Workers across Britain are experiencing severe cuts in wages in real terms. The latest measure of average pay settlements is just 2% higher than a year ago, while a long-standing indicator of inflation shows prices rising by 6% over the same period. Contrary to widespread claims by Boris Johnson and many others, wages are not surging. In fact, the decline in pay in real terms (after inflation) is the sharpest since the global financial crisis in 2009. This represents a sharp decline in living standards.
The measure of pay settlements comes from professional human resources consultancy XpertHr, in a November 18 press release. It differs from the data provided by the Office for National Statistics (ONS) in important ways. The ONS measures average pay, not average pay settlements. Ordinarily, there would be little disparity between the two. However, this is an exceptional period.
During the pandemic there have been hundreds of thousands of job losses. These have been concentrated in low-paid sectors of the economy, especially hospitality and accommodation. The ONS measure naturally monitors the pay of those in work. But, in making a comparison with prior periods, there is a bias as now a higher paid group is being measured.
This is highlighted by the ONS statisticians themselves, who caution about how the average data should used. Memorably they argue that using this measure is like taking an average height of the occupants of a room, asking the short people to leave and then taking a new average, which is much higher. But no-one has become taller. In the jargon, it is a compositional change.
At the same time, the Retail Prices Index is a key measure of inflation long used as a reference in pay bargaining. Unlike the CPI it includes housing costs and so is a broader measure of the prices workers are actually paying. The RPI has shot up to 6% growth year on year (while the CIP has also risen, to 4.2%).
Chart1. Retail Price Index (RPI) inflation, year-on-year % change
Of course, these facts did not prevent Boris Johnson claiming that not only is pay rising, but other matters such as the deaths from Covid-19 or longevity should be disregarded as higher wages are the metric on which his government should be judged!
But no-one in the labour movement or who is in support of workers’ pay and conditions should believe his nonsense and certainly not repeat it. The claims on higher wages are an unscrupulous attempt to hoodwink viewers and voters and will prove short-lived as annual comparisons with the pre-pandemic workforce fall away over time.
As the ONS chart on real average pay below shows, the previously favourable year-on-year comparisons on pay are already starting to fall away. And it is clear from the data on pay settlements combined with the appropriate inflation data, that workers are on average suffering one of the biggest attacks on their pay for many years.
Chart 2. Average Real Pay, % change year-on-year
This sharp fall in living standards is likely to have wide-ranging economic and political consequences.
The purpose of this article is first to set out the factual position in relation to government spending, and then to offer a framework in judging the over stance of fiscal policy. From these two key points it can be shown that this is another, quite vicious austerity Budget and that to argue otherwise both disarms and discredits the labour movement in the face of this attack.
The government have conducted a major sleight of hand when it comes to the presentation of the policy it has adopted in the latest Budget and Spending Review. This con trick is highlighted in a key Treasury table below.
Table 1. Total Managed Expenditure (TME)
This TME table is one of the key pieces of information in any Treasury Budget document as it gives the summary data for many of the key totals for government spending. For anyone analysing the Budget, it is one of the first things they will examine.
But here the presentation of the data is misleading, probably deliberately so. In the top right-hand corner of the table highlighted there are two columns, showing the growth in the expenditure variables in real terms (adjusted for inflation). The first shows the growth in real terms in the Fiscal Year 2021-22 to the FY2024-25. The second of these columns shows the same end date FY2024-25, but the start date is 2019-20.
What is missing is a column with the start date FY2020-21, which is the most recent Fiscal Year, that ended at the beginning of April 2021. As a result, there is no measure of future years in comparison to the one that has most recently ended, which is the normal yardstick for assessing any change in policy.
There is a good reason for this. The start date of this most recent year would show a very different outcome. Instead of rising in real terms there would be sharp falls in real terms. In fact, using the FY that has just ended of 2020-21, there are falls even in nominal terms (before inflation) which are shown in the preceding columns.
To illustrate this, Total Public Sector Current Expenditure was £989.1bn in FY2020-21 and is projected to fall to £974.3bn in 2024-25. The same is true of Total Managed Expenditure (which includes gross investment as well as day-to-day spending, but does not include depreciation). This falls over the same period from £1115.2bn in FY 2020-21 to £1107.6bn in 2024-25.
Remember too that the totals in these columns are in nominal terms, before inflation is taken into account. Using inflation forecasts from the Office for Budget Responsibility (OBR) the present author calculates that prices will rise by a cumulative 12.5% over the period. So, in real terms (adjusted for inflation) Total Public Sector Current Expenditure will be £852.5bn in 2024-25, while Total Managed Expenditure will be £969.2bn. These would represent falls of 13.8% and 26.7% respectively in real terms.
To be clear, these are the gross totals where each of the government spending departments together comprises those totals. This is a planned and very deep cut to government spending. It amounts to a vicious deepening of austerity.
The sleight of hand is made possible by the government including the huge increase in spending, an extra £200bn in 2020-21 that was forced on it by the pandemic, while it is slashing that extra spending in future years.
The overall picture becomes even clearer in the Chart below, which shows total government receipts and spending in relation to GDP.
Chart 1. Government Spending and Receipts as a percentage of GDP
From this it is clear that, measured in relation to GDP growth, there was a spike in government spending in the first year of the pandemic. This was caused by its own complete failure in responding to the outbreak of the virus, and the human and economic damage that resulted. This country has had far more days of lockdown that other countries which successfully suppressed the virus.
However, the government now proposes (shown in the black dotted line) to reverse almost the entirety of that increased spending almost immediately. This is something like a 10% to 11% decline in public spending as a proportion of GDP.
It is worth noting that the government’s timetable for that scale of reduction is literally a couple of years. There was an equivalent decline in government spending achieved by Margaret Thatcher over the course of 10 years, but that was at a time of relatively strong growth due to the inrush of North Sea oil. No such period of higher growth is anticipated for the period ahead, which would require the cuts to government spending to be applied even more ferociously.
Government apologists claim that spending is returning to normal as the economy returns to normal. Of course, the pandemic is far from over, so the assertion is highly doubtful. But as even the OBR suggests, the combination of Brexit and the pandemic has left permanent ‘scarring’ on the economy, so it is not going to return to ‘normal’. Under these circumstances, there is no justification for ripping the bandages off the scarred patient and discharging her from hospital.
Total government spending is being slashed in real terms and as a proportion of GDP. The notion that this constitutes an end to austerity is simply without any factual foundation.
Fiscal policy matters
The overall stance of fiscal policy cannot simply be gauged by the amount of spending and whether it is increasing.
It has already been shown that in fact, government spending is falling in real terms, as a proportion of GDP and in nominal terms. However, even if that were reversed and spending was rising, that would not be the key determinant of fiscal policy. Government priorities for tax and spend affect different classes of society unevenly. What matters, is who receives the spending, who is being taxed.
Suppose a bad teacher has a packet containing 12 biscuits and chooses two favourites among the class who are given 3 biscuits each. The rest of a class of 30 are told to fight among themselves for the remaining 6 biscuits. When the rest of the class complains that this is unfair, the teacher brings in a packet of 15 biscuits. But now the two favourites receive 5 biscuits each, leaving the rest of the class fighting over 5 biscuits. Even though resources are increased, their distribution has become more unequal, not less.
Austerity is about the distribution of resources, not about the level of government spending. Indeed, extreme right-wingers like John Redwood like to claim there has been no austerity because government spending has risen. Of course, he is wrong. There has been fierce austerity despite a rise in government spending.
As Chart 1 above shows, an upward trend in government spending has been in place since 1990. But that did not stop Osborne and Cameron, in one of their first major austerity measures from increasing VAT (overwhelmingly paid by those on average on lower incomes) while cutting Corporation Tax (paid on profits). As far as the Treasury was concerned this was ‘fiscally neutral’ as the rise in VAT yielded about £13bn and the tax cut was approximately worth the same. But the effect was to distribute incomes from mainly average and low earners to profit-making businesses.
In short, austerity cannot be determined by the level of government spending. As Diane Abbott and others have shown, the measures contained in the latest Budget were a vicious attack on low and average incomes earners and pensioners, with forecasts that real average earnings will fall, at the same time that bankers and other receive tax giveaways.
In this Budget there is both a reduction in spending, and a redistribution of spending from workers and the poor to bankers and higher paid. Austerity is the transfer of incomes and assets from poor to rich, from labour to capital. That is what this Budget implemented.
Calling things by their real name
It is possibly unfortunate for many readers that such a basic factual presentation and such elementary analysis has to be provided. But such is the level of confusion and outright deceit surrounding government policy, that basic truths are necessary.
The widespread assertion that austerity has ended is factually incorrect. High taxes are not progressive if they are paid by average earners to facilitate the privatisation of the NHS. The claim that a government cutting Universal Credit and state pensions, while cutting taxes on banks and presiding over a fall in real wages is ‘carrying out Labour policies’ insults the intelligence.
The repetition of these falsehoods discredits the labour movement and in particular all those who fought successfully for an ‘investment, not cuts’ approach that was adopted under Jeremy Corbyn’s leadership of the Labour Party. Crucially, falling for this Tory con trick disarms the labour movement in arguing against the austerity measures and in mounting any defence against them.
The latest Budget and Comprehensive Spending Review from the Chancellor provided a boost to certain parts of the economy. If you are a big polluter or fossil fuel producer, or a bank executive or shareholder, or an arms manufacturer — then this was a good spending round for you.
But for ordinary people the picture is once again very different. You are getting clobbered by a Tory Chancellor and a Tory Prime Minister who is only anxious to get the PR right and can definitely rely on the media on Budget day to deliver.
If this is reminiscent of Osborne and Cameron, or Hammond and May, it should be. They all belong in the rogues’ gallery of “reverse Robin Hoods.” They have all hammered ordinary working people with tax hikes and pay freezes while providing handouts and tax breaks for the rich, big business and the banks. This Budget was precisely in that mould.
Thankfully, we can rely on some objective analysis on the Budget from think tanks such as the Institute for Fiscal Studies (IFS), the Resolution Foundation and others.
They are very far from being left of centre. The Resolution Foundation is chaired by Tory Lord Willetts and the IFS probably would not object to being described as fiscal hawks.
In any event, they do provide detailed and non-partisan analysis of tax and spend policies — and their verdict is clear. They have simply made explicit what is contained in the projections of the Office for Budget responsibility (OBR) and the Treasury’s own documentation.
The key points include: • falling real wages next year and no increase over the following two years • a higher tax burden on ordinary people, up to £3,000 a year more for average households by 2027 • one of the biggest “savings” is from the government abandoning its manifesto pledge to keep the triple-lock on the state pension • the “big increase in department spending” is primarily driven by the increase in financing for social care • which is funded by a whopping increase in National Insurance Contributions (the most regressive tax on the books, clobbering the lowest paid while the highest paid are shielded) • much of the remainder in spending is a sticking plaster for the NHS, which is under severe threat from the government’s Covid policy • and just to make sure we understand their priorities clearly: a cut in taxes on the banks (the surcharge and the bank levy) which benefits shareholders and bank executives
This has nothing to do with “build back better,” “levelling up,” or all the other false claims made for current Tory economic policy. It is old-fashioned, dishonest austerity policy to take from ordinary people, people on middle incomes or below and to provide tax giveaways to big businesses, banks and the rich. Austerity has not been halted. It is being deepened.
One the eve of Cop26, the Budget also completely disregarded the climate emergency, which was not mentioned in the Budget speech and had pitifully low resources devoted to it. Cuts to air passenger duty for short haul flights and for fuel duty are a kick in the teeth for the entire environmental movement.
These are surely a political gesture on the Chancellor’s part. While Boris Johnson allows dumping of raw sewage in our waterways, as Cop26 host he must at least pretend he is interested in the issue of catastrophic climate change. But Rishi Sunak is signalling to Tory backbenchers that he shares their contempt for the issue, as part of his campaign to eventually replace his boss.
The terrible priorities of this government were also clearly on display in relation to the defence budget. While other departments remain below their real spending level in 2010 and the crisis in local government funding is so grave that local authorities are told to look for a £400 increase in council tax, the MoD continues to expand its arsenal of hardware.
While the MoD budget is projected to rise modestly in real terms overall, there is a huge increase in spending on the military capital budget. This means that there is likely to be a further shrinkage of military personnel and a very significant expansion on military hardware.
As CND points out, the unilateral increase in Britain’s nuclear warheads already announced is in breach of international law on non-proliferation, a treaty which the British government has signed.
The increase in spending on military hardware can now be widened in scope. The Treasury documentation describes this as “the largest sustained increase in defence spending since the Cold War, to safeguard the UK’s cutting-edge military, underlining the UK’s commitment to Nato.” So, people on universal credit must tighten their belts, but there are billions for the new Cold War.
All of this takes place against a backdrop of exceptionally weak growth in official projections over the medium term. The Chancellor neglected to mention that this country will have one of the weakest recoveries in the G7. This is mainly because we have also had one of the worst pandemic outcomes, which the OBR says “scars” the economy over the medium term, as well as inflicting a huge toll on public health.
According to the OBR, the combined effect of scarring on the economy from Johnson’s Brexit policy and his pandemic inaction is to lower growth by 6 per cent. But the Chancellor really had nothing to say about this prolonged stagnation and the crisis of productivity that underlies it. Unsurprising then that he has no measures to address it.
Johnson is literally presiding over death and destruction. Just as he has let disabled people, the elderly, ethnic minorities and working people bear the brunt of the Covid-19 death toll, so he is ensuring that the economic price of these barbaric policies is overwhelmingly paid by middle- and low-income earners.
Meanwhile, Sunak looks after his own in the banks, while polluters and arms manufacturers have also done well. For almost everyone else, this is even more austerity.
Diane Abbott is MP for Hackney North and Stoke Newington.
The above article was originally published here by the Morning Star.