The King’s Speech: Governor’s “bigger picture” isn’t big enough

Published on Incomes and Inequality

Bank of England Governor Mervyn King yesterday acknowledged that Britain’s households are now facing the toughest squeeze on living standards since the 1920s. His comments echo the findings of our report Squeezed Britain, which revealed in December that, on the basis of Office for Budget Responsibility (OBR) projections, the average low-to-middle income family will be £720 poorer in 2012 than they were in 2009.

That all comes before the government’s planned spending cuts. And with King now admitting that inflation could hit 5 per cent this year, that £700 is likely to rise, with faster price-growth doing even more to corrode the value of wages.

As far as King is concerned, behind the day-to-day pressure being felt by families, there is a ‘bigger picture’ here that we need to keep in mind. The current period of declining real wages is simply the “inevitable” result of an economy that’s rebalancing.

As such, it’s a problem that the Monetary Policy Committee “neither can, nor should try to, prevent”. We need to ride out the storm, and wait patiently for wage-growth to resume its long-term trend of outpacing inflation.

It is good to see King acknowledge the depth of the squeeze now facing families across Britain. But his ‘bigger picture’ isn’t big enough. As the chart below shows, the stagnation we’re now seeing in the value of real wages is not simply the result of the recent downturn; on the contrary, the last time the UK saw strong and consistent real wage-growth was 2003 – long before the crisis hit, and long before the dip in GDP growth.

The truth is, we still have little understanding of what is causing this trend.

In the coming months at the Resolution Foundation we will be launching a major programme of work to look at that question, and to examine the broader challenges raised by the longer-term decline in living standards for low-to-middle earners. For now, it all suggests that something more fundamental is happening in our economy than King’s speech implies. If that’s the case, just ‘waiting it out’ is unlikely to deliver a cure.