Rread this, and you might put your head in your hands, get your family together, and consider emigrating. This year’s Annual Living Standards Audit from the Resolution Foundation contains charts that are likely to send readers into utter despair over the state of this murky country.
Here we have it: UK household income growth between 2007 and 2018 lagged behind the rest of Europe, with only Greece and Cyprus below us. Ireland rose 6%, France 10%, Germany 19%, while the UK fell – yes, back – 2%. All countries are grappling with this energy shock, but after 15 years of stagnant incomes, “global Britain” is the hardest hit and the least resilient.
“A toxic combination of low growth and persistently high income inequality” is the definition of the British disease given by this audit. Among EU countries, only Bulgaria is more unequal than us.
With the Bank of England predicting a steep rise in unemployment to 5.5%, many will be shocked to find that Britain’s Jobseeker’s Allowance is at its lowest level ever, at just 13% of the average salary. Sweden pays 80% of the previous salary for those looking for a new job. In this fragile society, more than a quarter of households say they cannot manage a month with their meager savings.
Economic commentators warn of the gathering storm clouds of a recession. Consumer confidence, the best predictor, hit an all-time low as alarming news drops daily. The pound has fallen 10% against the dollar this year, having already fallen sharply since the Brexit vote.
The trade balance was once so crucial that in 1970, the first election I covered as a junior journalist, Harold Wilson’s shock defeat was partly caused by bad last-minute trade numbers recording a deficit of only 0.2%. Compare that to our huge post-Brexit trade deficit of 8.3%, the worst since records began in 1955. No wonder the government is banning any assessment of Brexit’s impact. The Resolution Foundation found that Brexit caused an increase in the cost of living after the referendum equivalent to an increase of £870 per year for the average household. This makes the restoration of EU trade an urgent necessity.
All of this is about to be made worse, deliberately. Regardless of the cause of this inflation, the Bank of England is bent on raising interest rates to strangle non-existent demand. Orthodoxy commands that inflation be crushed by intentionally increasing unemployment. For the Bank of England, with a hammer, every worker looks like a nail. Never mind that stagnant wages have no responsibility for inflation.
Whenever the technical “recession” arrives, Monday’s audit shows that living standards have been in a 15-year recession and are still falling. Half of households below the median income level are 70% dependent on earnings and 30% on supplementary benefits – so both are responsible for falling living standards in Britain. Wages must continue to rise, but benefits must also have the same triple lock as pensions.
Surely this means that these strikes must succeed to stop the decline in wages. And then the salary must continue to increase. The call for Bank restraint is so economically misguided that there will be no remedy until we escape the Treasury and Bank of England orthodoxies that have helped us land here.
Of course, we should tax more and more fairly: look at the crummy long-term social consequences of paying less tax than France and Germany. We should tax the rich until their pips cringe, when they have gained so much recently while everyone else has lost. But, in the end, all that can sustain us is increased productivity.
However, companies are on strike over investment. Already abysmal, favoring dividends and share buybacks, business investment fell 9.2% below pre-Covid levels. Profits for the largest non-financial companies are up 34% in 2021, compared to pre-pandemic levels, according to the Institute for Public Policy Research think tank: It’s time to rein in profits. The National Institute for Economic and Social Research finds the cause of Britain’s low productivity to be low business investment, inadequate infrastructure, insufficient innovation and low skills.
Where the market fails, the state must intervene. Ditch the Treasury rules defining capital spending as just bricks and mortar, and invest in human capital. Why is continuing education funding so low and apprenticeships declining, while universities are cutting places? Getting through a decade of moribund productivity takes a leap of bold investment, imagination and determination. The only hope is renewable energy, insulation, housing construction, and research and development to match top performers with highly skilled and educated people. Borrowing with confidence to invest wisely and optimistically builds a country’s credibility against the threat of a falling value of the pound sterling.
Beyond the fossilized Treasury thinking, better ideas abound. Take this one from economist Richard Murphy: The £70bn invested annually in tax-free ISAs should only get this tax relief by investing in productivity-boosting green government bonds, solidly guaranteed and offering a decent return.
The audit reminds us that Britain has signed up to the international Sustainable Growth Goals. This includes “by 2030, halve the proportion of people living in poverty”, while increasing “income growth of the poorest 40% of the population at a rate above the national average”. Incomes must rise, not only for social justice but also for productivity.
Without bravery or imagination, the Treasury and the Bank of England will tighten the screws, leading to lower living standards, rising unemployment and worsening inequality in a downward spiral of productivity. But don’t emigrate just yet: with political will and courage, we can stop slipping ever further below the countries we once equaled.