Is the UK economy really as bad as we think it is? Here is the truth of the matter | Jonathan Swarbrick

The British economy has endured a series of setbacks in recent years: austerity, Brexit, the global pandemic, soaring energy prices and an increasingly fractured and uncertain world. The early optimism that accompanied Labour’s election victory faded quickly, with a recent poll ranking Rachel Reeves as the worst chancellor in modern history.

But is this fair? Is the economy really in as bad a shape as people feel?

Wages

A good place to start is with recent trends in inflation and wage growth. If prices rise faster than wages, we feel the pinch as the cost of living rises.

Price inflation shot up in the aftermath of the Covid pandemic, sharply eroding the spending power of our salaries.

Wage inflation has now caught up with price inflation, with strong income growth for all but the very poorest. On paper, that should have eased the cost of living pressures for most people. So why does our everyday experience tell us something different?

When we measure headline inflation, we average across all the different types of goods people buy. This is problematic since price inflation hits different items in different ways, and many frequent purchases are still relatively expensive.

Even though our wages have grown faster than the prices of electronics and clothing, average incomes have not kept pace with the cost of essentials such as food and housing. And even if things balance out overall, we might tend to anchor our sense of the cost of living on a few frequent purchases – a takeaway coffee, or the price of eggs.

And this uneven inflation matters. Poorer households tend to spend more of their income on precisely those goods with prices that have risen the most: rent, energy and food. They are then hit twice over: exposed to the sharpest inflation and facing the weakest income growth.

Assets

As well as income, we also judge how well we are doing in relation to the assets we own and our personal wealth. Take the housing market. The house-price-to-income ratio has more than doubled since the 1990s, and most people cannot afford the kind of home their parents bought at the same stage of life. And for a growing number, buying at all is out of reach. We actually have more real disposable income than previous generations thanks to strong income growth and low inflation in the early 2000s – but housing has become far more fraught.

Years of (necessary) expansionary monetary policies have boosted the value of financial assets, such as property, and widened wealth inequality. Years of easy money flowed into property as well as equities, and this liquidity, combined with a housing stock that has not kept pace, has driven prices ever higher and worsened the affordability squeeze. While, for most, owning a home is an aspiration; for international investors it is just another financial asset.

Public services

An underresourced NHS and strained public services are further sources of deep dissatisfaction. Waiting times have been rising across a host of services, from A&E and ambulances to scheduled treatments. The UK has fewer practising doctors per 1,000 people than most EU countries, and fewer dentists than all but one (for which there is available data). Similar comparisons can be made across a whole range of measures.

Two big factors stretching public services are a lack of investment and an ageing population. Pension systems were built on assumptions of fast growth and shorter lives. In a world of lower economic growth in which people are living longer and demanding more healthcare, that model no longer works.

It seems likely that we’re all unhappy for slightly different reasons. The poorest are unambiguously worse off, with lower real incomes than 20 years ago. And while those on low to middle incomes have seen their wages grow, they are less likely to own their own home or have larger mortgages. Both these groups are more likely to rely on public services than those on higher incomes, and so are experiencing a tangible fall in living standards.

There is a growing sense of discontent among middle- to high-income householdswho contribute an unusually large share of the UK’s tax take. The average worker pays relatively little by international standards, but taxes rise more steeply with income in the UK than almost anywhere else.

So what can the government do? If it wants to get serious about public service improvement and the investment needed to fuel growth potential, then it will probably need even higher taxes.

The recent welfare increases will be welcomed by some and rankle with others, but survey evidence suggests many would support higher taxes if they went towards much-needed spending on the NHS and other public services.

Reducing wealth inequality would increase the purchasing power of all but the richest, and most would like to see them contribute more. But wealth is notoriously difficult to tax, and financial capital is very mobile in a global economy. Capital we also need for business investment – vital for growth and missing for years.

If the government succeeds in navigating these issues, then we will benefit from a more dynamic economy, rising home ownership and improved public services. If not, the public will give others a go in charge, and those that promise simple solutions are likely to make things worse.

• Jonathan Swarbrick is a lecturer in economics at the University of St Andrews Business School