The British economy is not as strong as many think

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19 May, 2017

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How strong is strong?

The British economy is not as strong as many think

 

And “ordinary working families” have little to look forward to

 

IT IS NOW a cliché of the campaign that Theresa May is fond of clichés. One such cliché is that Britain has a strong economy. At last week’s prime minister’s questions, for instance, she referred to “a strong economy with the benefits felt by everyone across the country”.

On one level, this claim seems completely accurate. According to the International Monetary Fund, in 2016 Britain was the fastest-growing G7 economy. Many expect growth to slow in 2017, but not by too much. GDP per head is now well above pre-crisis levels. Unemployment is below 5%. The employment rate is its highest since records began.

On this evidence, the Conservatives would have a claim to be the party of a strong economy. But that is not the whole story. For one, what really matters for many people is not the rate of GDP growth—GDP is a highly abstract concept—but the rate at which their pay-packets are growing. On this question, the Tories have much less to crow about.

Compared with their level in 2010, when the Conservatives came to power along the Lib Dems, inflation-adjusted wages have fallen by about 1%. (They are also still below their pre-crisis level.) That is not a particularly impressive record over seven years, given that Britain was coming out of recession just as the Tories took the reins of power. Some evidence suggests that of advanced economies, since the crisis British wages have done worse only than Greece’s.

Things look particularly bad for the so-called “ordinary working families” that Mrs May is courting assiduously. The number of families in “absolute” poverty (ie, with income less than 60% of the national median in 2010-11, in constant prices) has been drifting upwards. The number of people in working-poor households has grown by around 1m since 2010, having fallen sharply in the late 1990s and 2000s. And now, a majority of the households in poverty are in work (as opposed to lazing on benefits).

The future does not look particularly bright, either. Average wages are not expected to surpass their pre-crisis level for some time—possibly, until the next general election in 2022.

And ordinary working families are probably going to struggle. Assuming that Mrs May does not significantly change tack following the election, a raft of changes to tax and benefits are expected to hit those at the bottom hard (see chart).

A household in the third-bottom income decile, who surely fall into Mrs May’s definition of “ordinary working families”, will see their net income fall by around 5% as a result of tax-and-benefit changes implemented since 2015. There has been a cash freeze in most working-age benefits (which means that as inflation rises, what those benefits can buy goes down and down). The total amount that a household can get in benefits—the so-called “benefit cap”—has been tightened recently.

All this should give Mrs May pause for thought. The headlines certainly suggest that the British economy is strong. But dig a little deeper, and things look a lot less rosy—especially for her core constituency.

 

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