Worried about losing a decade after the autumn statement? We might lose two

Those fretting about whether we might face a “lost decade” need to steel themselves. It could be worse than that. Based on the downgraded Office for Budget Responsibility (OBR) assumptions we can now project that the wages of an ordinary worker in 2016 will be at the same level as they were in 2001; and that only under rosy assumptions will wages surpass their pre-recession levels by 2020.

And if, when GDP steadily climbs again, we find the “new normal” is for growth to co-exist with wage stagnation, as occurred in the years up to 2008, then we need to prepare ourselves for not one lost decade but two. And all this is assuming that the OBR is actually right to say that we’ll return to steadily rising GDP growth in 2013 and beyond. This gloomy longer-term outlook comes on top of last week’s news from the Office for National Statistics which confirmed what millions of people already felt in their pocket: real wages have fallen fast as inflation has outstripped earnings for low-to-middle earners.

Given this context, how are Britain’s squeezed households going to achieve a higher standard of living? Will promised economic growth translate into financial gain for families? There are only three real ways of achieving this: higher wages, more people working (or more hours worked), or greater income from the tax-and-benefit system. That’s basically it.

Looking back at how these different forces combined to create higher living standards in the years prior to the recession is both instructive and worrying – scotching the complacent notion that when growth picks up things will automatically turn out all right for families on low-to-middle incomes. Rising income from female employment was crucial to improving household finances, as it has been consistently over recent decades. A steadily rising minimum wage – up 65% in real terms since it was introduced in 1999 – dramatically helped those on low pay, even if the gains didn’t trickle up to middle earners. And tax credits played a vital role, increasing by around 5% a year in the years before the crisis.

Whether you love them or loathe them, these were the forces that generated higher living standards for millions of households. And they are now all likely to flatline or go into sharp reverse. Which raises a rather important and, you might think, blindingly obvious question: what will replace them?

Pose this to members of the coalition and the answer you will receive contains a list of things that they say won’t solve the problem. You’ll hear that we can’t sustain higher wages via bureaucratic regulations like the minimum wage – indeed this mindset is one reason why experts think it will be doing well just to keep up with inflation in the years ahead. You’ll doubtless be told that tax credits are the ultimate leitmotif of a state largesse that we can no longer afford – which is why, as the autumn statement so vividly demonstrated, they are the coalition’s favoured quarry to mine whenever it needs to plunder new resources.

And nor, at least from the more candid members of the coalition, will you hear that increased female employment is likely to be a motor of higher living standards as cuts to the public sector, and the withdrawal of support for second earners, take their toll.

If you persist in pushing for an answer to the “how-will-we-get-richer-in-the-decade-ahead” question then you will end up listening to vague talk about the promised fruits of “rebalancing” the economy. Quite how this is supposed to translate into gains in the household finances of a struggling family is never made clear. It would be nice to have a plan A for living standards.

Perhaps wages – low and middle – will finally recover their mojo and climb rapidly in a few years’ time. Maybe. But let’s not invest all our hopes in that scenario.

It’s as likely that we’ll face a prolonged period of low-wage growth, meaning higher living standards will require more people working. And if that’s the case then we need to think radically about how Britain can better resemble those countries that see far higher employment rates, not least among women, at the same time as we continue making big strides on older workers. This raises not just an economic challenge, but a far-reaching social and cultural one too.

In the longer term, it may turn out that getting the right policy on childcare and elderly care is not just vital in its own right; it may be our best industrial policy too. Limiting ourselves to one lost decade is not a foregone conclusion: we need to think afresh if we are to be sure it won’t be two in a row.