Inflation and unemployment 'totally inadequate' yardsticks and failed to identify weakness in the economy, says Fabian Society

Living standards should become the central measure of Britain's economic performance, according to a Fabian Society report which recommends a complete overhaul of how success is measured.

The left-leaning thinktank says the traditional yardsticks of growth – inflation and unemployment – are "totally inadequate" and ought to be replaced by 20 new indicators that would each have goals that could be tracked.

Andrew Harrop, general secretary of the Fabian Society, said the report was an attempt to show what real economic success would look like in 2020 for the administration elected in 2015. He said median household income, currently at 2002-03 levels, should replace gross domestic product as the central determinant of economic progress.

"Next week George Osborne will stand at the dispatch box with the latest statistics on Britain's economic performance," Harrop said. "But despite the better headline news, this Fabian research reveals huge problems remain, including rising inequality, falling living standards and an unbalanced, unsustainable version of recovery.

"What we measure – and how we measure it – matters. The financial crisis proved that simply targeting the headline goals of GDP growth, unemployment and inflation was totally inadequate as these measures failed to identify major economic weaknesses as they emerged."

He added that the 20 measures identified by the thinktank had been chosen to reflect the direction the economy needed if it was to achieve fairness, sustainability and long-term prosperity.

"By making median income the headline economic indicator we will be able to go beyond GDP and measure how far national economic performance is feeding through into rising living standards for typical households."

The chancellor is likely to use next week's budget to highlight the recent improvement in the economy. After contracting by 7% during 2008-09, the economy moved sideways in 2010 and 2012 before starting to grow again in 2013. Unemployment has decreased to 7.2%, while inflation has fallen below its official 2% target.

But an increasing population has meant that living standards have continued to be squeezed even though the recession came to an end almost five years ago. Both the chancellor and Mark Carney, the governor of the Bank of England, have said recently that the economy needs more investment and a better trade performance if the recovery is to be made sustainable.

The Fabian report says shared prosperity should be the headline measure of success, with the aim of increasing median household income by 2% a year. Other indicators should include reducing the national debt, reducing poverty, the de-carbonisation of the economy, increasing the supply of affordable housing and reducing the current account deficit. "Despite the recent good news on GDP growth and employment, our indicators suggest that, as things stand, Britain could be drifting towards long-term economic decline: the nation lacks the saving and investment to boost long-term growth, is scarred by an unequal and unstable economic model and remains at risk of staggering from crisis to crisis," it says.

"Overall, the indicators show why the British economy needs to take a different turn. Unlike traditional economic measures such as GDP and unemployment, around half the indicators we have selected were a significant cause for concern before the financial crisis.

"They highlight the short-termism and inequality of rewards which were storing up problems.

"The trends with respect to income inequality, low pay and intermediate skills had been a cause for concern for many decades, but many problems really only emerged in the 2000s: business investment and household savings fell; housing became less affordable; median earnings and incomes began to fall."

Median household incomes



This measures the change in living standards and financial prosperity for typical households better than GDP, which has not been a good guide to incomes. Recent trend: The recession and austerity dealt a "significant blow" to middle incomes, which fell a cumulative 5.9% from 2009-10 to 2011-12, taking average incomes back to levels seen a decade earlier.

Target Average 2.2% rise in incomes per year.

Greener economy



UK greenhouse gas emissions have fallen by around a quarter since 1990, with reductions averaging 1% a year, but with prevention of climate change essential for the wellbeing and prosperity of future generations, they will have to fall faster, the Fabian Society said.

Target Cut emissions by 80% between 1990 and 2050. The UK is set to meet interim targets up to 2017, but miss targets to 2027 if current trends continue.

National debt



The debt must come down to ensure the UK can deal with future shocks, but a balance needs to be struck between lower debt and the public wellbeing and with economic growth through that government spending can bring.

Before the crisis National debt was less than 40% of GDP. Since 2008 it has risen rapidly, and but is forecast to reach 80% of GDP in 2015-16.

Target Public debt should be returned to pre-crisis levels of 40% of GDP, but over decades, with "the precise goal less important than the direction of travel.".

Income inequality



Poverty must be reduced further to enable people to live adequately and take part in society. The number living in relative poverty fell from 20% of the population in 1997-98 to 16% in 2010-11. But child poverty fell from 27% to 18% – missing an interim target outlined in the Child Poverty Act.

Target Cut the relative poverty rate to 10%, both for children and the wider population.

Labour productivity



From 1997 to 2010 the increase in output per hour was second only to the US, helping drive long-term prosperity. But since the crisis now UK productivity has fallen behind other countries and output per worker is 15% below the pre-recession trend.

Target Catch up with other advanced economies such as Germany, and rReach the top quartile of annual productivity improvement for OECD nations.

Intermediate skills



Significance: Strong skills are a cornerstone of an economy with high employment and good jobs, and essential for personal prosperity and resilience in the face of change. The UK has traditionally suffered in this area and sSince 2002 the proportion of the population with skills equivalent to GCSEs and A levels has been roughly flat at less than 40%.

Target 50% of adults to have at least an intermediate qualification by 2020.

Affordable homes



Significance: The UK is suffering from an acute housing shortage with many people priced out of home ownership, while those renting can pay out a significant proportion of average incomes. In 1997 a median home in England cost valued at 3.5 times moderate median earnings; that was 6.5 times by 2012.

Target: Get the affordability ratio stable would be an achievement given "rapidly increasing property prices" – ideally the measure would declineget it down to levels seen a decade or more ago.

Low pay



The incidence of low pay – defined in 2012 as below £7.44 an hour – has been stable since the late 1980s at about 21% of the workforce, despite the introduction of the minimum wage – keeping households on low incomes and increasing reliance on social security.

Target Reduce the incidence of low pay to 17% of the workforce – the level achieved in the 1970s after the Equal Pay Act.

Employment rate



Significance: Raising the rate will support growth and increase average incomes, reducing pressure on the tax and benefit system. Employment has been more resilient than expected during the crisis. Between 2001 and 2008 the rate was 73% among 16- to 64-year-olds. It is currently 72.1%.

Target Restore pre-crisis levels of employment in the short term, but achieve closer to 80% employment in the longer term.