A strange and troubling feature has emerged in the early stages of the UK general election campaign. For the past 40 years the centre ground of the battle has been the economy and the respective policies of the major parties. Tax and spending proposals featured highly.
But the battle thus far has been dominated by the personalities of the leaders. And Brexit, while a recurring topic, has yet to find a defining focal point beyond claims and counterclaims over “hard” and “soft” Brexit given that detailed negotiations have yet to begin with EU leaders.
Yet it is the economy – and the bread and butter concerns over household incomes, earnings and general financial well-being – that are of keen concern to voters and where disappointingly few new ideas or policy proposals have yet to emerge.
This is all the more notable given the widespread conviction among economists that little by way of improvement is expected – and indeed, most are forecasting a slowdown in growth and employment for the foreseeable future. Figures last week showed that the UK economy grew by just 0.3 per cent in the first three months of the year. The Office for National Statistics said that the slower pace was due mainly to the service sector, which sank to 0.3 per cent growth against 0.8 per cent at the end of 2016.
As for Scotland, if only we were so lucky. Official Scottish government figures showed a 0.2 per cent fall in output in the fourth quarter of last year and that Scotland’s economy grew by a mere 0.4 per cent over 2016 as a whole – a deeply disappointing estimate and little more than half the growth rate experienced by the UK as a whole. Yet on this the SNP administration has yet to break an unaccustomed silence – other than retreat into the familiar rhetoric of “Westminster imposed austerity”.
The problems, of course, run deeper and are more intractable – which may explain why so little mention has been made of economic policy in the election so far. A measure of how deep seated the problems are can be found in the latest report from the Institute for Fiscal Studies (IFS), which examines key trends in the UK labour market in recent years and the challenges facing the next government.
On the surface, it appears we have been holding up well: the remarkable growth in employment since 2012 means the current employment rate is at a record high of 75 per cent. However, it has levelled off in recent months and is not forecast to rise further. Although the number of non-UK-born workers has increased faster than the number of UK-born workers since 2008, the employment rate of UK-born individuals is at a record high.
But the employment boom has not translated into higher earnings. After adjusting for inflation, average earnings of employees are still below pre-recession levels, and are being squeezed by rising household inflation. Central forecasts from the Office for Budget Responsibility imply average earnings will still be lower than their 2007-08 level in 2021-22.
And this is despite an extraordinary increase in the education levels of the workforce: 35 per cent are now graduates compared with 25 per cent in 2008. Men and younger workers saw larger falls in average earnings than women and older workers since 2008.
And with unemployment having fallen to below five per cent, further increases in employment will be harder to achieve. A key future challenge is pay growth: it will continue to disappoint unless poor productivity growth can be redressed. It is hard to overstate how important this is to increasing living standards in the long run.
Jonathan Cribb, a Senior Research Economist at IFS and an author of the report, says: “A period of this length over which earnings have fallen is unprecedented in modern times. They had started to recover a little between 2014 and 2016, but rising inflation linked to the fall in the value of the pound since the EU referendum has put a stop to that modest recovery. Tackling this will require a turnaround in the UK’s recent dire productivity performance. This should be a central focus of the next government.”
The squeeze on consumers is further highlighted by the ONS reporting that households’ real disposable income fell 0.4 per cent quarter-on-quarter in the fourth quarter of 2016 and was only flat year-on-year. Thus ongoing robust consumer spending in the fourth quarter of 2016 came at the expense of the household savings ratio plunging to a record low of 3.3 per cent in the fourth quarter.
Global Insight economist Howard Archer says the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power. He expects inflation to reach three per cent before the end of 2017 and it could well rise further to a peak of around 3.3 per cent in the early months of 2018.
Taking all this together, the slow squeeze on household incomes is set to intensify, notwithstanding better than expected CBI figures for April showing a year-on-year bounce in retail sales volumes to the best level since September 2015. This was largely due to the timing of the Easter holiday and better weather which boosted clothes sales.
It is against this background that economic policy debate has been muted. It is by no means clear, for example, whether the traditional Conservative Party prescription of lower taxes will be on offer. It has hinted that it may drop the previous government’s pledge to keep a lock on income tax, national insurance and value added tax. While this will give a Conservative chancellor new flexibility, raising the spectre of higher taxes is fraught with political risk ahead of the election.
And as matters stand the IFS has calculated that the total tax burden is set to rise to its highest level in 30 years – even with the Conservatives’ “tax lock”. The March Budget projected that the tax burden will rise to 37.2 per cent of national income by 2019-20, the highest rate of aggregate taxation since 1986-87. And with overall government debt approaching 90 per cent of national income, the victor on 8 June will be well and truly boxed in. Little wonder there is a muted engagement so far on tax and economic policy.