The promise from Theresa May, the British prime minister, in her speech to the Conservative party conference last year was unambiguous: "Our economy should work for everyone, but if your pay has stagnated for several years in a row and fixed items of spending keep going up, it doesn't feel like it's working for you." She was right.
When Mrs May spoke, the UK's living standards were in the midst of what Torsten Bell of the Resolution Foundation, a think tank, calls a "mini-boom". Those happier times are at an end.
The prospect now is the worst of both worlds – slow growth in living standards, as in the years since the crisis, plus sharp rises in inequality, as in the 1980s. Does this have much to do with Ms May’s policy choices? Oh, yes. So, was Ms May’s speech hypocritical? Again, yes.
Brexit
The work of the think tank reveals a country that is choosing to give priority to the well-off over the poor, and the old over the young. Whatever such a country might be, it is not one that, in the prime minister’s own words, acts “to correct unfairness and injustice and put government at the service of ordinary working people”. This rhetorical flourish is quite far from the reality. Moreover, the “hard Brexit” the prime minister has chosen will make it worse.
The data are sobering. Real median disposable income rose quite strongly in 2014-15, 2015-16 and 2016-17. The main explanation for this was very low inflation and strong growth in employment.
Real growth in pay has been consistently weak, largely because of what Mr Bell rightly calls the UK’s “ recent productivity disaster”. Real average earnings are forecast to be no higher between 2010 and 2020 than between 2000 and 2010 – the worst performance since the early 20th century.
What then might lie ahead? We can reasonably expect rising inflation, as a result of the post-referendum depreciation of sterling, and a plateau in the level of employment, which is already at high levels.
Using the latest forecasts from the Office for Budget Responsibility to project household incomes up to 2020, the foundation concludes that median real disposable incomes will increase by 3 per cent between 2015 and 2020, those of the top half of the distribution will grow by 7 per cent and those of the bottom half will shrink by 2 per cent.
The picture is one of overall stagnation, plus rising inequality – and pensioners, who have done far better than people of working age people in recent years will continue to do so.
Growth
Why is this happening? A part of the answer is slow prospective growth, which depends mainly on the prospects for productivity, but partly on the impact of Brexit. It also depends on the tax and benefit plans inherited – but, crucially, maintained – by Ms May.
A particularly important contributor is the significant cuts in benefits for those of working age, notably the freeze on most benefits in cash terms, exacerbated by the rising post-referendum prices. Also important are substantial tax cuts for the relatively well-off.
Together, these changes will impose sizeable proportional declines on the real incomes of the bottom half of the distribution, especially the bottom three deciles. They will deliver proportional rises to the sixth, seventh, eighth and ninth deciles and then impose a tiny proportional decline on the top decile. To those who have, the government has decided to give. This outcome makes a mockery of the government’s inclusive rhetoric.
This is not all, however. Another interesting piece of work indicates that the “millennial generation” – those born between 1981 and 2000 – are the first to have lower real earnings than the prior generation. Notably, this decline is being experienced only by young men.
The result is greater pay equality between young men and women, but not because the women are doing absolutely much better than before, but rather because men are doing absolutely far worse.
The UK, it is clear, confronts huge challenges. Not only is productivity stagnant, it must also navigate Brexit. This is all bad enough. But the government has also decided to give greater priority to the old than to the young, to pensioners than families with children and to the better off than to the relatively worse off.
It is hard to believe these are wise choices for a country that wishes to secure a better future for its people. It is still harder to believe these are moral choices for a country forced to share out losses imposed by a massive financial crisis and weak subsequent growth.
They need to be challenged and reconsidered. But, without an effective opposition, they will not be. The government may be brazenly hypocritical. But it also seems likely to get away with it.
– Copyright The Financial Times Limited 2017
