Faced with the worst economic inheritance since the 1970s, Keir Starmer has pledged a “government of service in the mission of national renewal”. But there won’t be a second term unless the new government can bring about promised plans for economic growth and foster greater social solidarity in a divided Kingdom. Boosting GDP is the means, but the goal has to be higher living standards otherwise the space will be wide open for an insurgent right to defeat Labour at the next election — led by Nigel Farage’s self-proclaimed people’s army.

It’s hard to overstate just how much worse off large sections of society really are. Bills are up by more than pay while infrastructure and public services are crumbling all around us. During the last parliamentary term, the country saw one of the sharpest contractions in living standards since records began in the 1950s. Work by the National Institute of Economic and Social Research (NIESR) with the support of the Nuffield Foundation shows that since the previous election in December 2019 household living standards fell on average by 7 per cent. That’s more than the 3 and a half per cent cited by the Office for Budget Responsibility in their analysis at the time of the March Budget. The reason is as simple as it is stark. Once you factor in housing costs, actual living standards are a lot lower. Soaring rental and mortgage costs have wiped out the gains from higher wages, leaving people worse off. 

Based on NIESR’s work, we also know who has borne the brunt of the hit to living standards. It’s the poorest fifth of the population. The bottom 10 per cent have seen their living standards fall by 20 percent, while people in the second-lowest income decile are worse off by some 8 per cent. In monetary terms, this means that the poorest 10 per cent face an income shortfall of some £4,600 this year compared with December 2019 levels. Without the shocks of Covid and the energy price hike, household disposable income would be close to £20,000 instead of £15,500.

Of course, the government spent billions helping us through the successive storms of a global pandemic and a once-in-a-generation inflationary shock following Russia’s invasion of Ukraine. Indeed, central state support since 2022 has amounted to some £2,000 on average for each household. But this number masks huge distributional differences. The poorest 10 per cent received a bit more state support (£2,100) than the average, but those in income deciles 2-4 — the “squeezed middle” (remember them?) — only got about £1,400. 

Contrast that with the top two income deciles who received respectively £2,520 and £3,940 in state assistance. The reason is the Energy Price Guarantee introduced by Liz Truss (remember her?) in October 2022. It was a general subsidy that benefitted higher-income people with higher energy consumption, notably large houses and second-home owners. What we should have done instead is to target support at low-income households who needed it the most.

But it gets worse. The 2p cut to National Insurance Contributions in January and again in April this year, which was supposed to change the electoral fortunes of the Conservative Party but didn’t, has been regressive. This tax cut is worth about £450 to people on average incomes of £35,000 per year, whereas high earners on £100,000 per year benefit by about £1,500. And there is the freezing of the personal allowance at £12,570 and the freezing of the tax bands, which drags ever-more people into paying income tax and paying it at higher rates. Despite Labour’s promise not to raise income tax, this is an income tax increase in all but name. 

At the same time, real wage growth is slowing down even as inflation proves to be sticky. With the price levels of essential goods and services some 20-30 per cent higher compared with 2022, it is no wonder that living standards for the bottom half of the population will not return to pre-pandemic levels until 2028. That’s two lost decades since the 2008 financial crash — an unprecedented decline in the postwar era which casts a long shadow over our economic model and the ability of our democracy to represent the millions of people who are abandoned. The stakes for the new government could scarcely be higher. Yet the cautious tinkering at the edges feels small and inversely related to the sheer scale of the task.

Like society, the economy is fractured, and we need to rebuild it on firm foundations

To say that economic issues, not “culture war” stuff, will decide Labour’s fortunes is not to repeat the 1990s mantra “it’s the economy, stupid”. That mantra was part of an economic and technological determinism espoused by liberal centrists from Bill Clinton and Tony Blair to David Cameron and Barack Obama according to which the arc of history bends towards perpetual progress. Yet the forward march of globalisation and the “knowledge economy” was halted, and technology is not the panacea for all our economic and social ills. 

Like society, the economy is fractured, and we need to rebuild it on firm foundations. That means focusing on decent work and wages which generate value, rather the fusion of financial speculation and debt with technological manipulation and process at the expense of people’s common sense, which underpins the Post Office scandal.

As Labour embark on a decade of national renewal, we would do well to remember that the economy and culture are intertwined. Each economic question has a cultural dimension and vice-versa. Jobs provide both income to pay the bills and give us some purpose, and when bullshit jobs don’t do either, there is a popular backlash that drives insurgents to defeat incumbents — as is happening with Presidents Macron and Biden. A home gives us at once physical shelter and emotional stability, which is why the rising rate of homelessness is a national shame and the lack of affordable housing a scandal. 

Economic realities have both material meaning and symbolic significance, and we need to view policy in this more integrated, holistic manner. So it’s less about abstract numbers, whether fiscal targets or the precise number of new builds and net migration, and much more about the wider ecology of institutions and relationships that offer people a more decent life anchored in the dignity of work and bonds of belonging.

Most people worry far less about high mobility and much more about buying their own house, starting a family, finding their children a place in a good school, having access to proper healthcare and living in relatively stable communities with low levels of crime and a moderate degree of trust and neighbourliness. Yet this life is not available to millions of Britons up and down the country. Thus, the focus on living standards has nothing to do with a purely economistic worldview and everything to do with giving people hope that — while things can always get worse — they might eventually get better. Faith in democracy depends on it.