Waving goodbye to two decades

Nice or nasty, either way the economic future doesn't look great.

Another week, another terrible set of GDP figures, an IMF downgrade of the UK's growth prospects, and a new report showing the squeeze on living standards is set to run and run. The public, along with our politicians, is probably starting to grow immune to some of the shocking headlines about how long it will be before their incomes recover. All attempts at peering into our economic future do, of course, need to be taken with a handful of salt. And if long range economic forecasting is a mug's game, then seeking false precision about the resulting political consequences is truly the pursuit of fools.

Yet for all the uncertainty we can discern the broad contours of different possible paths for living standards over the rest of the decade. None are attractive -- though some are uglier than others. All are likely to challenge the standard assumptions upon which recent politics have been based.

Let's start by tracing the immediate prospects for low to middle income households (broadly those in work in the bottom half of the income distribution). To do this we can adjust the OBR projections for average earnings (reflecting the historic relationship between average and lower earnings), and take account of the coalition's planned cuts to tax credits. The depressing result is that typical disposable household income for this large swathe of Britain is set to fall 8 per cent by 2015 (from just under £22,000 in 2007-08 to just over £20,000).

To get any sense of the range of possibilities for the next parliament the best we can do is draw on different periods from our recent past as alternative guides to the future. So let's consider a "nice growth" and "nasty growth" scenario from 2016 up until 2020. The nice scenario replicates the growth in household income experienced during the first half of Labour's period in office (until 2003) when wages were climbing and the creation of tax credits further boosted low to middle income households. Given the miserable times we are currently living through, referring to this as merely "nice" is something of an understatement. Yet even under this cheery scenario low to middle income households would only regain the position they reached in 2007-08 by 2020. They would have lost more than a decade, but at least they'll be headed in the right direction.

Nice and nasty scenarios for low household income of low to middle income Britain

 

So much for the supposed good news. Under the "nasty growth" scenario low to middle income households don't share in rising prosperity; their living standards stagnate as they did between 2003 and 2008 -- a period of steady economic growth. Household income limps along at around £20,000 to 2020, around the same as it was in 2001. We've waved goodbye to two decades. And just to repeat: both these scenarios are premised upon the OBR's assumptions for GDP growth until 2016 being realised (and many think that will be a stretch). We haven't dared contemplate a nightmare scenario in which the Eurozone implodes and there is no or very low growth for an extended period.

What might all this mean for how politics shapes up as we approach the next election? The conventional wisdom would hold that the defining question for a living standards election, which 2015 should surely be, is Ronald Reagan's "are you better off" than you were five years ago?

I'm not so sure. As things stand it's not clear in whose interests it will be to make this the issue hovering over the ballot paper. Unless Labour somehow manages to secure a seismic shift in the public's assessment of where blame lies for the crisis and its aftermath it may not like the answer it gets if this becomes the election question. As for the Conservatives, "things could have been even worse" is not exactly a rousing campaign tune for David Cameron to be humming. All of which raises the unlikely possibility that the largest decline in household incomes in living memory might be the dog that no one -- or at least no party leader -- wants to bark come 2015.

Nor is it clear what the electorate's frame of reference will be: their living standards when David Cameron first entered Downing Street or the change in the months immediately prior to the election? A lot could hang on this. For every economic commentator who thinks the scale of our personal debt overhang will mean growth staying miserably low all the way to 2015, there are others who believe that at some point in this parliament, probably late on, things will -- finally -- tick upwards. Eventually, so this argument runs, forecasts that have been too rosy will give way to those that are too gloomy, with strong pre-election growth and sharp falls in unemployment. Veterans of election campaigns will tell you that changes in economic sentiment in the months running in to a campaign are absolutely vital: it's all about finding your mojo for the final sprint. Even the faintest glimmers of economic hope provide the basis for a traditional incumbent campaign theme along the lines of "don't let Labour ruin the hard won recovery".

Yet there is another, counter-intuitive, and altogether more troubling scenario for the coalition: it's just possible that the emergence of a year or so of strong growth prior to the election could even become a source of vulnerability. A stoical public, after years of swallowing the harsh medicine of austerity, may finally refuse to take another spoonful if the long promised return to strong growth fails to lift their own economic prospects.

Only a fool would claim to know which of these scenarios will come good. What's more clear is that for all the endless talk about the new times we are living through, today's politicians are still operating under the old assumption that nice growth is bound to prevail. They still haven't reckoned with the possibility that the world really may have turned nasty.

Gavin Kelly is the chief executive of the Resolution Foundation.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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