Falling real wages,more saving and weak borrowing no wonder the UK economy is becalmed

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.


This entry was posted in General Economics, Inflation, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • Ian.Jones

    So Gordon Brown and Labour did nothing but rack up massive debts and create zero wealth. No surprise there then. A lot of house owners feel better off as interest rates have been cut so much but in reality its a transfer of wealth from savers, mostly pension funds which means those house holders will get lower pensions. Thus the only ones to come out on top are public sector workers, who votes Labour again?

  • Rods

    Hi Shaun,

    Another excellent piece of analysis.

    “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?”

    Depending upon his politics that would make him a left Charlie or much more likely a right Charlie. :-)

    It is interesting that we now have lost decade of wage rises as it was from 2002 onwards that the last Chancellor and the BOE both went completely off the rails with monitory policy. A housing bubble due to interest rates being too low (which many economists were calling but the BOE were deaf) and a public sector spending and borrowing boom (with no bust allegedly!) which has wildly unbalanced the economy and left the country with a crippling deficit and debts. There was also a mass migration policy which has driven down wages. The current Government has done very little to rebalance the economy, so there will be little if any economic growth. They have also done very little to slow mass migration, so there will be continued downward pressure on wages in many sectors of the economy. Until a rebalancing happens there will be no economic growth, the Euro crisis will keep migration high along with that from Asia, so all the majority have got to look forward to in the foreseeable future is real wage sapping, above target, inflation. The best we can hope for in 2013 is stagflation, providing the markets don’t decide otherwise!

    Going slightly off topic. Lord King (who I generally have not much time for) actually made a very good speech yesterday, but I don’t think he thought through all the implications of what he was saying. This was that the banks in the future could still be in effect to big to fail due to the £85,000 limit and the pressure the Government would be under to help those with deposits over this if a bank go into difficulties, especially for short term large deposits and maybe some sort of insurance is required.

    Now he has actually hit the nail on the head with “some sort of insurance” although I’m not sure he realizes it or not. Now say that for deposits over £85,000 it was compulsory for banks to offer optional Personal Default Insurance (PDI), (Optional and prices shown separately on all statements to avoid the PPI situation), then the price of this via the bank or third party PDI insurance would be a cost against the interest received. So a higher PDI from a perceived or actual risk would reduce a banks effective savings interest rates. If it was also compulsory for banks to disclose the quality of their loan book in their accounts, you would then have an open risk pricing mechanism for the PDI. Bank would then be subject to market pricing against perceived risks which would include any breaches of compulsory ring fencing around their investment banking. Although this would increase bank volatility it introduces a real price and moral hazard into their activities.

    Now if a bank went bust, where the government refused to bail it out, there would be very little public outcry or sympathy for those with large deposits who took the risk and failed to take out insurance and therefore suffered losses.

    Shaun, I would appreciate your comments, on my thoughts on this.

  • Anonymous

    Hi Shaun,

    ‘I only add yet as it is reasonable to give FLS some more time unlike the busted flush which is QE.’

    12 months ago it was possible to get 3.6% on 12 month fixed savings, now its
    2.5% from the same institution. So that hits the ‘wages’ (income) of savers (a
    31% fall in spending power, before tax).


    It has reduced the interest that has to be paid by the banks for their retail
    funding, such as it is, without requiring reduced charges.

    So maybe FfL is really a spun bank bailout with a side effect that it ‘may’
    increase lending, thus its at least a 50% success already?

  • DaveS

    Thanks Shaun

    It was clear that UK GDP relied heavily on consumer spending and its impossible to grow consumer spending with wage constraint, inflation, falling savings rates, falling pensions, increased taxes and falling house prices. I think even our MPC puppets could understand that.

    However I think they also believed that a falling pound would lead to export growth, GDP growth and a rebalancing of the economy away from consumer spending. That hasn’t happened either.

    Without that growth, the whole UK debt dynamic unravels and now they are trapped in perpetual QE for fear of the alternative – its a vicious spiral because every year the alternative gets riskier.

    But without QE, then I think we would have looked a lot more like Spain in its recent crisis – if the housing market had crashed by 30-50% (like it should have) then the UK debt dynamic would have unravelled very quickly indeed and I think it likely we would be on an irreversible path to sovereign default.

    (Sorry Shaun, I can’t agree with your argument that without QE, UK Gilt yields might have been even lower e.g. like Germany. Sadly the UK economy does not resemble Germany’s and we can’t remotely be considered a safe haven).

    Now its damned if you do, damned if you don’t – because our economy was irreversibly damaged long before the 2008 crash – I’m afraid the MPC can’t put Humpty back together again.

  • anteos

    Hi Shaun

    another great piece. The policies of the Boe have mendaciously destroyed pensions and savings. And yet it hasn’t encouraged spending. Low interest rates have forced people to save harder, which is the opposite effect to what they expected (I know I am). Consumption will only increase when a decent return is made on savings, and this gives confidence for people to spend.

    its the savers, not the debtors who will turn the economy around.

  • Alex

    The better return on your savings would have been to buy food in bulk and if you could any fuels you need.
    A year of food or more stashed away would have insulated you from the rising prices and falling sizes of products – better return than an Isa I suspect.

    Getting solar panels and water butts would also help, all of which are signs of one looking after ones self rather than looking to them there governors in charge of the mad hatters tea party to get it right for you.

    I only half listened to this mornings Radio 4 news / commentary in which we were being told we are to expect higher electricity prices as “we” fund the infrastructure and switch over to wind and renewables. I might have got it wrong but it sounded like this. Wasn’t that what privatising the electricity industry meant to do in the 1980′s????

    All on the basis of achieving ‘security’ of service and not being beholden to foreign supplies – see previous paragraph.

    After we’ve stumbled through the introduction of ‘being in it’ aka the new pension scandal, opps, I meant scheme, rising house hold costs and falling real income, we get a glimpse of whats further down the line. Get off the grid.

    The next ‘inescapable’ fleecing mechanism is being laid down.

    As I have posted before, it won’t be long before we make the choice of being in work, and either paying rent / mortgage or food and getting too / from work. But not all of them.

    We are the cashpoint of the government, the lender of last resource. opps, lender of last resort?? oh I don’t know and neither do they,

    We will be the working population living on the streets.

  • mike

    The ‘Funding For Lending’ scheme may not have had any effect on lending nor on the amount saved but it has certainly had a dramatic effect on savings interest rates.
    As soon as this scheme came along the banks and BSs were suddenly showered with cheap money so they had no need to pay the 3.2% instant access rate as many were doing. Now the best offer is 2.00% – 2.20%, a full 1% reduction.
    That amounts to another government sponsored raid on already meager returns, which affects many millions of folk badly. I would expect to see corresponding cuts in spending from these millions also.
    So well done to those eggheads who came up with that bright idea just as things were getting a little better!!!

  • Anonymous

    Why would anyone start a pension plan now with all the factors you list (plus train/bus fares) reducing disposable income and returns on savings? – HMG timing is counterproductive – this is an attempt to reduce future benefit payments with poor returns for the low paid.
    Any news on fuel duty for 2013? I expect any fall in oil price to be matched by increased fuel duty as GO scrambles for more tax revenue

  • pavlaki

    Anteos – you are right. Poor interest rates have indeed reigned in discretionary spending and money that was previously available for second holidays, second cars, meal out each week is now being saved against the rising cost of essentials. I frequently hear that savers outnumber borrowers and yet fiscal policy is always targeted to help those who borrow. Add to this the imported inflation from a low value Sterling ( another policy that is failing in my opinion) and it is hardly surprising that stagnation and prudence is the order of the day.

  • Noo 2 Economics

    Hi Shaun, Please could you clear up for me “whilst the idea of a national pension scheme is laudable”. Are you talking about automatic enrolment into work place pensions or something else?

    Isn’t borrowing too much what got us into this mess. Why are they expecting people to borrow more?Haven’t the authorities learnt anything?

    It always seemed obvious to me that given the banks have a lot of debt to roll over next year the only reason for Funding for lending Scheme (FLS) was to cover off this eventuality. As I understand it, the terms of FLS are loose enough for the Banks to say that they meet the criteria as the underlying loans which they are re financing are to SME’s – it doesn’t have to be brand new loans to SME’s to qualify for FLS. Am I the only one who views FLS in this way? That means to say I don’t expect FLS to have any effect on new , increased real lending to real SME’s. A second order effect is lower savings interest rates which the BOE presumably hopes will result in savers spending/investing on the markets rather than mess about with poor returns.

    That said, I don’t think it is a very productive approach. As someone else has said here, rates need to be higher (in my opinion about 3% higher) before savers will gain confidence to start spending.

    Seems like I am becoming Notayesman to your Notayesmanseconomics these days.

  • Anonymous

    Hi Ian

    As ever I will steer clear of the political debate.

    On the subject of the public versus private sectors there was this which I found interesting.

    “The median gross weekly pay of full-time employees in the public sector was £565 in 2012, up 1.6% from £556 in 2011. For the private sector the comparable figure was £479, up 1.5% from £472 in 2011.”
    The ONS somewhat bizarrely explained this by saying that the private sector contained workers who were lower paid. Er,well yes…..
    Also whilst I am on detail women did have a faster rate of wage growth than men in the year to 2012 so the gender pay gap narrowed a bit.

  • Anonymous

    Hi Rods

    No problem the bit which catches my eye is this “If it was also compulsory for banks to disclose the quality of their loan book in their accounts” because as we stand banks have been able to travel in the opposite direction.
    This would be the biggest step as I believe that if you did that some banks would be underwater. So I think that one needs a plan for the banks which would be immediately exposed as bust. This however would be a good thing as I think “better the devil you know”….

  • Anonymous

    Yes one way of looking at the response made by the UK to the credit crunch overall is to consider that a transfer has been made from savers to the banks. FLS has continued it.
    I am not a fan of that in the first place but it gets even worse as strategy if savers save more as it was supposed to discourage saving…

  • Anonymous

    There is no compulsion to agree with me on here at all,which goes in line with my trade name i think….
    In fact I think exactly the reverse, thoughts and ideas are welcome.

  • Anonymous

    Yep privatisation of profits and socialisation of losses is a theme which goes on and on and is beginning to feel like a type of perpetual motion.

  • Anonymous

    Hi Chris
    Pensions are an area where I have travelled something of a journey. I used to be something of a vocal supporter. But as change has followed change and meddle has followed meddle we now have the issue that planning over a 20/30/40 year timespan seems to be matched by annual rule changes and that simply does not work well.
    So whilst I am still a supporter the truth is that compared to the alternatives pension saving has taken a notch or two downwards (for those of us that have to put money in it anyway).

  • Anonymous

    Hi Noo 2
    Yes I mean the new workplace pensions system which has had various names but I think that the latest is NEST.
    As to you being Notayesman mark two I am not so sure as I think that your second and third paragraphs have a lot of validityand we are quite close to full agreement! I am trying to be fair to the FLS and give it a bit of time but yes it does look like moves in Japan which went the way you predict…

  • http://www.scoop.it/t/european-finance-economy/p/3477071055/falling-real-wages-more-saving-and-weak-borrowing-no-wonder-the-uk-economy-is-becalmed-mindful-money Falling real wages,more saving and weak borrowing no wonder the UK economy is becalmed | Mindful Money | European Finance & Economy | Scoop.it

    [...] 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…  [...]