The living standards issue that’s bigger than Brexit for lower income households

Published on Tax and Welfare

Love it or loathe it, the long shadow of Brexit is set to dominate our political weather for some considerable time to come.

With good reason of course. The long-term impact remains uncertain, but we can be sure it will be significant. And in the near-term, there’s no denying that the referendum result is at the heart of the pay squeeze that has returned in 2017. The collapse of the pound continues to feed through into higher import prices, with this spike in inflation more than offsetting any cash increases in wages in recent months.

Yet for millions of low and middle income Britons, the living standards clouds were gathering even when Brexit was nothing more than a twinkle in Boris Johnson’s eye.

The key moment came when, fresh from the Conservatives’ 2015 general election victory, then Chancellor George Osborne delivered a Budget that promised to “reward work and back aspiration”.

True to his word, he presented some very good news in the form of the introduction of the National Living Wage – a sizeable and welcome supplement to the minimum wage for employees aged 25 and over. Since its introduction millions of low paid workers have benefited from wage increases that have far outstripped anything seen in other parts of the earnings distribution.

The problem was that the good news in Osborne’s Budget was eclipsed by the bad. The estimated £4 billion boost that the raising of the wage floor was expected to provide by the end of the decade was dwarfed by savings of £14 billion from cuts to working-age welfare.

And it wasn’t just the variation in scale that mattered, it was the lack of overlap between the winners and losers too. The £14 billion of welfare cuts were concentrated among households in the poorest half of society. In contrast, the £4 billion gains from the higher wage floor were relatively evenly spread. After all, not all low paid people live in low income households.

Add Brexit uncertainty into the mix and we’re now facing the prospect of something we haven’t seen before: a toxic combination of rapidly rising income inequality and a material deterioration in living standards. Inequality of course soared in the 1980s, but incomes on the whole grew. After 2007 incomes fell, but they did so in a way that didn’t increase inequality. The current perfect storm is unprecedented.

Faced with such a gloomy forecast, any government that’s interested in re-election must feel the need to act. In this regard, Brexit provides an opportunity. The world has clearly changed since 2015, offering the Chancellor the chance to legitimately argue that so too must government policy.

He chose not to take that opportunity back in March: his Spring Budget unwound just £0.6 billion of the £14 billion of cuts. But six months is a long time in politics. The Conservatives’ poor election showing means the Chancellor will be under pressure to provide some cheer when he delivers his next Budget at some point in the coming months.

He should of course introduce measures that try to further boost employment (which is already at a record high) and fix the UK’s appalling productivity performance (which helps to explain why UK workers earn no more today than they did in the mid-2000s). And in the longer-term the details of our post-Brexit position in the world will of course be of huge importance.

But the easiest and most direct way of protecting low and middle income households from another living standards squeeze is to simply revisit the welfare cuts introduced by his predecessor. Projections suggest that there’s enough headroom within the fiscal rules he has set himself to pay for the reversal of those cuts still to come. Alternatively, he could fund a large portion of any reversal by cancelling planned tax cuts that deliver the majority of gains to the richest parts of society.

Brexit undoubtedly matters. But political obsession with it mustn’t be allowed to obscure more immediate priorities. There is no Brexit deal – good or bad – that could matter as much in the next few years to lower income households as the government’s position of welfare.

A version of this article first appeared on The Guardian