Articles

Category: Living costs

28 February 2011

Sitting in the middle, Public Finance

Yesterday at the Resolution Foundation we launched a wide-ranging investigation into the pressures now facing low-to-middle earners. The Commission on Living Standards will focus on the long-term economic trends that are changing the reality of life for those on low-to-middle incomes in Britain, writes James Plunkett

It will bring together leading thinkers, from major employers to top economists, to look at a wide range of trends, from pay and employment to the cost of living. Its aim is to bring much greater definition to a debate than can prove elusive – think the ‘squeezed middle’ and ‘alarm clock Britain’ – and, ultimately, to sketch out a view of what can be done.

That aspect of the Commission’s work – thinking about responses to the problem – won’t just mean making recommendations to government. Employers and third sector organisations will have an important role to play in raising living standards in the decades ahead. But two big parts of the work will speak directly to how the role of government may need to change in the coming years: the question of how we reform the tax-benefit system to ease pressures on low-to-middle earners, and that of how public services can give greater support to families to raise their own living standards.

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Three charts that complicate a simple focus on growth, Spectator Coffee House

GDP growth figures have become the barometer of choice for commentators trying to tell the political weather – a good measure of how the public will eventually fall in the faceoff between Osborne and Balls. The story goes that a return to sustained growth will mean a return to rising living standards. That means a vindication of the government’s position, and a victory for the Chancellor.

As a simple story, that makes sense if the pressures now facing Britain’s households are straightforwardly growth-related – if, in other words, we’re in a post-recession hangover that will vanish when growth returns.

But there’s now mounting evidence of a deeper problem for living standards in the UK economy. Take the chart below. It shows long-term trends in UK median wages. It reveals that stagnant wages didn’t start with the 2008-09 recession, but began as far back as 2003, when GDP growth was still strong.

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Wanted: a new purpose for British capitalism, New Statesman

Gavin Kelly asks how Britain can avoid going down the US path where for the last generation the majority of the gains from growth have gone to the richest.

If this year's question is "When will growth resume?", next year's will surely be "How do we make sure that growth benefits the great majority of working people?".

For much of the 20th century, that second question would not have been necessary. Higher growth was underpinned by rising labour productivity; higher productivity led to rising real wages. The link between growth and living standards held strong – it was the golden thread of the social contract, binding together the shared efforts of labour, capital and government in a win-win deal for all sides.

But today, across many advanced economies, that thread is badly frayed, while in others it has already severed. The US has seen a generation of flat or falling real incomes among the bottom half of earners. From 1970 to 2010 the link between productivity and wages ruptured – the "great decoupling", as Lane Kenworthy has called it. GDP continued to grow, but it didn't trickle down.

In the 37 years from 1973 to 2010, the annual incomes of the bottom 90 per cent of US families rose by only 10 per cent in real terms. Median US household income was $64,000 in 2007. Had it kept pace with growth in GDP, it would have grown to $90,000. As the table below shows, the richest 1 per cent of the population has captured a truly staggering proportion of the gains from all income growth – two-thirds of the total gain during the Bush years.

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After the recession, the real pain begins, New Statesman

Fuel price protests rattled Blair. The 10p tax row dogged Brown. Is David Cameron ready for the storm that his huge raid on our personal finances is about to unleash? writes Gavin Kelly in the New Statesman.

Economic narratives take shape like stalactites: the drip, drip of daily headlines deposits its wisdom and, before you know it, there's a solid consensus. For the recent recession, that consensus runs something like this: things were much worse than expected in the financial system but far better than predicted in the real economy - particularly in terms of the fallout in unemployment and home repossessions.

Now, the thinking goes, we are on a tentative path to recovery but we need to watch the growth figures carefully. Some still predict a double dip; most do not. But the key framing questions for 2011 are broadly accepted - will growth pick up, and can a resurgent private sector create jobs as fast as they are being destroyed in the public sector? Will the gamble pay off?

Behind that account, however, lies another story. It is one that is increasingly at odds with the impression given by headline GDP numbers and, critically, with the coalition's "on the mend" narrative. It focuses not on GDP, or the headline figures, but on the living standards of a swath of our working population on low to middle incomes. It is a story not of riding high in the boom years and then falling, only to bounce back quickly and thrive in the years ahead, but one of prolonged squeeze - a tale of growth without gain.

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We'’re all squeezed now, Prospect Magazine

Research suggests that most British people will call themselves middle class by 2020. But many will find it increasingly hard to achieve the lifestyle that is supposed to go with it, writes Gavin Kelly in Prospect Magazine(£).

It is one of the most famous sketches in comedy: John Cleese, Ronnie Barker and Ronnie Corbett, lined up in descending height, dressed as the three tiers of the British class system: a pinstriped upper-class Cleese to the left; a middle-class Barker in suit and tie in the centre; and Corbett, meek and flat-capped, playing the role of the lower class, who sighs: “I know my place.”

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A new generational compact, Progress

Care for the young and old will be the next great chapter in the story of the welfare state. Labour should seize the chance to write it, write Gavin Kelly and Nick Pearce.

One of the best books written by a politician in recent years is David Willetts' The Pinch. In it Willetts documents, with great clarity and rich empirical evidence, how the baby boomer generation has been pinching too big a share of the nation's wealth, enjoying rising house prices and generous pensions while failing to invest in the future for their children and grandchildren.

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The 'squeezed middle' is a real problem, The Guardian

Whatever the terminology, politicians cannot afford to overlook a group that feels justified anxiety about its standard of living, writes Gavin Kelly in The Guardian.

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The Big Squeeze, Spectator Coffee House

The media and political establishment are yet to wake up to the fact that working families in Britain are about to become poorer, writes Gavin Kelly in the Spectator Coffee House.

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