From the TUC

It’s official: falling real wages are bad for the economy

30 Mar 2011, by in Economics

You knew that, of course. So did I. But it’s good to see it confirmed by no less a body than the Office for Budget Responsibility, the independent organisation set up by the Chancellor, George Osborne, to provide impartial economic analysis.

Today’s Financial Times carries a report headlined ‘Osborne defends Budget as MPs hear of oil risks’. This report describes evidence given to the House of Commons Treasury Select Committee on the effects of Budget 2011 and includes the following passage: “Mr [Steve] Nickell, of the independent Office for Budget Responsibility, said that if wages failed to keep pace with inflation, real wages would fall, consumption would decline and growth would be weak. ‘That, in some senses, is the worst of all possible worlds,’ he told the Commons Treasury committee. ‘You have higher inflation and lower growth as a consequence, which means the difficulties facing the [Monetary Policy Committee of the Bank of England] are of a very high order.'”

Given that the OBR was established to give credibility to the direction of economic policy, we can now expect George Osborne to take steps to boost real wages. Or perhaps not. I suspect arguing the case for wages will continue to fall to the trade union movement. So expect more blogs from me on this subject in the months to come.

Meanwhile, the same FT story reports: “The OBR also saw insufficient evidence that the government’s ‘Plan for Growth’ would do anything to boost the economy’s long-term expansion rate.” You knew that too.  The TUC worked with BIS in the run-up to the Budget, sitting alongside the CBI and EEF to try to develop meaningful growth proposals. This was, inevitably, a short-term project and the TUC argued that, after the Budget, BIS would need to keep this workstream going, to look at the real long-term drivers of growth, rather than the quick rabbits-out-of-a-hat that politicians of all parties look for in the run-up to a Budget. A long term growth strategy, developed with both sides of industry, is vital if the fears of the OBR, and the rest of us, are to be allayed.

Finally, the FT describes George Osborne’s tone at the Select Committee as “bullish” and reports that he brandished “an economic billet-doux from Angel Gurria, head of the Paris-based Organisation for Economic Co-operation and Development, who has become an admirer of his fiscal discipline”. I was at the OECD last week and, along with trade union economists from across the world, met with Pier-Carlo Padoan, the OECD’s Chief Economist. I warned him that the UK’s most political of Chancellors will do this kind of thing and, to be fair to George Osborne, if I’d been in his position I’d have done it too. But as the TUC said when the OECD published its UK Economic Survey, that organisation has massively understated the risk of a double dip recession or a prolonged downturn as a result of the spending cuts. The OECD had said that economic growth slowed in the second half of 2010, which is a huge understatement: we had growth of -0.5 per cent in the final quarter of last year. With declining real wages and a growth plan that doesn’t even impress the government’s own forecaster, we are in dangerous waters. The OECD needs to recognise that.

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