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1 February 2017updated 29 Jul 2021 11:18am

How the UK can avoid a repeat of 1980s inequality

The government must do more to support low-income households and to boost productivity.

By Torsten Bell

The 1980s deserve a bad reputation. Sweatbands, leg warmers, and diverse crimes against hair – think perms and mullets, feathered or otherwise. Then we start on the self-indulgence of the music and the fact that Rick Astley was allowed an entire career. Yes, we had The Smiths but even Bob Dylan had a bad decade.

On economics the charge sheet against the 1980s has one item front and centre – a surge in inequality. This rise was unprecedented and unrepeated; inequality has been largely flat ever since (see chart below). Recent trends have reinforced the negative view of 1980s exceptionalism, as richer households took the biggest hit in the wake of the financial crisis.

But that may be about to change, because the only thing worse than hugely unequal growth is next to no growth at all with the pain disproportionately loaded onto poorer households. The risk is that is exactly what Britain faces over the remainder of this parliament.

Let’s start with the actual levels of income growth we might see. Britain has experienced something of a mini-boom in living standards over the last few years, as the chart below shows. It’s important to recognise what has, and hasn’t, driven this boom in order to understand the challenges that lie ahead.

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Ultra-low inflation and an employment growth surge both provided strong and progressive boosts to incomes between 2014 and early 2016. Crucially, these boosts masked the continued weakness of weak pay growth that reflects, and probably reinforces, Britain’s recent productivity disaster.

Looking to this year and the parliament ahead, the living standards mini-boom looks set to have come to a close all too soon. Rising inflation, in part due to an end to oil price falls but reinforced by sterling’s post-referendum depreciation, looks set to squeeze income growth over the next two years in particular. The plateauing in employment since last summer is forecast by the OBR to continue right through to 2020.

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As these two big, progressive income boosts recede it leaves household incomes too reliant on something we have been quite poor at delivering for over a decade now – pay rises. As the chart below shows, “quite poor” is something of an understatement – we’re breaking the wrong kind of centuries-old records when it comes to earnings growth.

Our annual Living Standards audit projects forward to 2020 what that reliance on pay growth means for household incomes, using OBR forecasts on pay, prices, jobs and housing costs and taking into account government policy. Yes, pensioner incomes will continue rising at a decent pace, but typical working age household incomes look set to grow by just 0.5 per cent a year between now and 2020. That’s a big slowdown from over 2 per cent a year for the last couple of years. This is on the back of the living standards disaster of the financial crisis, and is in stark contrast to strong average annual income growth during the 1980s of over 3 per cent. There’s a reason people felt confident enough to have those haircuts or had the cash to buy that much lycra.

Then we turn to who the winners and losers look likely to be – or more accurately who the losers and big losers are. Let’s start with the (relatively) good news – the top half of the income distribution looks set to see income growth of 7 per cent cumulatively over this parliament (as the chart below shows). Now this is some growth, but it’s much weaker than the 16 per cent growth of 1987-1992 or the whopping 27 per cent from 1983-1987. One silver lining is it’s certainly not enough to give us another phase of 80s-style yuppiedom.

Much more seriously, incomes look set to fall for households across the bottom half of the working-age income distribution. This hasn’t happened in any parliament since record began in the 1960s. This isn’t really driven by the wider economic trends noted above, or by Brexit despite what some may argue. Instead it’s driven by policy choices – the tax and benefit plans inherited by Theresa May from David Cameron. Significant working age benefit cuts total more than £12bn are being introduced over the next few years. Higher inflation compounds the impact of these cuts given that they freeze most benefits in cash terms, and working families on low incomes with children will be the biggest losers. Even after accounting for very welcome increases in the minimum wage and less welcome income tax cuts (that disproportionately benefit higher income households) these policy choices amount to huge income hits for the bottom half (see chart below).

The result is the prospect of the first rise in inequality since Margaret Thatcher was in Downing Street. Crucially, though, this time it’s being driven by income falls at the bottom rather than a boom for the rich. Whatever the change people voted for in the Brexit referendum it wasn’t this one. Doing something about it means a more sensible tax and benefit policy mix, and pressing ahead with increases in the National Living Wage. But it also means recognising that unless we sort out stagnant productivity we haven’t built a sustainable base for rising household living standards. That should give all of us pause for thought next time we come to rubbish the 1980s, because we might be living through a phase that feels worryingly similar, just without the feel-good factor. If Morrissey thought he was miserable then – heaven knows how he feels about the state of Britain today.