The defining question in British politics at the moment is if and when most families will start to feel the benefits of the economic recovery. At present, while output is rising at its fastest rate since the crisis, wage growth (just 0.7% in the most recent quarter) continues to lag behind inflation (2.2%).
In Labour’s view, this is further evidence that the link between growth and earnings has been severed and will not be easily repaired. Ed Miliband’s team point to the pre-crash period, when incomes for millions of low-and middle-income earners stagnated even in times of strong output, as evidence that the market can no longer be relied upon to deliver for the majority. In an economy as unequal as Britain’s, any gains quickly flow to the top. If there is wage growth before the election, it will be of the unbalanced kind seen in April, when high earners collected their deferred bonuses in order to benefit from the reduction in the top rate of tax (the one month since May 2010 in which real incomes rose).
But the Treasury is confident that wages are merely a “lagging indicator” and that higher output will translate into higher salaries from next year. As George Osborne remarked after the publication of the most recent GDP figures, “If Britain is growing then the finances of Britain’s families will start to grow.” The Treasury has released new research showing that overall worker compensation has kept pace with economic growth, although the gains have been distributed in the form of higher pension contributions and National Insurance Contributions, rather than higher wages.
While the debate over the nature of the squeeze (structural or cyclical?) continues, it’s worth noting one group for whom there’ll be no pre-election rise in living standards: public sector workers. In his most recent Budget, after freezing public sector salaries above £21,000 for the last two years, George Osborne extended the 1% cap on pay increases until 2015-16, entailing further real-terms cuts for workers. (In the most recent quarter, their pay fell in nominal terms by 0.4%.)
For Osborne, public sector pay restraint is an essential component of his deficit reduction programme (which, even after recent improvements, remains more than £40bn offtrack) but if the Tories want to expand their support, they would be wise to offer some relief. AsRenewal, the Conservative group aimed at broadening the party’s appeal among working class, northern and ethnic minority voters, has noted, the majority of Tory target seats have a higher than average share of public sector workers, including 60% of Labour-held targets and half of the top 20 Lib Dem-held targets. While the Tories are likely to pledge to cut taxes for all workers, in the form of a £12,500 personal allowance, they should also consider easing the squeeze on the public sector.