Has The Government Improved The Standard Of Living In The UK?

With General Election campaigns well under way and the speculative dust settled from the 2015 Budget the timing is right for an analytical look at the coalition and their five-year premiership so far. This piece is not aimed at dissecting each manifesto claim made by the Tories, rather a commentary on living standards in the UK today.

Have the government’s policies actually improved the living standards of the average UK citizen?

Measuring living standards and the statistics and data used is critical to illustrate an accurate portrayal of actual living standards for the average person. Undoubtedly aggregate figures are important, especially when making macro comparisons with other economies. Nonetheless individuals should also be made aware with stats and figures they can truly relate to; GDP Per Capita figures give a clearer indication of this because they show the average wage per person. Moreover, people can see what the average person earns; they can also use the figure and compare how they are doing in comparison.

To arrive at a GDP per capita figure we take the Gross Domestic Product, (the sum of all work, spending and production) and we divide that by the total population we then arrive at a GDP per capita figure. This figure is a more accurate representation of the living standards for the average Briton as it provides the mean wage for everyone in the nation. Like all stats, always take them with a pinch of salt and never consider them to be final or conclusive, rather a useful analytical tool used to portray the bigger picture.

If we go back to 2009 the UK and most advanced economies were in the midst of the worst financial crisis since the Wall Street crash of 1929. I have opined my thoughts on the matter here and here. Prior to the hung parliament and David Cameron assuming leadership, Gordon Brown, the Prime Minister at the time and his Chancellor Alastair Darling, sanctioned tax payer’s money to be used on “bailing out the banks.” The term often used to describe the process that saw taxes being deployed as a monetary safety net for the struggling banks; banks that would have been crushed by their own recklessness had the tax funded finance package not arrived.

It is worth mentioning the background to the crisis in some minor detail as Prime Minister David Cameron has described this election as the “most important in a generation.” This is because the Tories have structured their election campaign on their idea of economic recovery and why continuity rather than change is required for the citizens in the UK. In the pre-election Budget Chancellor of the Exchequer George Osborne claimed, “Our economy had suffered a collapse greater than almost any country.”

Britain’s GDP like other nations suffered as a result of the global financial crash but can The Chancellor truly suggest that the financial crisis hit Britain as hard as some of the less developed nations such as Ireland, Greece or Portugal? The UK is not a Eurozone member, so it does not have to adjust economic policy in line with eighteen other nations, unlike the mentioned nations. In addition, nations such as France and Germany have higher GDP and GDP per capita figures than the UK. Both are members of what is clearly an unbalanced monetary union and still have had a stronger recovery in living standard terms since 2009.

Mr. Osborne added:

“Five years ago, living standards were set back years by the great recession. Today, the latest projections show that living standards will be higher than when we took office.”

At a time when the electorate needed reassurances and tangible evidence of a recovery it seemed a little odd to refer to living standard projections rather than the subsequent record during the coalition’s time in office. The graph below highlights GDP per capita from 2007-2014:

World Bank

As you can see in 2009 when the coalition took office living standards where at the lowest point on the range displayed. This is no surprise as the aftermath of the banking crisis combined with the deficit reduction policies imposed by the government caused a shock to the economic system. Since then living standards have been the lowest among Britain’s adversaries, Germany and France respectively. So it remains unclear what the Chancellor meant when he proudly professed “Britain was walking tall again.”

According to ONS figures, unemployment in the UK ( February 5.7%) is lower than France (10.6%), Germany (4.8%) has a lower rate however; but the news was welcomed by the coalition. With French unemployment higher than the UK’s it highlights the importance of looking at the average wage per person as opposed to other figures because they do not portray a clearer picture of living standards.

Unemployment figures cannot account for underemployment. Underemployment looks at labour utilization (how productive workers are) as opposed to just labour (people in jobs). For example, a PHD holder working in a fast food restaurant is said to be “underemployed” because they posses a skill set that exceeds their requirements for the role, yet they are employed nonetheless. An extreme example yes but the idea is to look at situations where highly qualified individuals are accepting roles where their skills are not enhanced or utilized. This is a likely factor behind the UK’s laborious productivity and why it can have more people in jobs yet lower wages for those workers. According to the Bank of England in their Quarterly Bulletin 2014 Q2

“Since the onset of the 2007-08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend.”

In addition to that, Stephanie Flanders writing in the Financial Times suggests:

 “That the average UK worker, in Yorkshire or anywhere else, now produces less in five days than a French one does in four.”

Clearly the recovery is not close to pre-crisis levels so the government has not raised living standards for the average UK citizen. With slothful productivity levels systemic of what little recovery the nation has seen, it is difficult to fathom how the Chancellor could be so optimistic when clearly the past five years have been subdued. Political rhetoric should not be confused with economic reality and the reality is clear: living standards in the UK are not close to pre-crisis levels.

Government Debt and the effects on UK Unemployment.

There has been no secret of the coalition’s economic policies. That has been to reduce the deficit, i.e. the amount of money the government looses each year. The government has also aimed to reduce the burden of high levels of government debt. How it implements these policies has a drastic effect on the UK economy and in particular, unemployment.

Clintons are one of many well known brands to feel the strain of these tough economic times

Government debt management affects all aspects of the economy. The substantial reductions in government spending have led to several members of the population forced to find alternative employment. George Osborne was confident that the private sector would compensate for the jobs lost through the government policies. It is therefore vital to analyse how government debt management has affected the rate of unemployment. UK unemployment is currently 2.53 million, which is 7.9% of the population, which has fallen from the previous is sixteen year high. Last year unemployment peaked at 8.4%. This was an increase by 118,000 from September to November 2011 and a further 28,000 from November to January 2012. Clearly the government’s policies have not had the desired effect.

OECD Economic Outlook 2011

Above is a graphical depiction of the rise in unemployment from 2008, with both jobs losses in the public and private sector also depicted. Despite the claim in the November 2010 Budget, Osborne claimed that the private sector would compensate for the jobs lost in the public sector, the evidence is clearly contrasting to the government’s claim.  The Chancellor claimed,

“Public-sector job creation would far outweigh the job losses in the public-sector.”

Unemployment in the UK continues to rise to record levels and the jobs being lost in the public sector are a direct result of government policy. When The Chancellor made the premature assumption that the private sector would compensate for the jobs lost through the public sector it may have highlighted an inadequacy in government policy. High and rising levels of unemployment is detrimental for economic growth because it places a financial strain on those working as transfer payments such as Job Seekers Allowance (JSA) and benefits. The number of individuals claiming JSA has risen by 28,000 from November 2011 to January 2012. With further increases expected for the rest of 2012 and 2013.  Moreover, there has been an increase in part-time employment as jobseekers have been desperate to earn some income, but it is proving insufficient to make a substantial difference in terms of contributing towards substantial economic growth.

In addition, the higher than target inflation, those in work will have less disposable income and the government will have to increase transfer payments out to those affected by unemployment. Secondly, tax revenue will also decrease simply because less people are in work, the government must therefore create employment in order to raise taxes so it can finance expenditure that can later contribute to economic growth.

Unemployment is therefore the greatest challenge facing the UK economy because it does not appear to declining. By making such large expenditure cuts, the government may have undermined any recovery effort and may find it very difficult to reduces its debt obligations. The most effective method to reducing government debt is establishing sustained economic growth, however, sustained economic growth in the UK is some considerable way away. Although the UK economy is no longer in recession, rising unemployment will continue to place a severe burden on those in work due to the inflationary and tax restraints already in place, with lower disposable income, growth is likely to remain very low. Moreover, the method in which the government has chosen to reduce its debt may have exacerbated the problem because of the sharp rise in structural unemployment.