Stagnation in real income growth in the last 15 years has caused UK living standards to plummet, according to the latest report by the National Institute of Economic and Social Research.
The research estimates that around half of the stagnation in real wages can be attributed to weak productivity growth (TFP).
Weak productivity is costing UK workers £4,300 per year: had UK wages grown as they did in the US after the 2008 financial crisis, UK workers would be more than £4,000 better off today.
Tax and benefit changes have also contributed to the overall slowdown in real incomes, exacerbating the decline in living standards.
The report, UK Living Standards Review 2025, funded by UK Research and Innovation (UKRI), also lays bare the extent of regional inequality in the United Kingdom. While parts of the United Kingdom are among the richest regions in Europe, the poorest parts of the United Kingdom are now poorer than the poorest parts of countries like Slovenia and Malta. UK regional income growth has been among the slowest in Europe, whilst real incomes in the majority of European regions have grown at a faster rate than those in UK.
Furthermore, the analysis shows how the UK now has some of the least generous welfare across OECD countries, ranking in the middle of OECD countries for welfare spending (as a per cent of GDP) and third lowest for welfare value (calculated as a percentage of average wages).
The value of welfare payments does not cover the cost of essentials. It has done so only in two out of the last 14 years, during the pandemic, thanks to the £20 per week uplift to Universal Credit.
The report concludes that the United Kingdom is currently neither a high-wage nor a high-welfare country, leaving millions trapped between low wages and inadequate support.
To raise UK living standards and improve productivity, the report says the Government needs to abolish the two-child limit and remove the benefit cap would be the most cost-effective way of reducing poverty.
Remiving the benefit cap would cost around £2 billion per year but would reduce the number of people living in poverty by 1.7 million (2.6 per cent of the population).
Government welfare always covers the cost of living with an essentials guarantee. We estimate this to cost 6 billion but would raise the incomes of the poorest households substantially.
The report calls for an increase both public and private investments (underinvestment, particularly in training and skills, perpetuates a low-skill, low-wage cycle), with the creation of a National Development Bank to further stimulate business investment and to establish an independent Growth and Productivity Institute (GPI) that could unify stakeholders, ensure policy continuity and drive long-term improvements (successive UK governments have implemented 11 growth strategies between 2011 and 2023).
Max Mosley, Senior Economist and main author of the report, said: “The uncomfortable truth our report has uncovered is that economic stagnation over the past decade is now threatening the UK’s position as a place for a high standard of living. A combination of weak productivity growth driving near zero growth in real wages and cuts to welfare has resulted in a situation where we are neither delivering prosperity through high wages nor security through welfare.
That the poorest in our country now fare worse than those in nations once considered less affluent is a stark indictment of the UK’s economic social model. Reversing this decline will likely come to define the government’s growth agenda.”
Professor Adrian Pabst, Deputy Director for Public Policy, said: “The government’s mission to grow the economy is not just about aggregate numbers but about higher living standards in every part of the country. Given the dramatic collapse in the living standards of the poorest 40 per cent in society, it is vitally important to raise public investment in ways that unlock business investment to generate productivity increases and sustained real wage growth.
The government should revisit its decision to delay the uprating of the personal income tax threshold until April 2028. After more than 15 years of real wage stagnation for millions, working families need to see a tangible improvement in their living standards over the duration of this Parliament.”
