The cost of living election?

Economist Michael Roberts examines the facts on living standards

LABOUR LEADER Ed Miliband reckons that it will be ‘a cost of living election’ in 2015. That may not be the only issue, but it is true that British households have suffered the most, out of the top ten advanced economies, in lost incomes and jobs since 2007, with a combined loss of over 7%.

In the UK, real wages have fallen by a cumulative 6.1% – the biggest fall in the Group of Seven industrial economies. At the same time, real wage growth was mainly positive for Canada (4%), France (2.8%) and Germany (3.1%).

If we combine the change in employment with the change in real wages, it reveals just where the pain for working people has been felt most. On this measure, British workers have suffered the most in the last five years, with a cumulative fall of 7.3%, mainly from a decline in wages, but also from a fall in employment. This contrasts with the US, where the cumulative fall of 4.5% has been almost totally due to a fall in employment and hardly any change in real wages.

Living standards in Britain have suffered their most prolonged decline for at least half a century. A report from the Office for National Statistics found that real wages have been falling consistently since 2010, the longest such period since at least 1964, when comparable records began.

The Conservative-Liberal coalition has tried to deny these facts. The government circulated a Treasury analysis that claimed take-home pay had risen faster than prices between April 2012 and April 2013. But the Treasury data are bogus. The latest data show that real wages fell by more than 1.5% on the same quarter a year ago.

Moreover, there is no sign that this unprecedented decline in living standards is going to reverse any time soon. The Institute for Fiscal Studies warn: “there is little reason to expect a strong recovery in living standards over the next few years”. This forecast was repeated by the Office for Budget Responsibility, which reckoned real earnings would not return to their 2009-10 levels until 2018-19. “Further discretionary cuts to benefits and tax credits will put downward pressure on real incomes, particularly for low-income households.”

As a result, more than half of Britons are cutting back on heating, takeaways and clothes shopping, with the number of people worrying about having enough money to make ends meet having risen for the first time since 2011. Market research firm Nielsen said 60% of Britons are seeking to reduce their electricity bills, 58% have cut back on expanding their wardrobes, 57% have cut out takeaways and 55% are switching to cheaper brands in the supermarket.

payAnd it’s lower-income groups who have fared worse over the post-recession period, mainly because of welfare cuts. While headline inflation has been 20% since the crisis, food costs are up by 30% and energy 60%. This drags down lowly living standards.

And contrast the struggle for average and low income households with the top 1%. Total income before tax for the very rich is astronomically higher. The top 1% of tax payers ‘earn’ over £150k a year – that’s nearly four times more than those that make it into the top 10% and at least seven times higher than the bottom 70% of income earners, who are on about the average annual income or below. The cost of living is not an issue for the 1%.

As the TUC has pointed out, the squeeze on real wage growth has been going on for decades, as British capitalism has found it increasingly difficult to grow at a rate which can deliver sustained prosperity. Average annual real wage growth was 2.9% in the 1970s and 1980s, dropping to growth of 1.5% in the 1990s, 1.2% in the 2000s, and now it has been minus 2.2% every year since the start of 2010.

“Worryingly, average pay rises have been getting weaker in every decade since the 1980s, despite increases in productivity, growth and profits. Unless things change, the 2010s could be the first ever decade of falling wages,” said TUC leader, Frances O’Grady.

The government chirps on about the economic recovery and the success of its ‘austerity’ policy. But any recovery in profits and house prices has been at the expense of the living standards of most British households.

» Michael Roberts blogs at:

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