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How Osborne disguised the truth about living standards

The Chancellor boasts in his Times piece that disposable incomes have risen but in the first quarter of this year they fell at the fastest rate since 1987.

George Osborne delivers his Mansion House speech on June 19, 2013 in London. Photograph: Getty Images.

With the return of the economy to something close to normal levels of output, attention has quickly shifted to the nature of the recovery. Is it balanced or unbalanced growth? Is it a recovery for the few or one for the many?

In his response to the GDP figures yesterday, Ed Balls emphasised that while the economy is growing (albeit after three years of stagnation), most people's real incomes are still shrinking. He said: "Families on middle and low incomes are still not seeing any recovery in their living standards. While millionaires have been given a huge tax cut, for everyone else life is getting harder with prices still rising much faster than wages."

But in a column in today's Times, George Osborne declares that the government is ensuring that everyone, including low-earners, benefits from the recovery, noting that "inequality is at its lowest for 25 years and disposable incomes grew by 1.4 per cent above inflation last year despite the squeeze, the fastest for three years". 

So who's right? The figures cited by Osborne are correct but they offer a highly partial picture. First, based on the most common measure - inflation - most people's pay is still falling, as it has been since the crash. In the year to May 2013, total earnings rose by just 1.7%, more than two percentage points below CPI inflation (2.9%). Since the election, average pay has fallen by £1,350 a year in real terms, with most now earning no more than they were in 2003. And the situation is unlikely to improve anytime soon. Wages aren't expected to outstrip inflation until 2015 at the earliest and earnings for low and middle income families won't reach pre-recession levels until 2023

But even if we accept Osborne's metric of choice - real household disposable income - the picture isn't as rosy as the Chancellor implies. Household incomes did increase by 1.4% in 2012 but they went on to fall by 1.7% in the first quarter of 2013, the largest quarterly drop since 1987. 

As for inequality, Osborne won't be able to masquerade as an egalitarian for long. While inequality has fallen to its lowest level since 1986 (owing to a combination of lower wages for middle and high income earners, the automatic stabilisers and the rise in the personal tax allowance), it is expected to rise from now on as the welfare cuts bite. In particular, Osborne's decision to cap benefit increases at 1 per cent for at least three years (an unprecedented real-terms cut) means the poorest will see a steep fall in their incomes. The IFS expects inequality "to rise again from 2011–12, almost (but not quite) reaching its pre-recession level by 2015–16."

The Chancellor might want to have a good story to tell about living standards and inequality, but he'll need to change his policies first.