#3 Can we earn, or must we borrow?

If you ask them – or, indeed, even if you don’t – Ministers will tell you that the British economy is improving. Of late, they even have some figures to back up this claim.

The opposition, naturally, sees things differently, and has scored a bulls-eye with the publication of House of Commons Library statistics on comparative real wages in the European Union. This impartial assessment shows that, after inflation, the average British worker is 5.5% worse off now than he or she was when the Government took office in mid-2010. By this undeniably-important measure, only the Greeks, the Portuguese and, perhaps oddly, the Dutch have fared worse. Even in Spain, real wages have fallen by less (3.3%) than they have in Britain.

Using figures from the Office for Budget Responsibility (OBR), Labour has calculated that average real wages will continue to fall between now and the 2015 general election.

The Labour implication, of course, is that wage-earners would have fared better if Ed Balls had been in charge. This is a pretty doubtful proposition given the shadow chancellor’s preference for borrowing Britain’s way out of a debt problem.

Even if we reject the opposition’s prescription, though, we can hardly deny their diagnosis. Taking a somewhat longer horizon, we need only compare the rise (of 10%) in nominal wages between 2007 and 2012 with official CPI inflation over that period (16%) to accept that working people have become poorer. My preferred take on this is to compare the 10% rise in wages, not just with CPI, but with a basket of essentials, which increased by 33% over those five years*.

The divergence between wages on the one hand and the cost of essentials on the other bears hardest on low earners, because they spend a higher-than-average proportion of their incomes on essentials. The other hard-hit group, of course, are savers, who will have derived no comfort at all from the Bank of England’s newly-stated commitment to keeping interest rates at rock-bottom for a period that is likely to be at least three years.

Like savers, then, wage-earners have become poorer, not just over three years but over a longer period, and Labour is probably right to argue that this trend will continue. What are we to make of the apparent improvement in the economy?

Well, I’m afraid it looks like a case of reversion to type – a return to borrowing as the basis of “growth”. The Government is committed to “helping” first-time home buyers (though you might think, as I do, that enabling people to acquire interest rate exposure in order to buy over-priced properties is a strange kind of “help”). The idea, of course, is that bolstering the property market will make people more relaxed about taking on additional credit, thereby boosting consumption despite continuing weakness in real wages.

What it all boils down to is this. If Ed Balls had had his way, the state would have borrowed more, whereas, under George Osborne, consumers will do the borrowing instead. Either way, the conclusion seems to be that the only way that the British economy can grow is by borrowing.

Depressing though it is, this analysis seems valid – even in the so-called “boom” years under Gordon Brown, household and government debt grew by a lot more than the economy. There’s a parallel here, too, with the banks. In the bad old days before 2008, the banks grew their “profits” by trashing their balance sheets and, according both to the Conservatives and to Labour, the only way in which the country as a whole can grow is by doing the same thing.

The trouble with this, of course, is that aping the banks’ behaviour on a national scale invites the same fate. If you look at the shorter-dated end of the government bond markets, particularly in the United States, you’ll see that rates are rising, which points to the nightmare that must keep Treasury officials awake at night – if the market wrests control of rates out of the hands of central banks, the most indebted countries (and individuals) are in real trouble.

My solution to this would be to come at the problem from the opposite direction. Essentially, we need to boost real wages by getting inflation down. Whilst there’s not much that we can do about the prices of inputs like energy and food, we can certainly improve the mechanism which translates these variables into the average person’s experience.

Coincidentally – or, I believe, not coincidentally at all – the fastest price increases are happening in sectors where competitive pressures are at their weakest. What we need, I believe, is far greater competition in sectors like transport, utilities, banks, telecoms and food retailing.

On the one hand, regulation is no substitute for competition. On the other, there should always be at least a dozen major players in each important sector.

So here’s the question – does anyone have the stomach for breaking up over-concentrated markets, or must consumers go on relying on borrowing rather than earning?                 



* Those interested in such things might like to know that I’ll be continuing the Tullett Prebon index as the TM UK Essentials Inflation Index, which will be published on this web site in the future.                 


8 thoughts on “#3 Can we earn, or must we borrow?

  1. Here is an interesting article from MIT postulating that technology destroys jobs,


    Combined with large scale off shoring of manufacturing then the only way that some form of faux growth can be achieved is through borrowing, if the U.K. did not have such a chronically bad balance of payments deficit then it could get away with it but ultimately the borrowed money tends to go on imports and the borrowed money comes from abroad, rather than the Government who can just create it. I know creating money sounds bad but so long as its given to people who do jobs that create real wealth its not a problem.

  2. Tim,

    In one of your previous publications for Tullett Prebon, you advocated the unthinkable, namely building Council Houses.

    How about doing the same again and advocating the return of utilities to public ownership?

    Prior to the 1945 Labour Government nationalising gas, water, electricity, road haulage and the railways, many Local Authorities owned gas, water, bus, tram and electricity undertakings, while telephones had been nationalised in 1912.

    This had not been done for doctrinaire reasons but because of a recognition that private ownership did not necessarily provide what the consumer needed or what the national interest required. Needless to say the complaints from rural areas about the absence of broadband are much the same as those from rural areas in the early 1900’s about the absence of a telephone service.

    While I have been a critic of the old Central Electricity Generating Board in the past, at least it managed to keep the lights on unlike the current bunch of shysters. Again any profits went back to the Treasury, while many of the utilities now seem to be in the hands of foreign banks and pay no corporation tax.

    • John – you raise some good points here.

      My belief is that what works best is a mixed economy. Some things are best done by the private sector, and others are done better by the state. In the case of housing, for instance, I believe that house building (for sale) is best done by the private sector, but the state is better at providing social housing for rent (hence my strong support for building council houses). This seems obvious to me, if not to our leaders. A nationalised plumbing trade would be a disaster – and so would a privatised police force.

      One of the problems that we have now is that these lines are blurred. For instance, the NHS is a state service, and evidence shows that introducing “internal markets”, PFI and so on has not improved the service – markets work well, of course, but only when they are real markets, not artificial ones.

      Energy security is a special matter – it’s part of the infrastructure which the state has to care about. However small you think the state should be, there are certain essentials, and the state, in my view, should be responsible for these essentials (and dare I mention security for London 2012 here?!).

      So, certain services – roads, for example, police, prisons, law courts and so on should be state activities. Water, in my view, was “a privatisation too far”.

  3. Tim,

    Thank you.

    So where do we go from here? Obviously this is very much simplified.

    We can agree on two things, firstly a Council House building programme and secondly a major investment in energy conservation/renewables.

    Tackle the ‘tax gap’

    There seems to be a huge chunk of the private sector which is basically parasitic, either/or/and just running public contracts, paying low wages and not paying corporation tax. in a nutshell, take away the public sector contracts and make them pay tax and a living wage.

    Reintroduction of some form of credit controls to keep a lid on house prices and the explosion in consumer debt.

    Rein in ‘top pay’ and bring it into line with Europe.

    Major cut in defence/security expenditure to about the EU average – 1.6% GDP compared with 2.56%

    That’s just for starters, marks out of 10?

    • John:

      Council house building is a must – it ticks every box (much needed by the public, good for the economy, affordable, and so on).

      This aside, let me come at the question from a different angle:

      1. A market economy (assuming it’s competitive) creates wealth and serves the customer

      2. In certain areas, state provision is necessary

      3. Blurring the two seldom works

      What we have now doesn’t conform to this. In many areas, we don’t have a market economy but a corporatist one. That’s bad for the customer, and bad for the economy. The private/public divide is blurred, which is generally a bad idea. There is a lack of accountability in the public sector.

      So, what we need is (a) increased competition in the private sector, and (b) a simplified, centrally-controlled public sector.

      In a genuine market, competition safeguards the customer (and the employee). In the public sector, robust accountability is essential.

  4. Tim, What’s your current view on if and when the British Economy will be hit by crippling interest rate hikes? – If government can now borrow 10 year money at 2% what happens when this goes back up to 4 or 5%. ?

    • Kenneth: This is a critical issue, as we are one of the developed world’s most indebted economies (and Help to Buy can only make that worse). The big risks to interest rates come from overseas. QE is keeping rates down in the US, but even the suggestion of tapering has had an adverse impact on the emerging economies. The debt markets to watch are the US and Japan. Where timing is concerned, I think the idea of keeping rates low until 2016 is very optimistic.

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