Is the fall in our living standards inevitable? No


1:38 pm - September 12th 2011

by Nicola Smith    


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Today’s IFS report sets out the scale of the living standards falls that families across the UK are set to experience. The consequences of cuts and tax rises on household incomes are set to be felt for up to 10 years and with households having already experienced the largest drop in income since 1981 over the last year.

For an average household the living standards gap is likely to be equivalent to a loss of £4,600 a year by 2013.

But a key question put to me as I Woke Up to Money this morning, is whether these living standards falls are inevitable.

The Government would have us believe there is no other way. Their story is that without sharp and immediate cuts interest rates will rise, growth will be stifled, confidence will plummet and the outcomes for everyone will be worse.

But the facts don’t bear this interpretation out – indeed the Government’s worst case economic picture is looking increasingly similar to our economic reality, with an additional dose of austerity on the side.

There are two key reasons the Government story doesn’t stack up.

Austerity is a direct cause of falling living standards

Falling living standards are a result of real incomes not keeping up with inflation, which has in part been directly caused by Government cuts and tax rises: incomes are being squeezed by higher VAT, tax credit and benefit cuts and a change in the inflation measure these payments are uprated by (from the higher RPI measure to CPI).

These measures are all a direct result of the Government’s decision to attempt to cut the deficit over 4 years with an 80:20 split between spending cuts and tax rises (and significant corporation tax cuts for large businesses and banks).

Slow growth and a weakening labour market
The other reason is that wages are trailing inflation. In the public sector this is because of a continuing pay freeze, while in the private sector it’s because weak growth in the economy and a slack labour market mean that few industries are in a position to bargain for pay rises that match or exceed inflation.

And crucially, austerity is playing a role in limiting the economic recovery (and therefore exacerbating the problem of falling real wages). As the global economic outlook darkens, consumers have less to spend and when Government simultaneously cuts back on expenditure demand in the economy remains weak and confidence falls.

It’s this combination of factors which has led to growth of only 0.2 per cent in the second quarter of 2011 and which means that GDP per worker in the UK remains 13% below trend, the worst in the G7 by some margin.

With growth slowing, unemployment rising and underemployment at its highest levels for decades it is no wonder wages are trailing inflation.

The Economist recently spelled out the impact that austerity is having for recoveries around the world, and the Managing Director of the IMF has said:

Slamming on the brakes too quickly will hurt the recovery and worsen job prospects.

Without Government stimulus our economy will remain at high risk of continued stagnation and at worse a double dip recession – and the further decline in jobs and incomes that either scenario would bring.

In contrast a focus on boosting demand and a slower deficit reduction timetable has potential to improve living standards and support growth, which in turn would further support jobs and incomes.

Of course the deficit can’t just be ignored. But austerity is proving to be self-defeating.

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About the author
Nicola is the TUC's Senior Policy Officer working on a range of labour market and social welfare policy. She blogs mostly at ToUChstone.
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Reader comments


1. Leon Wolfeson

Wages have been falling as a percentage of incomes for nigh-on 30 years, despite productivity gains, and wealth has been re-accumulating to the rich. It’s not inevitable, but it’ll take far more than you’re suggesting.

“Wages have been falling as a percentage of incomes for nigh-on 30 years,”

Eh?

I think you mean the labour share of GDP has been falling for 30 years?

What a silly question. China and India’s economies are growing at 10% annually and ours obviously could be too if the parasitic Luddite politicians weren’t actively opposed to allowing it. Everybody knows that.

4. Leon Wolfeson

@2 – That too, but remember I’m the one who argues against the artificial distinction between progressively-taxed and 28% taxed income for the rich…

5. Just Visiting

Gradual lowering of living standards in the west is surely an inevitable fact of globalisation of information.

In manufacturing, you can spend X Milion on a factory for semiconductors/widgets and put it anywhere in the world – but you need skilled staff.
Once you have those skilled staff, the factory might as well be in China, where they work for less, because living costs are lower. There’s nothing British or German skilled staff can add – there are no secret skills, the Chinese workers can be taught the same courses as western workers (indeed it’s often the same western companies training them in China with the same training materials).

And if eastern Chinese cities get too expensive – go to western ones. Or to english speaking parts of Africa: I understand some Western companies do back office stuff in Ghana now: it’s cheaper than india?

Likewise in services like software development – the internet means all software guys globally can learn the same tips and tricks, download the same clever tools.
But in India they churn out 100,000 Computer Science graduates a year: who can live a very happy middle class life in India on a salary 1/3 of what they’d need here.

Globalisation, simples :<)

JV

* of course there are small, niches, where globalisation of information or training means things cannot be done cheaper in india or China or etc….not yet…

A friend of mine told me that in manufacturing – the industries left in the UK are still going because they either:
* make something so bulky and low value, the shipping costs are too great (foam mattresses.)
* are in such a small global market – the costs of getting set up in China and maintaining your staff training and etc that is unique to your little niche: is not worth the management and costs it takes. Eg Niches less than £50M global markets
* they are in brand new niches, with state of the art products -so the info is not globalised yet. But…. as soon as those high-tech niches grow a bit (new niches grow fast…) the benefits of taking the manufacturing/software development to China/India will apply and off it will go.

I can even imagine a day when accountants and lawyers go offshore!

Indian or Chinesse guys study in the UK, study English law, and then start back-rooms of lawyers/accountants overseas – with just the front office, of project managers and client liaison folk still based on London.

I know for some who hate lawyers and accountants…that come-uppance would be a wet dream!

Maybe it's already happening? Not my sector.

Or it may be a long way off. – the legal profession do move verrrrrrry slowly. I discovered today, there is no central database available to lawyers of employment tribunal cases. So if you want to find out if an employer has been regularly take to a trinubal…. you can't. (let me know anybody, if I was badly informed….. it was a lawyer who told me…)

@5. Just Visiting: “Gradual lowering of living standards in the west is surely an inevitable fact of globalisation of information.”

No, on the whole, the west is not competing with the east to make stuff. The west competes on the ability to design stuff and to provide services.

I think the answer is “yes” – wages in China are rising rapidly, as is the exchange rate, so we are losing an external source of cheap goods, plus the days of our effectively buying those cheap goods with borrowed money are coming to an end. This adds up to an inevitable reduction in real purchasing power for the UK.

Lots of people on this board want “rebalancing” and more manufacturing in the UK, fewer imports. I think this is what it looks like.

The only way we could avoid a reduction in real incomes is if we could engineer an increase in UK productivity to offset what we’re losing, but I don’t think we can match former Chinese wage rates.

I agree the cuts are doing us needless harm and that we could do more to grow our way out of the deficit, but let’s not pretend that no increases in taxes / reductions in spending were necessary. Some fiscal tightening was also inevitable.

9. Just Visiting

Luis Enrique

> Consumer goods from China are getting more expensive

Yes that will happen often but doesn’t deny the long term trend.

10. Just Visiting

Charlieman

> the west is not competing with the east to make stuff. The west competes on the ability to design stuff and to provide services.

I agree. We compete on that ability – BUT in a world of global information, , why should the west jave an edge anymore?

My German friend who works at an engneering design company -they have reduced their workfroce 50% the last couple of years as there is more competition from India + China. So even Germany is feeling the breeze.

Because designing too is global – eg software development is a ‘knowledge industry’ of creative design – and it’s grown hugely in India because wages for the same skill level are much lower.

And as it gets more expensive in India….there are other less developed countries that will benefit by hoovering up the work.

It won’t come back to the West on a large scale, unless our wage costs were lower – maybe in 100 years that will happen – at that point UK standards of living will be no higher than India, China and most of the rest of the world….

Uf Just Visiting were in any way correct it would obviously be impossible for Hong Kong or Singapore to be better off than their competitors a few miles away.

In fact, of course, they are among the wealthiest countries in the world – considerably mores than us.

The reason we are in recession is simply because our Luddite and parasitic political class insist on it with the full hearted support of the enitre econfascist movement, Nobody with the tiniest trace of personal honesty evver claims that the fall in living standards aka recession is in any way inevitable or other than deliberate.

@11 – If London declared independence, then it could do as well as the city-states in question. As it isn’t…


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Is the fall in our living standards inevitable? No http://t.co/d3aWsqZ

  2. AntennaRed

    Is the fall in UK living standards inevitable? No: http://t.co/VYeeCEB #UK #US #economics #austerity #banks #news #media #GDP #unemployment

  3. Jonathan Davis

    Is the fall in our living standards inevitable? No – Liberal Conspiracy (via @libcon) http://t.co/CBRiByD





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