Lower-income households in the UK are significantly poorer than their counterparts in countries like France and Germany. What’s more, the gap in living standards gets wider still when you factor in the particularly high price of goods and services faced by these households, write Simon Pittaway and Zaynah Janan. What’s driving these trends – and what should be done?
As a consequence of the toxic combination of 15 years of low growth and high levels of inequality, British households on low-to-middle incomes are significantly poorer than their counterparts in countries that we consider ours peers, such as France, Germany and the Netherlands.
To make matters worse, recent Resolution Foundation analysis shows that official data actually understates the gaps in living standards between poor British families and their Western European counterparts because, it turns out, Britain is a particularly pricey place to be poor.
Comparing living standards across borders
Understanding how the living standards of UK households compare internationally provides crucial context when assessing our overall economic performance.
To get an accurate picture, international comparisons need to account not just for what people earn but what they spend it on. Typically, this is done by comparing incomes that are adjusted to reflect Purchasing Power Parities (PPPs) – such as those calculated by the OECD – that measure the cost of the same goods and services across different countries.
On this measure, the UK lies towards the more expensive end of OECD countries. Across all spending categories, the things households buy are, on average, 8 per cent more expensive here than they are for the typical OECD country. Switzerland is the most expensive OECD member (47 per cent above average) while Turkey is the cheapest (65 per cent below average).
But these PPPs look at all prices. In reality, we know that lower income households have different spending patterns to richer families – spending more on essentials, and less on luxuries. In our analysis, we income-adjust PPPs to get a more accurate picture of prices for low-income families and adjust international living standards gaps accordingly.
Low-to-middle households spend a disproportionate amount on housing
Looking at how the spending habits of British households vary by income, our analysis shows that low-to-middle income households spend more on housing – here comprising rent, maintenance and utility bills – and food. By far the biggest difference is in housing: low-to-middle income households allocate more than a fifth (22 per cent) of their budget to housing, in contrast to only 13 per cent for higher-income households. In fact, higher-income households spend a larger share of their budget on recreation and culture than they do on housing.
Lower income households allocate 22% of their budget to housing, in contrast to only 13% for higher-income households – who spend a larger share of their budget on recreation and culture than they do on housing
These spending differences matter because, compared to other countries, certain goods and services in Britain are more expensive than others.
The good news for low-income families is that many key essentials are relatively inexpensive here. Food (poorer households’ second-largest expense), communication (which includes phone and internet services) and clothing are cheaper in the UK than the OECD average. This is partly thanks to competition between retailers and Britain’s broad range of VAT reliefs and exemptions for many essentials like food and children’s clothes – one of the most generous sets of carve-outs in the OECD.
But housing totally upends this trend. As shown in the chart below, in addition to being an outsized expense for poorer households, housing in the UK (the red dot) costs 44 per cent more than the OECD average. In fact, previous Resolution Foundation research has shown that the UK has the largest gap between the cost of housing and the aggregate price level for household consumption out of all OECD members.
Figure 1: For most goods and services, UK relative prices are favourable for low-to-middle income households – but housing is a major outlier

Britain is even more expensive for low-to-middle income households than we thought
Overall, the benefits of Britain’s relatively cheap essentials for low and middle income families are more than offset by our uniquely expensive housing. In other words, looking across the full range of goods and services, Britain is a relatively more expensive country for poorer families than for it is for the population as a whole.
This means that the aggregate PPPs generally used to compare livings costs understate the true gap in living standards between low-to-middle income households in the UK vis-à-vis their counterparts in other countries.
This can be seen in Figure 2, which compares low (10th percentile) and middle (50th percentile) incomes in major EU economies to those in the UK. In the pink bars, we adjust incomes using aggregate PPPs. Even here, there are wide gaps between British low-to-middle income households and many of their counterparts in other advanced economies. But when we use income-specific PPPs (the blue bars), which reflect the cost of things that British low-to-middle income households typically spend their money on, these households fare even worse – especially when comparing to countries with much lower housing costs than the UK. For example, the income gap between British and German households at the 10th percentile widens by a third, from 16% to 21% when moving from an aggregate to an income-specific PPP adjustment (or from £1,700 to £2,300, in 2022 prices).
Figure 2: Adjusting PPPs for spending patterns widens the income gap between low-to-middle income households in the UK and elsewhere

Housing holds the key to reducing the cost of living
Britain is expensive relative to its peers, and it is even more expensive for poorer households. As we’ve shown, these higher living costs are driven above all by the sky-high cost of housing, which puts a disproportionate strain on the pockets of low-to-middle income households.
If the Government wants to tackle UK inequality, then it must address the housing crisis. Its aim to build 1.5 million homes over the Parliament is an important step that should help to bring down average housing costs. But the distribution of housing costs shouldn’t be forgotten. The Government must also look at targeted policies that support poorer families with higher housing costs, including by permanently indexing Local Housing Allowance to local rents.
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All articles posted on this blog give the views of the author(s). They do not represent the position of LSE Inequalities, nor of the London School of Economics and Political Science.
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