IT WAS one of the essential tenets of Reaganomics – that economic growth in the wider economy would eventually “trickle down” and enrich the population as a whole.
In many ways we have not moved on from the movie actor- turned-President’s “voodoo economics”– with every rise in Gross Domestic Product or every fillip in retail sales being heralded as a return to prosperity.
However, this week saw the publication of a groundbreaking report by the Resolution Foundation which warned that lower income families across the UK may be locked in a terminal slump which threatens the fundamental health of the economy.
The Commission for Living Standards suggests even if the UK economy returns to steady growth lower income households will be worse off in 2020 than they were in 2011.
“Relative poverty is set to rise in the ten years to 2020, along with child poverty and other measures of relative earnings and income inequality. Incomes are set to decline for low to middle income households by between three and 15 per cent. The picture is somewhat better for higher income households, with the result that income inequality is set to increase.”
Compiled by an alliance which takes in bankers, trade unionists and parenting groups, the report argues lower income families have been disproportionately hit by the squeeze in wages, the increase of household debt and the rise of the cost of staples such as food and fuel.
Unless more can be done to combat the state of stagnation being experienced by lower income families, a portion of the population will remain in recession even if the economy as a whole returns to growth.
Combating the effects of inequality has become a matter much debated by economists across the world, who have an increasing tendency to argue that economic growth is not enough if it only benefits those at the top.
Clive Cowdery, commissioner and chairman of the Resolution Foundation, said: “For all of today’s important arguments about growth and recovery, there remains far too little debate about whether growth will benefit the broad majority of people. Our work suggests this will not happen automatically but also that, even in a tight fiscal climate, things can be done to ensure the benefits of economic growth are shared by all.”
According to the report: “Only 12 per cent of every pound of UK GDP now goes to wages in the bottom half – down 25 per cent in the last three decades.”
It says the UK has: “a chronic lack of skills in the bottom half of the workforce, a lack of structure in the jobs market and a lack of countervailing pressure for employers to pay above the bare minimum.”
What is more: “The UK now has the second highest level of low pay among advance economies, behind the US.”
Inflation on household essentials such as food and fuel has a disproportionate effect on those on lower incomes. “From the early 2000s the cost of basic goods including staple foods, household fuel and council tax rose far faster than headline inflation. This sharply eroded the purchasing power of low to middle income households who spend a larger proportion of their budgets on essential goods.”
A key indicator is the cost of household energy, which has soared over the last ten years. According to the Scottish Government’s own figures, more than half the households in Scotland may be in fuel poverty by 2016 – meaning they spend more than 10 per cent of their income on household bills.
The report shows that during the 2000s the cost of household fuel rose by 110 per cent, food rose by 37 per cent and travel costs rose by 52 per cent.
Over the last ten years, it says the annual rate of inflation for people on lower incomes has risen £400 more than for those on higher incomes.
The report says the Government should be doing more to balance such inequality, saying less inequality and more “shared growth” is essential for the wider economy.
Among its recommendations, the foundation suggests improved access to affordable childcare, doing more to help older people stay in work, raising skills. reducing council tax for cheaper properties and doing more to support low-paid workers. It also suggests TV licences and winter fuel payments should be means-tested.
Dr Ros Altmann of Saga welcomed the calls for more support for older workers, saying: “The older generations represent an incredible opportunity to reignite our economy and, as the baby-boomers head for retirement, encouraging more part-time work will help sustain growth.”
Sally Russell, commissioner and director of Netmums, said: “Much of the rise in living standards in the past 40 years came from more women working. These personal choices are now being curtailed by the very high cost of childcare, which is stopping many women from returning to work or forcing them into lower-skilled, part-time roles, meaning families cannot increase their incomes.”
Sir Win Bischoff, chairman of Lloyds Bank, who is also one of those behind the report, said: “These are difficult times for the UK economy and the first priority is to secure a return to growth. But for long-term sustainability we must also ensure that growth is built on the solid foundations of rising real wages through productivity increases and higher employment across the working population rather than rising debt and state support.
“That will require widespread improvements in skills, stronger work incentives, and an efficient tax and benefit system. All of this is required if we are to ensure that the benefits of growth are widely shared.”