From the TUC

Are improved living standards and fiscal austerity compatible?

03 Jan 2012, by in Economics

It is no surprise that many are asking what can be done about falling living standards. The wage squeeze in the months ahead is set to be worse than during the Great Depression and households are £522 worse off now than was the case this time last year.  And it is not just the falling real wages of the last few years that are concerning – incomes for those on middle incomes have been stagnating since 2003.

But the challenge is finding meaningful policy solutions which will improve this situation – both in the short and longer terms.   Halting the stagnation in living standards is no easy feat. And at a time when upwards of 700,000 more public sector jobs are to be lost (jobs where the only occupational groups who are paid more than in the private sector are those where workers earn the lowest incomes) with conditions reduced for those who remain, where moderately paid manufacturing jobs have been falling consistently since the 1980s (and despite the improved performance of exports in the middle of last year the jobs fall has continued, with employment levels down 25,000 annually to September 2011), where the recession sped up the increasing polarisation (pdf) of well and poorly paid work and where unemployment is currently pushing 8.3 per cent, it will be particularly difficult.

A strategy that successfully aims to create better jobs will need (to name a few) to change the sectoral balance of our economy, offset the tendency towards job polarisation (a result at least in part of globalisation and technological change) that the economy may now contain, lower the differentials between top and lower pay across the private sector and incentivise businesses to boost investment in their workforces, most likely at the expense of dividend payments to shareholders. And that’s at the same time as the arguably even more pressing problem of creating enough jobs to bring unemployment down.

Don’t get me wrong – this is exactly the direction I think we need to be taking. Evidence from abroad shows that low-paid sectors need not always be so and that better jobs and wages are possible. But they are not easy to achieve. It takes a combination of a real industrial strategy (backed up by new means of providing finance to growing businesses in strategic sectors and regions), more widespread collective bargaining, a stronger out of work social security settlement, better employment protection at work, far stronger corporate governance, better funded public services (particularly those which enable labour market participation, such as childcare and social care), massive investment in workplace skills and smart incentives for employers to invest (often all funded by a far more progressive taxation regime) to achieve real change.

The reality is that these solutions are politically challenging, inevitably medium to long-term in nature and in large part rest on a significant change in the UK’s social and political culture as well as new policy solutions. A move, for example, to bring the UK towards anything near European levels of employment protection (or indeed taxation) would meet with strong resistance from the employer lobby. Even the seemingly straightforward ask of a state investment bank would take several years to set up, and all of these solutions are mutually reinforced by each other and rest upon a healthy economy that is creating rather than losing jobs. There is simply not a free short-term quick fix that will provide significant immediate relief to large- number of middle and low incomes families.

Of course there is a clear direction of travel for the future which can and should be set out. Long-term solutions all start with short-term changes, and improved workplace rights, a commitment to setting up and funding new systems of state support for industry and moves to reinvigorate contributory social security and to temper of corporate power are all actions that could be taken now. But it would be misleading to pretend that these solutions will provide any immediate living standards boosts.

This matters, particularly in the context of recent ‘black labour’ debate, which could be read to imply that fiscal austerity is compatible with rising living standards if we can achieve wider economic change. It seems absolutely right that we need to reconfigure the way our economy is run if we are to achieve better long-term outcomes for working people, but we also need to be honest about the short-term reality, which is that with deficit reduction based on spending cuts of the speed and scale that the Government have currently set out, short-term falls in living standards are inevitable as tax credit and benefit expenditure to households is cut and little money is available for investing in boosting growth.

So what is the short-term solution? Stronger growth is needed to enable wages to rise more quickly (which a significant immediate stimulus could help to achieve) and a longer-term timescale for deficit reduction would limit the need for cuts to key family benefits (such as Tax Credits) which are adding to the incomes squeeze. Even then,  the outcome would likely be no more than a slow return of middle incomes to relative levels somewhat below the pre-crisis status quo – meaning further spending reconfigurations, changes to taxation and social security boosts may be what are needed for families to see any real change as well as, of course, significant change in the way our economy is managed along the lines set out above. While it may not be ideal that increased tax credit type expenditure is what’s required to immediately raise incomes and reduce inequality, all countries with a fairer distribution of income have more of it than we do and, as Richard has shown, decades of social democracy has failed to disprove the idea that transfer payments play a key role in achieving improved social outcomes.

Whatever decisions political parties make about their spending commitments (which will inevitably be far more constrained than in the past) over the years ahead, it does seem important to be clear about the facts. Dealing with the problem of falling living standards needs, as with most areas of economic policy, short and long-term solutions. There is absolutely a significant agenda of policy change we need to start now if we are to rebuild a fairer economy – and it is important that the policy commitments to achieve this aim match the rhetoric. But it is also vital that the promise of longer-term change is not presented as the solution to today’s living standards falls – an approach which would risk both misleading the public as to the reality of what can be achieved, as well as failing to provide any real and immediate respite to the UK’s increasingly hard pressed households. Whatever your views on Coalition style fiscal austerity, the facts are that it is simply not compatible with short-term increases in living standards – regardless of your longer-term economic plans.

3 Responses to Are improved living standards and fiscal austerity compatible?

  1. Coastliner
    Jan 4th 2012, 2:07 pm

    The alleged ‘fall’ in living standards should be welcomed if it signifies that people have to live within their means instead of living up to the eyes in debt to pay for absolute tat – iphones, 3D tvs, SKY tv etc.. that they DO NOT NEED! the ludicrous debt bubble needs to burst ASAP!

  2. BenM
    Jan 5th 2012, 1:39 pm

    Shorter Coastliner:

    Proles know thy place and forget trying to aspire to certain lifestyles!

  3. Questions of racism, dire economic predictions and a call for elder statesmen: Round up of political blogs for 2-4 January | British Politics and Policy at LSE
    Jan 7th 2012, 11:01 am

    […] dire predictions for 2012, as the TUC’s Touchstone blog wonders if improved living standards are compatible with fiscal austerity. At Talk Carswell Douglas Carswell looks at an apparently failed Treasury growth policy of national […]