#15. The economy, the cost of living and the continuing legacy of Labour

The UK  Economy

Ministers are entitled to relish today’s GDP growth data, and what they may enjoy most is the discomfiture of their opponents.

It’s worth remembering quite how wrong Labour have been about the economy. Labour’s line, if you remember, was that cutting public spending in a recession was a form of madness that would be practised only by benighted souls ignorant of the Gospel according to St John of Keynes. Labour’s strong preference was that Britain should borrow her way out of a debt problem, a strategy which was akin – as I said at the time – to handing a bottle of scotch to an alcoholic.

The basic problem with the Labour prescription was that Britain was undergoing a deleveraging recession, not a destocking one. And, whilst fiscal stimulus might reverse the latter type of downturn, it could not counter a deleveraging slump, because the only effect of exchequer largesse would be to transfer debt from the private to the public balance sheet.

Electorally, of course, these latest figures are an incomplete success. The gross value of the economy may be improving but, thus far anyway, living standards are not. In 2013, average wages are likely to have risen by about 0.9%. The government will hope that wage rates will pick up, and will overtake CPI inflation (now 2%, and falling) in time for the election.    

The government’s attempts to use Survey data to disprove Labour’s “cost of living crisis” are unlikely to succeed, because Labour isn’t going to focus on CPI (consumer price index) inflation in its electioneering. Rather, Labour will emphasise the cost of household essentials, where inflation remains well ahead of wage growth. One does not need a crystal ball to foresee television images of Ed Miliband waving utility bills at the watching voters.

Can the government counter this bill-waving? I think they can – and here’s how.   

*  *  *  *  *  *  *

There is no point in denying that the cost of household necessities has risen far more rapidly than wages. People know this, so there’s no point in pretending it hasn’t happened. Between December 2007 and December 2013, the TM UK Essentials Index, which tracks the weighted cost of non-discretionary outgoings such as fuel and power, food, travel fares and utility bills, rose from 132.9 to 179.3, an increase of 35%. At 10%, average wage growth over the same period was far lower than this, and even CPI, up by 17%, exceeded wage growth. If you earned the average weekly wage throughout that period, your earnings declined by 6% relative to inflation, but by 18% in relation to the cost of essentials, over that period.

How can the Conservatives and the Liberal Democrats counter this? First, they can point out that the slump in real wages began under Labour. Second, they can explain that things are getting better now.

In 2010 – Labour’s last year in office – the cost of essentials increased by 6.7%, whilst wages rose by only 1.3%. That’s a difference of 5.4%.

By the end of 2013, this gap was down to 1.9% (essentials +2.8%, wages +0.9%). That’s real progress.

In any case, the escalating real cost of essentials was caused by Labour’s failed economic management. From peak-to-trough, the economy contracted by 6%, and there is simply no way in which living standards can be insulated from a slump of that magnitude.

In recognition of Britain’s – meaning Labour’s – aggregate indebtedness, deficit and skewed economy, the pound lost more than 20% of its value in the latter months of Labour’s tenure. That automatically pushed up the sterling cost of commodities such as energy and food, essential purchases which are priced on international markets.

Moreover, Labour dithered over energy policy, most notably by dropping the ball on replacing Britain’s ageing fleet of nuclear reactors. A government which was pushing public spending up by £30-35bn annually somehow couldn’t afford to invest in nuclear reactors which, at that time, would have been far cheaper than they are now.    

*  *  *  *  *  *  *

What the government also needs to do is to counter the generally accepted narrative of Labour’s conduct of the economy. That accepted narrative tends to be that (a) the economy grew under Labour until 2008, and then (b) slumped because of a global (rather than a local) financial crisis.

In reality, neither of these points is true. To be sure, and expressed at constant values, the economy was larger (by 25%) in 2007-08 (£1.61 trillion) than it had been in 2000-01 (£1.29 trillion). But the “growth” difference between those numbers is £321bn – yet individual and government debt increased by £1,140bn. It’s a fair bet that, if someone gave you an extra £321 you’d be pleased – until you found out that your debts had risen by £1,140.

That’s not growth – it’s simply the inefficient spending of borrowed money.

Much the same was true of the ensuing slump. This, Labour insisted, wasn’t their fault – it was a global setback, with the banking system tottering under the weight of reckless lending. But, amongst the major economies, which country (and which government) was the most irresponsible borrower? You guessed it.

*  *  *  *  *  *  *

It won’t surprise you that I’m not totally convinced by the recovery. I think it’s fragile (a view seemingly shared by the Bank of England), and that much more needs to be accomplished (a view seemingly shared by the chancellor). I need to wait for some debt data which will confirm (or not) that the recovery is being earned, not simply borrowed. I wonder about the role of PPI compensation in stimulating consumption.

These are grounds for legitimate doubt. But it’s a long way from that to buying Labour’s line. A caveat-hampered recovery is better than no recovery at all – and, where the “cost of living crisis” is concerned, that can be traced straight back to Labour’s disastrous handling of the economy before, as well as during, the financial crisis.

7 thoughts on “#15. The economy, the cost of living and the continuing legacy of Labour

  1. Found this blog the last week. Remember your post in FT Alphaville regarding the essential inflation index and very happy to find out that you are still examining and producing this index.
    Many thanks.

  2. Kenneth, SK – Thanks.

    I do still produce the Essentials Index. It was the TP UK Essentials Index when I worked at Tullett Prebon, and it’s the TM UK Essentials Index now.

    I think it’ll be important at election time – it’s a fair bet that Ed and Ed will carry sheafs of utility bills into every TV interview!

    My next article might be about GDP, and why we need to treat official numbers with extreme caution.

    • Maybe we should ignore all figures and look for a non-quantified way of evaluating the national quality of life. Let’s call it an “Index of Happiness”! In the 1950s and ’60s, before the mad scramble of property-related indebtedness and materialism became the national ethos, I remember much more smiling. Now all I seem to hear is inane laughter.

    • Barry

      A couple of years ago I wrote an article suggesting this, and, tongue in cheek, suggesting the government style itself on the “Merry Monarch” himself, Charles II.

      Britain is very depressed, I think, and I notice this whenever I return from abroad. It seems to me that we’ve spent many years converting our economy into a giant ponzi scheme, and maybe that explains it……

    • I would be most interested to know your views Dr Morgan on the so called ‘recovery’. Is it just an illusion bought with borrowed money to create a feel good factor before the election.
      The UK economy hasn’t gone through any substantial change towards a more manufacturing based economy – it still seems to be made up in large part, to borrow your phrase, ‘doing each others washing’.

    • A bit early to tell, but (i) previous recoveries have tended to be debt-fuelled, and (ii) household debt is rising. Also, PPI compensation alone added about 0.8% to GDP, and may have been used by many as deposits for loans.

      In fairness to the coalition, any growth at all is welcome, given the scale of the problem. The sheer scale of Labour’s disaster is underestimated by many – the last govt did its best to turn the economy into a ponzi scheme, with each £1 of “growth” purchased with at least £2 of borrowing (“income”, actually paid out of newly raised capital, is the definition of a ponzi scheme, in my view). But the economy is not rebalanced, yet anyway.

      In a nutshell, Labour crippled the economy. The cripple is now at least walking, but how much it relies on its crutches (debt, PPI, trade creditors) remains to be seen.

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