There are many ways of looking at the UK economy and the credit crunch has led to a rise in dissatisfaction with measures such as Gross Domestic Product which crucially miss important factors out. This has led to alternative measures being looked at. Some of these are brand new such as the National Well Being Survey which was released earlier this week and others have been in existence for some time but have found that they have a rise to prominence. If we consider the National Well Being Survey I think that it is something that is laudable in theory but in practice is likely to prove elusive.
Wages in the UK
This has been a measure that has become increasingly focused on. There are two reasons for this I think. Firstly there has been a marked slowdown in wage growth over the credit crunch era. Secondly as the debate has moved towards the “1% versus the 99%” theme then workers wages have become something of a proxy for how workers who make up much of the 99% are doing.
So how are they doing?
The latest annual survey from the Office for National Statistics tells us this.
The median gross weekly earnings for all employee jobs (full-time and part-time) were £405, an increase of 1.3% from 2011.
If you are thinking that it is a rather small increase then you would be correct. Also we get a snapshot of where real wages were back in April as then Consumer Price Inflation was running at an annual rate of 3% and Retail Price Inflation was running at an annual rate of 3.5%.
So we see that real wages were falling at an annual rate of either 1.7% or 2.2% back in April when this annual survey was calculated.
However remember that these are gross and not net wages. We also know that the tax burden has also risen in the UK in recent years although the conventional measure of net earnings of subtracting income tax and national insurance does not really cut it anymore. The reason for this is the way that tax increases have been in the indirect section as sales taxes (VAT to 20%), fuel duty and quite a few other stealth taxes have risen. For example rising electricity and gas bills have been partly due to green taxes and subsidies. So if we add the lot together we have the worrying conclusion that the level of disposable income may have dropped by a fair bit more than even the numbers above.
A Lost Decade for Real Wages?
It is not made easy on the ONS website and there have been cateory changes over time but we can compare full-time earnings to see if the future back in 2002 was bright and if looking backwards we now see something of a lost decade for wages.
The annual survey in 2002 gave full time pay as £20,376 and the corresponding number for 2012 was £26,500. So we have seen a rise of 30% over the past decade in nominal wages.
Over the same time period the Consumer Price Index rose by 29% so we can see that by this measure real wages have barely edged forwards and if we allow for the fact that neither number is perfect we conclude that real wages have stagnated. If we use the Retail Price Index we see that it rose by 38% over this period andso we see that real wages have fallen by 8%.
If we remind ourseleves that particularly in the latter part of the period we have seen tax increases we are left with an even more uncomfortable thought that disposable income from wages looks as though it has fallen substantially over the past decade. No wonder they are busy “improving” all the inflation numbers!
It also means that the UK has also been applying the internal devaluation system which has been applied in the troubled nations of the Euro area although the UK application has been much more stealthy.
I wanted to display these numbers fully today as they demonstrate where the UK economy is right now. We are seeing disappointing numbers because real net wages have fallen and as we look back we see that we are now returning to past levels almost as if we were in Doctor Who’s TARDIS. To my mind much of this has been caused by the policy failure which is Quantitative Easing which has boosted prices and hence reduced real wages without much influence on output at all. They gambled and lost to my mind. The problem is that it is us who pay the price for their failure.
The Housing Market
If we consider the areas where policy has really been directed we see the banks and the housing market. If we look at house prices we see stagnation if we look through the fog of one index saying up as another says down! However we can also look at mortgage lending to see if there is any real change but if you see the latest numbers for the main banks you see this.
The banks’ net mortgage lending grew by 0.4% in the year to October
The banks are trying to parade their lending data but as fast as they issue new mortgages borrowers are repaying old ones. Also if we look to the wider population we also see that they are doing this.
Cash levels in accounts are 6% higher than a year ago, as people continue to build up deposits, particularly in ISAs, as a buffer against uncertainty
For overseas readers ISAs are a savings vehicle where you do not pay tax on the interest received. But the fundamental point here is that the strategy applied of QE and bank bailouts seems to have left us with stagnant mortgage lending (which is at much lower levels than previously) and an increased appetite for saving. Personal deposits with our main banks have risen by an average of £3.6 billion over the past six months for example.
If we review this we see that policy set to achieve one objective (more borrowing,less saving) is so far producing exactly the reverse!
What about business lending?
We gain some insight into this from the latest Bank of England Agents Report.
Funding for Lending Scheme appeared likely to have a more immediate impact on the availability of residential mortgage lending than on business lending
When we consider that so far the impact on mortgage lending is less than stellar one would be right to expect the worst. Indeed the section below looks like an outright fail for the Funding for Lending Scheme.
Some business lenders appeared still to be tightening terms. This was a particular problem for some SMEs, (Small and Medium sized Enterprises) where the availability of overdrafts was said to be continuing to reduce, with banks preferring asset-backed lending and seeking additional personal guarantees
And larger enterprises seem to want to avoid the banking sector completely.
Among medium-sized businesses there was growing evidence of a drift to non-bank lending
So we see that we can explain much of the disappointing performance of the UK economy by simply looking at real wages especially if we allow for the tax rises of recent years too. Also I think that the latest lending and savings reports give an insight into something else too which is that we as people have changed. What I mean by this is that into the boom if I may be permitted a sweeping generalisation we borrowed much and saved little and now we borrow less and save more. This compounds the impact of the credit crunch.
However if we get to the nub of the issue I feel that we are in an zone or time period where official attempts to change this situation only make things worse . For example we have seen rhetoric applied when a Deputy Governor of the Bank of England asked savings to spend spend spend in 2010. On that subject weren’t his parents prescient when they christened him Charles which allow people to call him Charlie? We have also seen QE and Funding for Lending designed to reduce borrowing costs and by implication the returns from savings but the corresponding reduced saving and increased borrowing has not happened yet. I only add yet as it is reasonable to give FLS some more time unlike the busted flush which is QE.
As we go forwards we will see another factor bite into disposable income. Whilst the idea of a national pension scheme is laudable we find that it is being applied on weak income levels and is another drain. It also has many of the features of a stealth tax albeit one which which (hopefully) provide a return in the future.