limit, benefit cap and Local Housing Allowance freeze.
Will politicians take heed?
A year ago Prem Sikka, Emeritus Professor of Accounting at the University of Essex, and a Labour peer tweeted of the then Tory government:
“Just £1.3bn would lift 250,000 out of poverty, reduce poverty for another 850,000. £39.5bn annual economic gain. Govts handed £1 trillion Quantative Easing to speculators but won’t help children.”
The choices made in the coming months will determine whether Labour’s promise of a “decade of renewal” is realised or squandered. As millions of children and pensioners continue to face the harsh realities of poverty, as Sikka points out, the stakes could not be higher.
The Resolution Foundation’s recommendations offer a clear path to reversing the tide, but only if the government has the courage to act. Will Labour rise to the occasion and tackle the root causes of poverty, or will it allow another generation to be lost to economic hardship?
The October Statement will reveal whether this government is truly committed to giving Britain “its future back” or merely paying it lip-service.
This is the full Living Standards Outlook 2024 report.
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