Drop in real wages reflects years of sluggish economy
FOR ANYONE who thought we had crawled our way out of the economic woods, figures for May are a reminder of just how stagnant the UK economy is. Output, according to the Office for National Statistics, fell by 0.1 per cent over the month – something it blamed on the extra bank holiday for the Coronation, though strikes must have played their part.
It is not all bad news. Many economists were expecting a steeper fall. The long recession which the Bank of England confidently predicted for much of 2023 has yet to arrive – if it ever does. But whatever positive spin you might try to put on it, the truth is that the UK economy is going nowhere.
A decade of sluggish economic growth – the 2010s – is being followed by a decade of zero growth. GDP is bumping along at about the level it was on the eve of the pandemic. Given that the population is growing that means GDP per head is falling – we are all slowly getting poorer. That is why, ultimately, wages are failing to keep pace.
With inflation at 8.7 per cent, Rishi Sunak’s offer yesterday of a six per cent rise for a million public sector workers still means a real-terms cut. It isn’t so much that someone else – chief executives, shareholders or others – are helping themselves to the financial rewards we think we deserve, we as a nation are failing to produce more.
PRODUCTIVITY growth fell away after the 2008/09 recession, but since the pandemic it has virtually stopped altogether. Separate ONS statistics published this week show that in public services, the average worker is producing less now than when Tony Blair entered Downing Street in 1997.
That is shocking, given technological developments such as the internet and AI ought to have increased efficiency massively. It doesn’t necessarily mean individual employees are working less hard than they were 25 years ago – I’m sure most are putting in a conscientious effort. But it does mean public services are being mismanaged.
Working practices have not been modernised, technology is not being used to its best effect – and the public sector is creating too many non-jobs which hamper rather than help.
On top of this, the Bank of England has failed to do the most important job: to keep a lid on inflation. First, the Bank failed utterly to see inflationary pressures building – predicting as late as May 2021 that the Consumer Prices Index would rise no higher than two per cent.
Then, when inflationary pressures became obvious it acted too slowly to raise interest rates.
In the US, where the Federal Reserve was quicker to react with interest rate rises, inflation this week fell to three per cent. The result is that we now face higher interest rates, and rates held high for longer, than we would otherwise have needed.
Unsurprisingly, Labour has tried to capitalise on the sluggish economic growth under the current government. But what would it do differently? Pouring even more, borrowed, money into a stagnant public sector isn’t going to achieve growth; quite the opposite, in fact.
Nearly a year ago, the Conservative party elected a new leader who promised to make “growth, growth, growth” the absolute priority of her government.
As we know, it went horribly wrong very quickly for Liz Truss as markets took objection to Kwasi Kwarteng’s mini-Budget. Their error was to announce uncosted tax cuts at the same time as planning massively to increase public spending under the Energy Price Guarantee. But she and Kwarteng were essentially right in their focus on growth. Unless we can increase productivity we cannot grow richer as a nation or as individuals.
IF WE don’t produce more our attempts to award ourselves higher wages will always be thwarted by inflation. It is going to take a multipronged effort to rouse the UK economy from its slumbers. It will take better working practices in the public sector, combined with better incentives for the private sector to invest.
As the OBR observed yesterday, we have an extra 440,000 people on sickness benefits since the pandemic, adding £6.8billion to the welfare bill. We need more people in the workforce – we have far too many people parked on out of work benefits.
It will take a more hawkish stance against inflation. And it will take firmness on the part of the Government to reject excessive pay demands. Pay rises will be possible once the economy is growing again. But for now, shrinking real pay is merely a reflection of our collective failure to produce more.
‘Unless we increase productivity, we cannot grow richer as a nation’