The Guardian View On The Economy: It’s Bad

“You’ve never had it so bad” has rarely been a good election-winning pitch. There’s a good reason why governing parties are usually reluctant to go to the country if voters are getting poorer: when they do, they lose. Historical precedent therefore suggests Theresa May is taking a gamble by holding an election on 8 June. As the latest labour market statistics show, the 2017 general election will be fought with prices rising faster than pay. This is highly unusual. On average, wages adjusted for inflation have risen by 1.5% a year since the second world war. In years ahead of an election they have increased by 3%. The last prime minister to fight an election against a backdrop of falling living standards was Gordon Brown in 2010, and he had no choice. Mrs May is fighting an election at a time of her own choosing even though annual inflation of 2.7% and annual earnings growth of 2.1% fulfil Mr Micawber’s definition of unhappiness.

Philip Hammond says something will turn up. The chancellor today played down the fall in real incomes as an aberration caused by a temporary spike in inflation, but this argument doesn’t really stand up to serious scrutiny. The unemployment rate was last this low in 1975, at which time the annual inflation rate was 10 times as high as its current rate, and wages were growing at 30% a year. The really remarkable feature of the economy is the weakness of earnings, especially at a time when the percentage of people in work is close to 75%, the highest since modern records began. Only in two years in the past decade have real wages risen, and then only because inflation was unusually low as a result of the collapse of oil prices. The real average weekly wage is lower than it was in 2007, marking the worst decade for earnings since the Napoleonic wars in the early 19th century.

What’s more, the idea that things are going to improve takes a leap of faith, given that 2% is both the government’s target for inflation and the new normal for pay growth. At best, the outlook is for living standards to fall this year and stagnate in 2018.

Depending on how the economy performs during the Brexit negotiations, it could be worse than that. Indeed, one reason for Mrs May’s U-turn over holding a snap election is likely to have been the naked political calculation that this is as good as it gets for a while. Britain’s recent experience seems to support what Thomas Piketty predicted in his bestselling book Capital in the 21st Century, namely that in an era of slow growth the owners of capital will fare better than those who rely on their wages and salaries to generate higher living standards. Greater inequality will result unless action is taken to prevent the concentration of wealth.

The battle between Labour and Conservatives to be seen as the workers’ friend suggests that both parties understand that labour’s share of national income cannot go on falling. For the trend to be reversed, though, the economy will need to run a lot hotter and at substantially lower levels of unemployment. In the years since the economy went into recession in 2008, the number of full-time jobs has grown by 3.6%, but part-time employment is up by 8% and self-employment has increased by 23%. That goes a long way to explaining why earnings growth has been so weak. It will also require action to tackle the long-term structural weaknesses of the economy: the lack of capital investment, the low level of research and development, the lack of attention to skills, and the paucity of long-term, patient finance. There will be no sustained improvement in wage growth until Britain’s poor productivity record is addressed. Voters know from their own experience that the economy is a lot more feeble than it looks, making it even more extraordinary that Mrs May’s gamble appears to be paying off.

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