10.02.2022

Destroyed by economygate?

After the “longest wage squeeze in 200 years”, workers in Britain face an unprecedented fall in living standards. Michael Roberts rejects the Bank of England’s call to “moderate” wage rises

Prime minister Boris Johnson is currently in danger of losing his job because of the blatant flouting, by him and his staff, of the Covid restriction rules imposed by his own government on the rest of the British people. But rather than ‘partygate’, it is the rocky road ahead for the economy and its impact on living standards for the many which is much more likely to destroy the fortunes of this rightwing Conservative government at the next election, probably in 2024.

What a mess the UK economy is in. At its February 3 monetary policy meeting, the Bank of England forecast that the year-on-year rate of inflation in prices would reach 7.25% this spring. This is after forecasting just 4% at its previous meeting. Indeed, the BoE’s forecasts have been wildly short of reality for the past year.

If inflation hits 7.25% in April, that would be the highest Consumer Price Index figure since August 1991, just after the first Iraq War oil shock. It has not risen to this level since Saddam Hussein invaded Kuwait in August 1990.

The BoE announced another hike in its policy rate with the belated aim of getting inflation under control “before it gets even worse”.

Of course, inflation rates are rising in all the major economies, driven partly by increased consumer demand, but mostly by supply-chain bottlenecks, particularly in fossil fuel, energy and food commodities. But the British inflation rate is considerably higher than even in the US or the euro zone and the hit to living standards of the average British household is going to be much greater. The BoE admits that real post-tax household income will fall by 2% in 2022, with a further fall in 2023.

This is a five times worse fall in income than in the financial crisis of 2008-09, and worse than Black Wednesday 1992, when the pound broke with tracking the European Currency Unit (the pre-euro currency “unit of account”). Indeed, it will be the biggest fall in disposable income on record - and comes after a strangulation of real household incomes for nearly 30 years in the UK - the longest wage squeeze in 200 years!¹

Ben Broadbent, one of the BoE deputy governors, said that “extraordinary” rises in global energy prices are a key factor beyond the bank’s control, with even bigger increases than during the oil price shock 50 years ago. He said:

I think this represents the steepest rise in energy costs for households as a share of income in a year than we have seen ever, including the 1970s.

Energy bills to British households are capped in the UK by a regulation authority, as in many countries. However, because of the rise in global energy prices, the authority is raising the cap by 50% from April.

The government has panicked and is introducing a price rebate or discount to reduce the bill. But this is no handout. Instead, it is only a loan to reduce energy bills and will be clawed back in higher bills “when energy prices are lower”. The government wants to maintain the profits of the privatised energy monopolies, rather than bring them under public control, and it is not putting public funds into providing energy to people at reasonable cost. So much for targeted price controls as a solution to inflation, as advocated by some on the left.²

Price controls do not work. But the authorities still expect wages to be controlled. BoE governor Andrew Bailey said that, while it would be “painful” for workers to accept that prices would rise faster than their wages, some “moderation of wage rises” was needed to prevent inflation becoming entrenched:

In the sense of saying, we do need to see a moderation of wage rises, now that’s painful. I don’t want to in any sense sugar that, it is painful. But we need to see that in order to get through this problem more quickly.

So, with inflation rocketing, energy and food prices spiralling, the Bank of England tells British workers not to ask for more wages. This advice comes from a bank governor who gets £575,538, including pension, a year, more than 18 times higher than the median annual pay for full-time employees in Britain of £31,285.

The BoE claims that if workers ask for more wages, firms will be forced to raise prices and then there will be a ‘wage-price’ spiral. There are two points here. Workers have not caused this price inflation - an important fact when mainstream economists (particularly Keynesians) argue that inflation is caused by ‘tight’ labour markets and ‘wage-cost push’. Second, there is no evidence that rising wages lead to price rises - indeed, there is much more evidence (as I have shown in previous posts)³ that wage rises generally lead to falling profit share. And that is what really worries the government and the BoE - the profitability of British capital, which is already weak enough.

And this low profitability leads to very poor productive investment and productivity growth.

The government boasts that the British economy is recovering fast from the disastrous pandemic slump. But this is nonsense. Inflation rates may eventually subside in the UK and the major economies - mainly because economic growth will slow fast. But Britain is in the worst position relative to other G7 economies. The UK is second from the bottom of the G7 league table, when comparing the overall recovery from Covid to the pre-pandemic GDP level. And now the BoE has reduced its economic forecast significantly, saying that UK economic growth would soon “slow to subdued rates” of around only 1% a year, lower than any other G7 economy.

Worse, the current growth rate is artificially boosted by £25 billion of corporate tax incentives this year and next, but investment remains weak. In the third quarter of 2021, it was still 4% below pre-pandemic levels - again lower than any other economy in the G7. And the government plans to raise corporation tax rates from 19% to 25% in 2023. The IMF reckons the UK economy will slide to near stagnation in 2023, with GDP only 0.5% larger than at the start of the pandemic: the lowest in the G7. That’s not a great scenario for another Conservative election victory in 2024.

Michael Roberts blogs at thenextrecession.wordpress.com