Living Standards Index: Measuring Inequality is Only Half the Battle

Yesterday Ed Miliband called for the introduction of a Living Standards Index to go alongside the regular measurement of GDP. As we’ve previously discussed, using GDP as the sole measure for economic progress is not helpful. Focusing on GDP does not tell you if all the gains from growth are going to a small few whilst everyone’s living standards decline. For a new indicator to be meaningful it must reflect life as it experienced at both ends of the income spectrum.

The UK’s extreme inequality means that life for those at one end of the spectrum is very different for those at the other. One consequence of this is that people on low incomes spend more of their money on things like fuel and food and face higher price rises and lower living standards as a result.

Recent ONS analysis has found that the level of inflation experienced by those at the bottom is substantially higher than those higher up the income spectrum. If Jobseekers Allowance was uprated since 2003 according to the ONS’s calculation of inflation experienced by the poorest it would be over £160 a year higher than if it was calculated based on the ONS’s calculation of average inflation[1]. This means that in real terms poorer people are worse off compared to richer households, even if incomes increased at the same rate. At the moment the ONS does not regularly produce an estimate of how inflation hits different points of the income spectrum and introducing a quarterly Living Standards Index which included this would be a large improvement.

It is encouraging to see a political party ask for a more comprehensive and timely measure of inequality. As it currently stands our most recent inequality data covers a period that finished over 20 months ago. If it’s possible for new high quality data to be prepared in less than 6 months it would allow for a much more timely discussion of how inequality is changing, in advance of the general election. It’s also positive to see a commitment for the OBR to forecast the new measure. However this still falls short of the action that is needed to tackle inequality.

For many commentators 2014 was ‘the year of inequality’, the year the issue came to national recognition. But a more accurate description of 2014 would be ‘the year of inequality rhetoric’. All parties talked of the problem of the growing gap between the rich and rest, but few made a concerted effort to outline how they would reduce it. Few in fact committed themselves to reduce it at all. For many of those struggling to make ends meet, a measure of living standards will tell them something they are only too aware of – that life is tough outside of the very richest, and getting tougher.

As such, what we really need are political parties who will not only measure inequality as accurately and promptly as possible, but also commit to reduce it. A very simple and reasonable example of this would be for them to commit in their manifestos to reduce the gap between the richest and the rest.

Tim Stacey, Senior Policy and Research Advisor