Read this, and you may just put your head in your hands, gather up your family and plan to emigrate. This year’s annual living standards audit from the Resolution Foundation contains graphs that risk plunging readers into downright despair at this benighted country’s state.
It has come to this: UK household income growth between 2007 and 2018 fell behind the rest of Europe, with only Greece and Cyprus below us. Ireland grew by 6%, France by 10%, Germany 19%, while the UK fell back – yes, backwards – by 2%. All countries struggle in this energy shock, but after 15 years of income stagnation, “global Britain” is the hardest hit and least resilient.
“A toxic combination of both low growth and persistently high income inequality” is this audit’s definition of the British disease. 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 when they discover UK jobseeker’s allowance at its lowest on record, just 13% of average pay. Sweden pays 80% of previous pay for those seeking a new job. In this fragile society, more than a quarter of households say they couldn’t manage a month on their meagre savings.
Economic commentators warn of the gathering storm clouds of a recession. Consumer confidence, the best predictor, has hit an all-time low as alarming news tumbles out daily. Sterling fell against the dollar by 10% this year, after already falling substantially since the Brexit vote.
The balance of trade was once so crucial that in 1970, the first election I covered as a junior reporter, Harold Wilson’s shock defeat was partly caused by last-minute bad trade figures registering a mere 0.2% deficit. Compare that to our stonking post-Brexit trade deficit of 8.3%, the worst since records began in 1955. No wonder the government bars any Brexit impact assessment. The Resolution Foundation found Brexit caused a post-referendum rise in the cost of living equivalent to an increase of £870 a year for the average household. That makes restoring EU trade an urgent necessity.
All this is about to be made worse, deliberately. Disregarding the cause of this inflation, the Bank of England is bent on raising interest rates to throttle nonexistent demand. Orthodoxy ordains inflation must be crushed by intentionally raising unemployment. To the Bank of England, with a hammer, every worker looks like a nail. Never mind that stagnant pay has zero responsibility for inflation.
Whenever technical “recession” arrives, Monday’s audit shows that living standards have been in a 15-year recession and are now plummeting further. The half of households below median income levels rely 70% on pay and 30% on benefit top-ups – so both are responsible for Britain’s slump in living standards. Pay needs to keep rising – but benefits also need the same triple lock as pensions.
That surely means these strikes must succeed to stop pay retreating. And then pay must keep rising. The Bank’s call for restraint is so economically wrongheaded that there will be no cure until we escape the Treasury and Bank of England orthodoxies that helped land us here.
Of course we should tax more, and more fairly: look at the shabby long-term social consequences of paying lower tax than France and Germany. We should tax the rich until their pips squeak, when they have gained so much recently while the rest lost out. But, in the end, all that can sustain us is rising productivity.
However, business is on strike over investment. Already abysmal, preferring dividends and share buybacks, business investment has fallen 9.2% below pre-Covid levels. Profits of the largest non-financial companies rose 34% in 2021, compared with pre-pandemic levels, says the Institute for Public Policy Research thinktank: time to rein in profiteering. The National Institute of Economic and Social Research finds the cause of Britain’s weak productivity is low business investment, inadequate infrastructure, insufficient innovation and low skills.
Where the market fails, the state has to step in. Jettison Treasury rules defining capital spending as only on bricks and mortar, and invest in human capital. Why is further education funding so low and apprenticeships falling, while universities cut places? To shoot through a decade of moribund productivity takes a burst of investment daring, imagination and determination. The only hope is renewable energy, insulation, housebuilding, and research and development to match more successful countries with highly trained and educated people. Borrowing confidently to invest wisely and optimistically shores up a country’s credibility against a threatened slide in sterling’s value.
Beyond fossilised Treasury thinking, better ideas abound. Take this one from the economist Richard Murphy: the £70bn a year invested in tax-free ISAs should only earn that tax relief by investing in productivity-boosting green government bonds, securely backed, paying a decent return.
The audit reminds us that Britain signed up to the international sustainable growth goals. That includes “by 2030 to reduce by half the proportion living in poverty”, while raising the “income growth of the bottom 40% of the population at a rate higher than the national average”. Incomes need to rise, not just for social justice but for productivity.
Without bravery and imagination, the Treasury and the Bank of England will tighten the screw, causing lower living standards, higher unemployment and worse inequality in a downward productivity spiral. But don’t emigrate yet: with political will and nerve, we can stop sliding ever further below countries we once equalled.