Much of contemporary politics is virtual. It flees from reality and seeks solace in abstractions like “equality, diversity and inclusion” or “value for money”. We live in an age of fantasy disconnected from the everyday experience of people. Nowhere is this truer than in the debate on the UK economy and economic policymaking. Magic money trees, a buccaneering Global Britain and world-class public services are just some of the fantasies believed by our political class.
As Richard Hughes, the head of Britain’s fiscal watchdog the Office for Budget Responsibility, recently said to the House of Lords’ Economic Affairs Committee, projections for the path of public spending at the time of the Autumn Statement last November were beyond a “work of fiction”. That’s because “the government has not even bothered to write down their departmental spending plans underpinning their plans for public services”. If it had, we would have been told about the inconvenient truth of huge post-election expenditure cuts. As austerity 2.0 beckons, we face a further dilapidation of the economy and our public realm. Crumbling schools, creaking railways, bankrupt councils, record NHS waiting lists, a broken housing market, no steelmaking and a depleted defence capability.
Meanwhile economic policymaking seems to inhabit a parallel universe. We are told that the government’s “plan” is working, that pre-election tax giveaways in the March Budget and the Autumn Statement will unleash growth when we know that trickle-down wealth flows upwards to the top 20 per cent rather than down every provincial gulley. Pockets of prosperity are concentrated in urban citadels and among landowners while a majority are sliding into precarity, struggling to get by on poor wages in insecure jobs.
Still our politics is stuck in a fantasised boom loop where “things can only get better”. First as chancellor and then as Prime Minister, Rishi Sunak has promised to deliver “world-class public services” that are the “people’s priority”. Last week he claimed that the economy was turning a corner and the burden on households is beginning to ease. It’s a variation on a common theme. At the time of his 2021 spending review, he told parliament he would bring about “[an] economy of higher wages, higher skills, and rising productivity. Of strong public services, vibrant communities and safer streets. An economy fit for a new age of optimism.”
Yet reality has a habit of coming back to haunt those who ignore it. For the past year or so, wages have risen faster than prices, but wage growth is slowing and real wages are still below pre-pandemic levels. Worse, millions of workers in the bottom half of the income distribution have seen their wages stagnate since the 2008 financial crash, leaving them with a lost wages gap of £11,000, according to research by the Resolution Foundation (if wages had continued to grow as before the crash). And as my colleagues and I at the National Institute of Economic and Social Research (NIESR) have shown in our latest outlook for UK households, the living standards of the poorest 10 per cent in society are lower by some £4,500 compared with pre-pandemic levels, whereas the top 10 per cent have higher living standards than before Covid.
But it is not just that the poorest are staying poor. What NIESR’s analysis also shows is that the economic divide is quickly widening. The bottom 40 per cent – that is, households earning up to £37,500 – will not see their living standards return to pre-pandemic levels until 2028. That’s almost ten years after Covid and 20 years after the financial crash. As stagnation has given way to contraction, it’s immiseration for many, not least when factoring in asset inequality besides income inequality. With low wages and high costs of energy and housing, the prospect of home ownership for the young generation has evaporated, as many 18- to 34-year-olds live with their parents – able to rent, buy or start a family. A rentier class of boomers is enriching itself at the expense of impoverished zoomers.
To which we must add the new trend growth rate of 1 per cent – markedly lower than the nearly 3 per cent in the postwar decades and 2 per cent prior to 2008. Low growth locks the country into a vicious circle of high debt and high tax on working people given our rapidly ageing population and 2.8 million people of working age who are long-term sick. The new normal is low growth, flatlining productivity, stagnant real wages and a lack of both science, technology, engineering and mathematics (Stem) graduates and vocational/technical skills. At the heart of the UK economy’s poor performance lies chronic underinvestment – in affordable housing, accessible and reliable transport, proper training, digital technology, our institutional ecology and the country’s social infrastructure.
The good news is that higher interest rates have brought inflation down and helped to drive up savings at a time when the government is increasing public investment to some 4 per cent of economic output per year – or about £120bn. That brings us back to the fiscal fiction of draconian cuts after the election.
Since they are politically unpalatable, the next government will have to introduce more wealth taxes such as taxing land or taxing the tech giants, which both parties have ruled out. This leaves scaling back capital investment and consigning the economy to the doldrums – as foreshadowed by Labour’s failure thus far to replace its £28bn green pledge with a strategy for radical yet realistic economic renewal.
And if austerity 1.0 contributed significantly to disillusionment and the Brexit backlash, then austerity 2.0 has the potential to detonate UK politics – a one-term Labour government followed by a Faragist “People’s Party”. This is what Joe Biden faces at the hands of Donald Trump and the why governing left trails the opposition right in Germany, Australia and Canada. Western politics is being consumed by the collusive complicity of technocrats and populists who inhabit a world of fiction while the real one continues to degrade.
[See also: No country for old men?]
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