Rachel Reeves

Member of Parliament for Leeds West

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The Chancellor has not delivered the high-wage economy he promised

New Statesman, 18 April 2016

 

Last summer David Cameron and George Osborne promised they would make Britain a “high wage, low tax, low welfare” economy.

But less than a year on, it is clear they are failing. The Budget documents show that the Government are set to miss their own welfare cap in every year of this Parliament, by around £4 billion each year, a staggering £20 billion gap over the next five years. And this is even as they pull vital support from low-paid workers, disabled people and children living in poverty.

While they may be making strides towards a “low tax” economy, their tax cuts are overwhelmingly targeted at the better off. According to the Resolution Foundation, the changes to income tax allowances and thresholds in the latest budget amount to a £2.6 billion annual giveaway by 2021. 80 per cent of this will go to the top half of the income distribution and nearly half (47 per cent) going to the top 20 per cent.

Where their failure is perhaps most catastrophic however, is in delivering a “high-wage” economy. In fact, the outlook for wages instead gets worse every time the Chancellor comes to Parliament.

Official documentation accompanying last month’s Budget revealed that expected earnings for workers have been revised down in every year for the rest of the parliament, and this is on top of the falls we had already seen in projected wages in last November’s Autumn Statement.

I commissioned the House of Commons Library to look at what these changes to earnings will actually mean for people. If the OBR forecasts are right, this analysis shows that compared to what the Chancellor was predicting only last summer, the average UK worker will be £79 worse off next year, £163 worse off in 2017, £343 worse off in 2018, £611 worse off in 2019, and £823 worse off in 2020. This means that the total loss in earnings over the course of this Parliament is £2,000 per working person, a huge loss to many people who are already feeling squeezed.

In fact, when accounting for “RPIJ” inflation, which takes account of housing costs, analysis from the Resolution Foundation suggests that the median hourly wage will still be lower in real terms at the end of this parliament than it was when this government took office – in today’s prices reaching just £12.34 in 2021, still less than the £12.43 the average worker earned in 2010.

And it's not just family finances that are hit. Low wage growth means extra benefit expenditure and lower tax receipts, so the public finances are hit too. The OBR figures show that the reduction in forecast wages since November will cost the government an extra £1 billion in benefit spending over the next five years, and more than £35 billion in lost tax revenues. All this is further demonstration, if any were needed, that you can’t deal with the deficit if you don’t also have a strong economy and strong wage growth – an economy that works for everyone not just a privileged few.

And the growth that the Government is forecasting over this period is dependent on “unprecedented” levels of net household borrowing. The OBR data shows that British households are running an annual deficit that is now set to hit £68.4 billion in 2020-21, with total forecast borrowing up one third since the Autumn Statement. The Chancellor is relying on this debt to continue to finance spending and hence economic growth to reach his targets. This leaves already stretched families even more exposed, and as we heard at the Treasury Select Committee this week, leaves the economy vulnerable too in the event of a shock, such as a rise in interest rates.

The Budget was a missed opportunity. If the Chancellor really believed we were “all in this together” he would want to use the Budget to target help towards ordinary working families and the low paid, encouraging stronger wage growth which would in turn help to bring down the benefit bill and build a strong economy while helping people and families who could most do with a bit of support. Instead, the Chancellor presented a set of measures that disproportionately benefit the better-off. It’s time the Chancellor realised that without action to build a more robust and inclusive recovery, he can only fail in his quest to deliver a high-wage and low-welfare economy.

 

Rachel Reeves is Labour MP for Leeds West and a member of the Treasury Select Committee.

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