Why living standards and public finances matter

They are the towering issues of British politics that are not about to go away soon: the steep decline in living standards and the grim state of the public finances. Each compounds the other. Taken together they will dictate the terms of politics between now and 2015.

Convince the electorate you have something important to say on one of them and you may temporarily seize their attention. Persuade them that you are serious about both and you will be in pole position to win the next general election.

Yet there are many on either side of the political aisle that would like to believe it is not so. The mood last week in Brighton at Labour’s conference revealed there are plenty in the party who believe their eye-catching policies aimed ateasing pressure on family budgets – on energy prices, the minimum wage, childcare and the like – mean they can move beyond, or at least reduce the focus on, the enormous problem any future government will have eliminating the deficit. This is by no means the only view – indeed Ed Balls, the shadow chancellor, gave a more forthright account of the fiscal challenge than ever before. But there is no doubt where the centre of opinion lies among the party faithful.

Equally, at the Conservative gathering in Manchester this week there will be plenty who believe the debate on living standards, while important and requiring sympathetic handling, is overdone. Once steady growth is restored these worries will melt away like snow on a sunny day. The implication being that the Tories’ perceived credibility on the public finances should remain their overriding message. Why get diverted from the clear mission of restoring fiscal order into the messy business of tackling the underlying causes of stagnant wages – not least when the public starts from a sceptical position about Tory instincts on issues such as low pay?

The easy temptations of these arguments should be resisted. They would make for poor policy and skewed politics. Both leaderships need to deal with the difficult stuff.

When it comes to the state of the public finances, it is beyond credulity to hope they will not hang over the ballot paper as much as the prospects for family incomes. The gravitational pull of election campaigns is always to a relentless focus on tax and spending – expect this in spades come 2015. The next government is expected to have to make another £26bn of cuts or tax rises above those scheduled to bite by 2016. This remains the central fact about the next parliament.

As for living standards, the notion that an upturn in gross domestic product will on its own deal with current concerns seems heroically optimistic. Sure, the problem is in large part cyclical, but it is structural too. It is not about to disappear. The wages of the typical worker are set to fall through next year and they will be doing well to climb noticeably above their pre-crash levels by the end of the decade. In real terms, the minimum wage has tumbled below the level it was at in 2004 and, assuming it does not sink further, it would take four years of chunky rises of above 2 per cent over inflation just to recover lost ground. People will be feeling the squeeze for years to come.

True, much could change between now and May 2015. Having made a habit of telling us the public finances are in a greater state of disrepair than previously thought, no one should be surprised if the Office for Budget Responsibility now tilts the other way, winding down the estimate of the underlying deficit.

Similarly, if a strong recovery really takes hold – still a big “if” – then perhaps productivity, and with it wages, will rise more quickly than expected. Perhaps. But the idea that any such improvement will remove either of these issues from the heart of political debate over the next 18 months seems far-fetched.

Arguing that both main parties must answer the same two questions is, however, a very different thing to suggesting they should arrive at the same answers. There can be competing strategies for boosting household incomes; just as there can be alternative paths to restoring fiscal balance – with different implications for tax and spending.

As the next election draws closer, each party leadership should bear in mind that they will be scrutinised most closely in their respective area of weakness rather than strength. Whoever convinces on both fronts is likely to come out on top.

This post originally appeared on Financial Times Opinion