The economic outlook published alongside the Spring Statement was grimmer than many economists had expected. The independent Office for Budget Responsibility is predicting inflation will climb to a 40-year high of 8.7 per cent by the end of the year, contributing to the biggest fall in living standards since current statistics began in 1956. That was the year of the Suez Crisis, which also foreshadowed a big drop in living standards.
The mid-1970s also saw two successive years of significant falls in real disposable incomes, as a result of oil price shocks and rapid inflation. That’s the era I remember as a teenager, in a family whose income could not keep pace with double digit inflation. The habits learned from my mum during this time—obsessively turning off lights and stockpiling special offers—have stayed with me ever since. The recession of 1981 was another bad one, bringing a tidal wave of factory closures as Britain set the seal on its deindustrialisation. My dad was one of the few lucky Lancashire cotton-workers to get another job when his mill closed; many never worked again.
What we can expect today is worse than any of these bad times past, according to official forecasts. It will be worse still for people on benefits or pensions, and for people repaying student loans, whose increased repayments make up the biggest chunk of the extra revenue the chancellor is raising. And it comes after more than a decade of stagnant living standards—the longest period of no improvement since years bracketing major conflicts, from the Napoleonic Wars to the Second World War. Despite recent years of low inflation and low mortgage rates, the typical household has not seen its spending power go up since the financial crisis.
As observed in one contemporary account of late-1950s Britain, “it is a great depressive to live in a constant atmosphere of ‘make do,’ to exist in a place where almost any effort to do anything or to go anywhere leads you pretty soon into a bottleneck.” The mid- to late-1970s were no fun either.
What has gone wrong in this throwback economy? Some blame lies with recent external shocks—the Russian invasion of Ukraine sending already frighteningly high energy, fuel and food prices higher, with more to come. Some of the rise in inflation also reflects demand for goods like clothing picking up post-pandemic, while supply shortages and delays continue. (Since the 2008 crisis, falling prices for household goods, clothes and electronic items have helped moderate the decline in real disposable incomes.)
And these external shocks will feed through to lower living standards, because wages are unlikely to rise commensurately with prices. Although there are some labour shortages in the economy, much of the workforce lacks bargaining power as trade unions have been weakened, and legal protections that remain are not properly enforced. This is in contrast to the 1970s, when powerful unions demanded and got big pay increases. It proved a mixed blessing as it pushed inflation higher, with non-unionised workers suffering even more as a result. The silver lining today is that the economy is less likely than in the past to get into an inflationary wage-price spiral, which would perpetuate the pain of inflation, especially for people on benefits or state pensions. But there is no easy policy fix for the 2022 combination of slow to no growth and rising inflation. External shocks—oil and war—mean we will be unavoidably worse off.
The typical household has not seen its spending power go up since the financial crisis
What the economy needs is for the government to tackle the deeper, structural reason why improvements in living standards in the UK have ground to a halt. Higher living standards have to be paid for by improvements in productivity—the term economists use for how effectively our work effort, materials and ideas are combined to produce goods and services. Productivity has been more or less flat since the mid-2000s, reflecting an economy that has lost its dynamism. There are many potential culprits but no definitive explanation. Unfortunately, the UK is exceptional—in a bad way—on a number of fronts, with low levels of spending on research and development, on business investment and on infrastructure investment by international standards. We also lag behind on workforce skills, on broadband speeds and on building homes where people want to live. A slowdown in productivity has affected other countries too, but it is especially pronounced in the UK, where highly centralised and not very effective government has made for worse economic outcomes and widening regional gaps. Hence the rhetoric about “levelling up.”
While rising inflation is the immediate problem, improved living standards for people of all income levels and across the UK will require the government to tackle deep-seated economic weaknesses that have been a decade in the making. Nothing in the chancellor’s Spring Statement suggested it has the political courage and long-term vision to do so. There was no recognition of the need for an economic strategy led by a state that will do more than cut taxes. There was no support for those on benefits, while there was a large, unannounced tax increase on young people who have borrowed to study. The UK looks set to continue to be a disappointing—and disappointed—country long after the current crisis.
