The 2020s: a horror film in four charts

Last week’s Budget contained one truly terrifying statistic – the 2020s are set to be the worst decade for living standards on record, enjoying a tenth of the growth of the disappointing 2010s. Some things are important enough to dig deep. This blog is for those who don’t just want to watch the horror movie but who, like me, enjoy figuring out what’s really going on.

TL;DR it’s bad however you cut it. The typical family looks set to do even worse than the headline, as housing costs and taxes rise. But! There’s a twist in the final act that offers a glimmer of hope…

You first need to know two main characters: RHDI and HBAI. These are the two main measures of living standards, or the incomes of households over time. RHDI (Real Household Disposable Income) is derived from the national accounts – the macro data on the size of the economy and how much of that is going to households, divided by the number of people – and is forecast by the OBR. HBAI (Households Below Average Income) is a survey-based measure of what households’ incomes actually are; we produce our own projections of it and, throughout this blog, use the after-housing-costs version and focus on non-pensioner households. Crucially, HBAI lets us look at what is happening to households of different incomes and characteristics.

These characters are frenemies. RHDI is the big-budget blockbuster shown on Budget day – complete with special effects, like counting the rent homeowners notionally pay themselves as “income”. HBAI is the indie film about real people, released two years late. Both with their strengths and their drawbacks. We tend to avoid putting them on screen together because it gets a bit complicated when they get together – but it can be instructive to compare and contrast.

1. The main scare: Worst decade on record

First, let’s check how these two measures (mean per-person RHDI, and median non-pensioner household income measured after housing costs) compare over different decades. They measure different things but the conclusion is the same: the 2020s are set to be the worst on record for living standards.

The gruesome detail is that typical non-pensioner household incomes are set to fall over the 2020s. I was particularly keen to dig into why we expect typical incomes to fall 3 per cent (a drop of over £1,000) over the next two years while the OBR is forecasting slowly growing RHDI. The chart below breaks down some of the differences between RHDI and HBAI in steps to try and get to the bottom of this.

Two differences stand out. First, housing costs (the difference between the red and green lines), which are deducted from HBAI, rise significantly over the next two years as mortgagors keep refixing at higher rates. The OBR expects the average effective mortgage rate to climb from around 4 per cent in 2026 to 4½ per cent in 2028. Second, a big chunk of the remaining difference (the gap between red and purple) is not explained by the obvious definitional differences. The most likely culprit is that on our reading of the OBR figures almost all of the RHDI growth over the next two years (around 0.9 of 1.1 percentage points) comes from non-labour income. Some of this isn’t cash in anyone’s pocket (homeowners’ imputed rent and pension fund returns), while the part that is – interest and dividends – is poorly captured in survey data and goes disproportionately to richer and older households.

2. The victims are spread across the landscape (of the income distribution…)

It’s all very well talking in averages, or about Mr and Mrs Median, but these can hide families with vastly different experiences. And this time what’s striking is how widely the pain is shared: as the chart below shows, living standards fall right across the income distribution, with no simple rich-versus-poor gradient.

The biggest falls are at the top, but the bottom is hit hard too – and a fall of this size bites far harder for a family with no savings to fall back on. Data can be less reliable for the very poorest households, but the data we do have suggests an extraordinarily difficult 8 per cent fall in living standards for the second-poorest twentieth of the population (we exclude the even-less-reliable bottom 5 per cent). The richest twentieth see the biggest drop. That owes something to tax changes falling especially at the top (and may be overstated if there is non-labour income growth that we are not capturing in our projections).

3. A survivor ending

We showed in our TOTC Budget special that the gap in living standards (RHDI) between the 2020s and the rest of the post financial crisis period was not explained by disappointing growth – GDP per person grows at a similarly sluggish pace, between 0.6 and 0.7 per cent a year, in both periods. The main culprit is net taxes and benefits, which boosted household incomes after the financial crisis but drags on them through the 2020s. We’ve now learnt that the rise in housing costs is also crucial for typical non-pensioner households .

But there’s one more mystery. On the OBR’s forecast (combined with outturns), real average earnings are set to grow by just 1 per cent over the decade, while GDP per worker grows by around 6 per cent. But why? Did I miss a decoupling of earnings and growth?

Well, no – or rather, this decoupling is a feature of the OBR forecast, but not (yet) of the UK as it stands (see our final chart). Up to 2025-26, pay, GDP per worker and GDP per person moved roughly together (even if not by much!). But the OBR judges that, going forward, the labour share will fall back as firms rebuild their margins, and this, alongside consumer prices continuing to rise faster than the prices of what the UK produces, leads to the growing gap.

So, as we look away from Halloween and towards Christmas, here’s a glimmer of hope: if the OBR is wrong about this, then the 2020s could at least get better from here. If incomes grew over the last three years of the decade at the (hardly stellar) pace of the 2010s, RHDI growth this decade would be nearly three times what is now forecast. Still the worst decade on record – but more B-movie than horror show.

This article was originally published on the Resolution Foundation’s Substack.