Fifteen years without a pay rise. The most protracted squeeze on real wages since Nelson’s victory over Napoleon’s fleet in the Battle of Trafalgar. A lost decade for productivity growth. The gist of the post-budget analysis from two of Britain’s leading thinktanks was simple: the economy continues to break records – mostly for the wrong reasons.
Neither the Institute for Fiscal Studies nor the Resolution Foundation could get especially worked up about the political controversy of the moment: Philip Hammond’s decision to raise national insurance contributions for the self-employed. The move was seen as progressive and a small step in the direction of aligning the treatment of the employed and the self-employed.
Paul Johnson, director of the IFS, said Hammond appeared to be breaking a Conservative manifesto commitment but lambasted the government for making such a “silly” pledge in the first place.
Instead, both organisations focused on the bigger picture: the performance of the UK in the years since the onset of the recession since 2008 and what is likely to happen over the next 10 years.
Johnson pointed out just how woeful the productivity performance of the UK economy had been since 2008. Growth in living standards depends on improvements in productivity, which in the years leading up to the financial crisis averaged more than 2% a year. In the nine years since 2008, Johnson noted, per capita incomes had grown by 2% in total.
“That’s nine years to grow as much as it would normally grow in one.”
What’s more, the productivity growth that has been lost will never come back. That’s because the Office for Budget Responsibility believes the UK has run out of spare capacity, which means that the economy cannot grow any faster without generating inflation.
Johnson said: “What the OBR is saying is that despite that truly dismal record all of the productivity – and with it earnings growth – we would normally expect has been lost forever. This remains the big story of the last decade: a decade without growth, a decade without precedent in the UK in modern times.”
Unusually low inflation since 2014 has led to a pick up in real income growth but rebounding oil prices and dearer imports as a result of the pound’s post-Brexit fall mean this period is coming to an end. The IFS says that on current forecasts real average earnings will be no higher in 2022 than they were in 2007.
“Fifteen years without a pay rise,” Johnson said. “I’m rather lost for superlatives. This is completely unprecedented.”
Top earners have had a relatively tough time, with their real earnings 12% lower in 2015-16 than they were when the recession started. Johnson said the top 1% pulled away from the rest in the 2000s but were being reeled back in. The ratio between earnings at the 99th percentile and those at the median hit 5 to 1 in the late 2000s but had fallen back at 4.6 to 1 now, about where it was in 1999.
Torsten Bell, the Resolution Foundation’s director says it is possible to find a decade that was as bleak for wage earners as the 2010s but you have to go back to a time when William Pitt the Younger was prime minister to find it.
The Resolution Foundation concentrates on those on low and middle incomes – a group it sees as particularly vulnerable in the years ahead. Weak pay growth and benefit cuts mean that for the poorest third of households, the second half of the 2010s will actually be tougher than the first half.
The IFS agrees. It notes that the budget changes announced by Hammond pale into insignificance when set against those introduced by George Osborne before he was sacked by Theresa May.
The former chancellor – now picking up £650,000 a year for four days work a month at the fund manager BlackRock – pushed through benefit cuts that will mean some families will be £7,000 a year worse off than they would have been otherwise.
The UK economy breaks more records – for all the wrong reasons – The Guardian