Britain’s stunted ‘recovery’ leaves us wishing for what might have been
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Version 0 of 1. Household incomes are back to 2007 levels, before the crisis – though still below their 2009-10 peak. Does this in some way vindicate the government’s economic strategy? For most economists, even asking that question is bizarre. As the UK has got richer, average incomes have grown pretty consistently since the second world war. And after recessions, they have grown particularly fast – for example, between 1982 and 1985 they grew by about 3% a year. But this “recovery” has been different. As Paul Johnson, director of the Institute for Fiscal Studies, puts it: “It’s astonishing actually that seven years later incomes are still no higher than they were pre-recession, and indeed for working-age households they’re still a bit below where they were pre-recession.” For the chancellor, George Osborne, to claim this as evidence of economic success – “a major milestone in our recovery”, he told BBC Radio 4 today – is not really credible. Related: UK household incomes near pre-banking crisis levels, thinktank claims So the recent record has been pretty dismal. As the IFS correctly points out, this is by no means the responsibility of either this government or its predecessor: other factors, ranging from commodity prices to the eurozone crisis, and above all the astonishing weakness of UK productivity growth, have played a major part. But that’s not to excuse the mistaken approach to fiscal policy in the early years of this parliament. Simon Wren-Lewis, professor of economics at Oxford, found that – even using the cautious estimates based on the analysis of the government’s Office for Budget Responsibility – cutting the deficit too fast has cost us about 5% of annual GDP, or £1,500 per household. While we should not put too much weight on one numerical estimate, there is little doubt that the cost of this error was significant. Fortunately, the government partially reversed course halfway through this parliament: its initial plan to eliminate the current deficit by 2015 has long since been ditched; instead the chancellor has made a virtue of what he once described as “the Guardian’s plan” to halve the deficit. Of course, what really matters is the implications of all this for the future. Here, the IFS makes two key points. What happens to average incomes over the medium to long term will depend on restoring productivity growth. We all have our pet policies to do this, but most economists would favour boosting skilled and student migration; improving transport infrastructure; and building more houses. Sadly, things seem to be going backwards on the first of these, with most politicians shying away from making the connection between immigration and growth. On the second, some progress has been made, but key decisions – such as expanding aviation capacity – are still being postponed. On the failure of successive governments to deal with the dysfunctional housing market, the more said the better – maybe they will finally get a grip on this issue. The IFS’s second point is that the choices made on tax, spending and borrowing by the next government will matter. So far, the distributional impacts have been mixed, with the largest burden falling on top earners (owing to the top rate tax and changes to pensions taxation); low-income working families (cuts to tax credits); and disabled households, especially poorer ones. Looking ahead, the benefits of further raising the personal income tax allowance goes mainly to middle and upper-middle earners. Meanwhile, taxing higher earners’ pensions to cut tuition fees is mostly a transfer from currently prosperous middle-aged people to young people who will themselves be well off in future. And cutting working-age benefits while protecting pensioners will further redistribute from the young, poor, disabled and those with children to the old and (relatively) well off. So today’s figures certainly aren’t evidence of success, still less a vindication of the government’s economic strategy. Rather, they are further confirmation of how dismal economic performance has been for most of us compared with what, in 2007, we might reasonably have expected. |