Ed Whiting

Where has all the money gone? A powerful new report from Resolution Foundation explains economic trends over the last 20 years, and why Britain feels so much poorer today. It’s a sobering picture. In the decade before the financial crisis, median household incomes grew at around 3% a year. Since then, growth has collapsed to just 0.3% a year. To put that in perspective: if incomes had carried on at their earlier pace, the average household would now be £20,000 a year better off. Why has this happened? The root cause is productivity. Our output per hour is now 24% lower than the US and 20% lower than Germany – a gap that has widened over the last three decades. And a key driver is chronic underinvestment. Across public and private sectors, Britain has invested around £100bn a year less than the OECD average for the past 20 years. That’s a staggering £2 trillion investment gap – money that could have delivered the factories, medical scanners, railways, housing, technology, and more needed to keep us competitive. In a situation where the overall pie is not growing, there have been winners and losers: Pensioners have seen their real incomes rise by 21% over the last two decades, compared to just 7% for working-age households. Families with children have fared badly, with child poverty rising and many households with kids now worse off than retired people. While the minimum wage has boosted pay for the lowest earners by 37% in real terms, cuts to benefits mean the poorest 10% of households are still worse off than they were twenty years ago. Meanwhile, wealth has grown even as earnings stagnated. Low interest rates fuelled asset price rises, pushing up the value of housing. That has entrenched inequality and made it far harder for young people to get on the property ladder unless they can rely on the bank of mum and dad. If house prices had tracked earnings since the mid-90s, the average home would now cost half what it does today. The international comparisons are equally sobering. In peer countries such as Australia, Canada, France, Germany and the Netherlands, middle incomes are on average 24% – or £8,000 per year – higher than in Britain. And because the UK is more unequal, the poorest households here are 40% worse off than their equivalents abroad. The bottom line is stark. Decades of low investment have produced weak productivity, leaving us poorer. And choices in government spending have worsened the squeeze on the poorest and families with children – something we see every day at The Sutton Trust, where child poverty undermines education, limits opportunity, and locks in inequality across generations. Turning this around will take decades of sustained investment and different choices about where government spends. But if we want a fairer, more prosperous Britain, there is no alternative. Credit to Ruth Curtice and the team at Resolution Foundation for pulling together such a compelling – if depressing – analysis.

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