Prepare for a pay squeeze as big as in the 1810s

Published on Jobs, Skills and Pay

The early 21st century doesn’t have too much in common – thankfully – with the war-torn early 19th century (Although a global superpower was headed by a man of dubious temperament). But Autumn Statement 2016 and the first official projections of the impact of Brexit on the UK’s economy added an unfortunate new connection. If the OBR is right, decade-on-decade pay growth in 2020 will be on a par with the 1810s in terms of the scale of the squeeze people have experienced.

Real average earnings are now forecast to be £830 a year lower than expected in 2020 – thanks to a double whammy of weaker pay rises and higher inflation. Growth of just 1.6 per cent between 2010 and 2020 compares with an increase of 12.7 per cent in the 2000s and over 20 per cent in every other decade since the 1920s.

Given these headwinds, the onus fell on the government to walk the walk on helping just managing families after weeks of talking the talk on supporting them. To be fair, the Chancellor did announce a handful of measures that will benefit some of the so-called JAMs: a 30p rise in the National Living Wage, banning letting agent fees and an extra 40,000 affordable homes. All welcome if not earth-shattering.

But the real test of the government’s rhetoric was how Philip Hammond would treat cuts to benefits bequeathed to him by his predecessor. Changes to Universal Credit announced at the Summer Budget in 2015 promised to hit the incomes of typical just managing families to the tune of £1,500 by the end of the parliament. That test was failed.

The 2 per cent reduction in the taper rate – how quickly benefits are taken away as families earn more – was a step in the right direction. But it was small fry. Together, when set against all other policy changes announced since the 2015 election, the Autumn Statement will only undo 7 per cent of the hit from benefit cuts to the bottom half of households.

You could argue that the Chancellor’s hands were tied in reversing these cuts by the huge borrowing black hole he faced. But the fact he chose to increase borrowing elsewhere begs the question of whether his tax and benefit priorities are right. After all, he chose to continue with expensive tax cuts – raising the income tax threshold and reducing corporation tax – that will overwhelmingly benefit those in the top half of the income distribution.

The combination of these policy choices and economy projections mean the rest of this decade is on track to be as bad if not worse for living standards as the period since 2010. Incomes are – on average – in line to grow by a measly of 0.2 per cent a year, even less than the sluggish 0.5 per cent a year between 2010 and 2014 as the country struggled through the aftermath of the financial crisis. And resurrecting the old question of whether we’re all in it together, while the highest earners were hit the hardest in the last parliament, it’ll be low and middle income households feeling the tightest squeeze this time around.

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To quote another figure from the early 19th century, “a leader is a dealer in hope”. While the Autumn Statement won’t have given just managing families much cause for hope, it’s crucial that Theresa May’s government does it all it can in the months and years ahead to prevent this grim forecast future from becoming reality.

This article originally appeared on the Prospect Magazine blog