The Autumn Statement - higher prices and lower earnings

The double whammy of higher prices and lack of earnings growth means money needs to be targeted to those who need it most.

Every time the Chancellor of the Exchequer stands up in parliament for a Budget or Autumn Statement, much of the focus is inevitably on how much any changes to taxes and benefits will affect different kinds of families.

However, at the precise moment that she or he sits down, the Office for Budget Responsibility (OBR) publishes its forecasts of what is going to happen in the economy. And on Wednesday this week, this was where the real shock was to be found.

In March this year the OBR thought that, in 2017, we would see earnings rising 2% faster than prices. If that had come to pass, it would have been a healthy level of wage growth, reflective of an economy where ordinary people were likely to see their purchasing power improving.

Only eight months later, however, and the story is very different. With a double whammy of higher prices due to the lower pound, and lower wage growth due to a sluggish economy, many of us will barely see wages keep up with prices. The forecast of 0.1% real earnings growth will take us back to a time when pay rises at work are only just keeping pace with prices in the shops rather than making us feel better-off.

The period from 2009 to 2014 was an unprecedented time in the UK economy. The long, slow recovery from the great recession in 2008 and 09 was characterised by wages falling behind prices in the shops for at least five years. However, as the chart shows, 2015 felt a bit better: it was the first year that we saw signs of recovering from that malaise. Yesterday, the OBR told us that this wage recovery is likely to be short-lived.

Real earnings growth (actual and OBR forecast)

So what is to be done about this? First and foremost, the government must avoid exacerbating the situation. At yesterday’s Autumn Statement, the Chancellor announced that he would continue George Osborne’s policy of increasing the income level at which we start to pay income tax, and the income level at which people pay higher-rate tax. At a cost of £2 billion in 2017-18, and £2.5 billion a year in future years, this policy doesn’t come cheap.

Yet we know that the majority of gains from this policy go to better-off households. And anyone on more modest incomes will have lost out far more from cuts to in-work benefits in 2016 and 2017.

If the income tax personal allowance in particular was important to the government, they could have restricted the benefits of raising it to basic rate taxpayers only. This is what George Osborne did during the early years of the coalition government and would have made sure that only low and middle-earners gained from the policy. Better still would have been raising the National Insurance threshold. Contributions kick in at earnings of £8,200 a year, much lower than the income tax personal allowance.

What is more, working families who rely on benefits to top up their incomes have lost out. Analysis shows the lowering of the Universal Credit taper – the one measure targeted at this group – doesn’t come close to making up for past and forthcoming reductions to in-work benefits.

The point is that when earnings are under pressure, prices rising, and public finances are tight, we need to make sure that money is targeted to those who need it most.