It has not been widely reported, but in last night’s keynote speech Mervyn King argued that the economy has been held back by a combination of high inflation and weak wages growth. Take note, ye pay-rise naysayers!
King’s argument was that inflation had been kept high by the rise in VAT, higher import prices and soaring energy costs.
“The consequence has been a ferocious squeeze in the purchasing power of take home pay. That led to a fall in consumer spending which accounted for much of the weakness in growth in 2011″
Mervyn King points out that consumer demand fell by a full 5% in 2008. He might have chosen to add that it has continued to fall more slowly and that it is not expected to return to stronger growth until at least 2013.
So there we have it, just as the TUC suspected, we have become stuck in recession because we have not had big enough pay rises.
This is a serious problem, because at the level of the individual firm it might superficially seem quite logical to pay as little as possible in hard times, but the net result will be that the economy gets stuck in a vicious circle of low demand. The Government has no appetite for coordinated action to increase wages – and doubly so in the public sector – but that is exactly what is needed now if we are going to kick start the economy.
This is not just pie in the sky, as the money is alreday there to use in most of the bigger companies. It is a little known fact that the UK’s corporate sector is sitting on an ever greater pile of financial reserves rather than investing and spending. Once we get a firm recovery going, that money could be unlocked and flow into the economy quite quickly – but this can’t be done while real pay is falling.
Turning back finally to last night’s “state of the economy” speech, there are quite a few matters where Mr King’s analysis of what is needed differed from my view, but I will gladly give him the last word on a point where he is absolutely correct:
“The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite”.