Chancellor George Osborne tomorrow presents his final Budget of the current parliament.
Fewer than two months before the general election, he is likely to be in a bullish mood, using an array of facts and figures to support his “long-term economic plan”.
But eyecatching statistics never tell the whole story, and any claims of sustained economic recovery rest on very shaky foundations – the same ones that dragged us into a major financial crash last time round.
What’s really going on beyond those likely headlines?
Headline 1 - “Real Wages are rising”
After six years of near-continual decline, real wages have recently started to rise. But government policy has had very little to do with this. It is largely the very low levels of inflation - caused by falling oil prices - that have seen real incomes rise. Even so, average real wages are currently about 2 per cent lower than they were five years ago.
The key element in delivering genuine, sustained increases in living standards is investment. Spending on new equipment, buildings, and infrastructure creates a demand for labour and improves productivity, which in theory should translate into higher wages. Having fallen by some £75bn over 2008-13, investment by businesses had been rising faster until around the middle of last year. But for the last six months companies have been investing less.
Without this, and with oil prices sure to rise back up sooner or later, sustained real wage increases are highly unlikely.
Headline 2 “GDP is rising”
Looking simply at GDP, the UK was the fastest growing developed economy last year. But with real wages falling for most since 2010, what exactly is behind this? The answer is rising debts and rising inequality.
As long as some people are earning more, some extra spending can happen. While income inequality fell during the crash and recession, it started to rise again after 2012 when social security cutbacks kicked in. Real income inequality is made worse by different inflation rates faced by those on different incomes.
Wealth inequality is also increasing. Social Market Foundation research shows the wealth of the richest 20% has risen by 57% since 2005, whilst that of the poorest 20% has declined by 46% over the same period. Meanwhile, new research from the Centre for Analysis of Social Exclusion at LSE suggests the top 10% have increased their wealth by 46.5% since only 2008.
Meanwhile, household debts other than mortgages have been rising between £0.5-£2bn every month since early 2013: the Office for Budget Responsibility forecasts further rapid increases, to levels far in excess of its 2008 peak, by 2018-19. As the gap widens, those on low incomes are piling on the debt to get by, which is a problem.
Headline 3: “Unemployment is falling”
On official figures, employment has risen by about 1.5m since the Coalition took office. But what’s actually happened here is an explosion in precarious zero-hours contracts and self-employment, the latter’s numbers at record levels. Self-employed incomes fell by 22% over 2012-2014, whilst self-employment was 32% of all jobs created over this period of time (despite only 5% of all jobs being self-employed). 80% of the self-employed now live in poverty.
The headlines also mask wider economic imbalances. The UK economy is becoming more rather than less, dependent on service jobs. The service sector is 8% ahead of its 2008 level while, the Chancellor’s s 2011 promise of a “march of the makers”, manufacturing growth has been slowing since early 2014 and has yet to recover.
The headline you won’t see …
What few headlines are likely to touch on tomorrow is the current account deficit: the value of all earnings from abroad, including those from selling exports and those from owning assets, minus the value of all earnings going to abroad, including from buying imports. Widening to 6% of GDP this is currently at its largest since official records began in 1955, mainly due to the loss of net income on assets abroad. Essentially, we have collectively sold so many assets abroad, and borrowed so much from abroad, that we are now paying far more to the rest of the world than we receive.
This will be a very difficult problem to resolve. If the current account deficit does not close soon, the UK is dependent on raising funding from the rest of the world, leaving it both exposed to shocks elsewhere in the world and, even without a shock, at risk of a dramatic decline in the value of the pound.
Either way, the next few months will be crucial. The recovery might embed itself, investment could pick up, and the virtuous circle will begin to turn properly. Or the whole economy will grow increasingly dependent on borrowing and rising inequality, and liable to crash again soon. This is the challenge facing any government after May.
Join us at our Budget Day Pots and Pans Protest today at 10 Downing Street, 6pm.