Living standards plunge

This week the government announced prices are going up by 3.8% a year before the VAT increase, excluding mortgages, or by 2.9% on its preferred measure of the CPI. Most commentators think that will rise again in January. Meanwhile the Council leaders announced there would be no pay increases this year. That means local government workers join the many industrial workers who had no pay rise last year, though it still will leave them better off than the many workers in the private sector who have been on short time, experiencing pay cuts.

In other words, this year, even before the Election, millions are contemplating a year in which their spending power falls by at least 2-3%. It takes special economic incompetence to deliver a fall in living standards on this scale.

Some months ago I forecast a big squeeze on living standards on this site. Labour immediately seized on my remarks and tried to make out I recommended it or wanted it. Let me make it clear again today. Like most MPs I want to see living standards rise. Unlike a majority of MPs, I recommend economic policies which could deliver that happy goal. Then, as now, I am predicting what will happen under Labour’s economic policies. They encouraged the private sector to live well beyond its means in the boom days. They presided over banks that lived well beyond their means. Now they are bloating the public borrowing, making the public sector live well beyond all our means. Even they at last recognise this cannot go on. After their booms come their busts.You cannot solve a crisis of over borrowing in the private sector by borrowing too much in the public sector.

I expect the plan was to try to keep things going until after the election – borrow all they could to see them through. Unfortunately for them the markets are running out of patience, putting interest rates up. The pound has fallen, so their money goes less far, as we learn today with the Foreign Office budget. And now, the Councils have been squeezed a bit so they are telling us the truth. If they are to avoid major redundancies, they have to offer no pay increase. Against a background of surging prices that means lower living standards.

The private sector, which was living well beyond its means, has been reining back hard on the debt. Individuals have been repaying credit card borrowings and cutting the mortgage where they can. New borrowing has been very restricted. It is now the public sector which has gone to extremes with the new borrowing. Yesterday we debated the Deficit and the government’s absurd Fiscal Responsibility Bill. I pointed out that the government has taken out a whopping mortgage for us all, which it has told us about,(gilts) but it has also taken out a second mortgage,(bank nationalisations) lots of hire purchase(leases) and maxed out on various credit cards ((PFI/PPP)without putting all those figures into the official borrowing stats they like to quote. Now we are into the final phase, the visit to the Pawn brokers. This week UK shareholders sold the rest of Cadburys which they still owned to a foreign buyer. There will be more of that to pay the bills we have run up not covered by our earnings. If we carry on importing our lifestyle from China, we have to find a way of paying off the debts we incur as we do so.

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35 Comments

  1. Stronghold Barricade
    Posted January 21, 2010 at 9:12 am | Permalink

    The Government also pointed out yesterday that over 8 million people are economically inactive, compared with the 3 million under the last Tory administration. That is some fiscal drag

    The worrying figure in my mind are the large numbers of people still registering as looking for work but not entitled to any benefit.

    Are these the people that Labour have got off Incapacity Benefit, only for the people to discover that they don't have any NI contributions to entitle them to the benefits, on top of which no one will employ because they have this large piece of "SICK" in their possible employment file? Presumably the self employed, who's businesses have gone under too

    Why aren't the conservative's going after Labour? Could it be that they will carry on the same policies?

  2. H W Tsudnim
    Posted January 21, 2010 at 9:56 am | Permalink

    As you well know, the NHS is sacred and we need more money to spend. We will ensure efficiency of spending by scrutinising the use of every penny: we will know the whereabouts of every bedpan (sparklingly clean and sterile of course, we don't actually encourage their use any more). We will spend no more than 110% of the new money in counting it and writing down lots of figures. Now, promise to print some more for us and we will vote for you. Never forget, THE NHS IS SACRED AND CANNOT BE DISCUSSED WITHOUT REVERENCE. GIVE us the cash. Just hand it over. Even today we heard of the plight of the morbidly obese who "cannot" diet and must have surgery, and the equally tragic plight of surgeons who don't have enough big operations to do. Some NICE chap suggested putting the two together and solving both problems. Do you understand? Never do a simple cheap thing when there is an exciting and costly alternative. Now stop bleating about recessions, there is no such thing in our world.

  3. Mark
    Posted January 21, 2010 at 10:04 am | Permalink

    Presumably we will pay the full price in Euros for Baroness Ashton and her minions regardless of the value of the pound, and the decision not to protect the Foreign Office budget against currency fluctuation is merely one designed to ensure that the transfer of responsibility to Brussels is accelerated? Or have the EU generously allowed us to set that budget in pounds as well?

    You'd have thought with all the banks the government now owns they'd have been able to get some competitive quotes on locking in currency values. Perhaps better still would have been to look at Asian (average price) options: the Treasury might even have gained some hints for economic management by looking at the asymmetry in cost of puts and calls.

  4. Captain Baines
    Posted January 21, 2010 at 10:08 am | Permalink

    Excellent, well said. What we need now are leaders who tell it like it is. We need some anger and the will to do away with all the bu****it of the Nu Labour years. We need reality more than spin. What a pity Mr Cameron doesn't share your fire.

  5. waramess
    Posted January 21, 2010 at 10:32 am | Permalink

    2.5% inflation is no more than a drop in the bucket compared to the bath we have taken on the sterling devaluation so far.

    What intrigues me is the absence of Conservative protest when the government hail their policies as having put an end to the recession.

    Government spending may well have put the economy back to where it was with house prices too high for the average potential first time buyer and the financial sector once again booming, but look at the debt levels; those were not there before and look at the risks inherent in these low interest rates.

    If interest rates begin to move up then debtor defaults will increase and massive losses will be booked on gilts holdings leading to banks getting into difficulty again and the entire pack of cards collapsing. What will we do then?

    It looks as if for the moment Labour is getting away with the lie and so long as the electorate believe them there is a great risk that Labour will stand a real chance of a revival in its fortunes

    • APL
      Posted January 21, 2010 at 11:37 am | Permalink

      H W Tsudnim: "Even today we heard of the plight of the morbidly obese who “cannot” diet and must have surgery,"

      Yes.

      waramess: "2.5% inflation is no more than a drop in the bucket compared to the bath we have taken on the sterling devaluation so far."

      Ain't that the truth. Heath's decimalization was nothing less than a devaluation by sleight of hand.

      In terms of Oz of Gold, you could buy 1 for fifteen pounds during the sixties, now one ounce will cost you around £600

      The problem is POLITICIANS they cannot resist bribing the electorate, sadly collectively we donot resist the promise of something for nothing. Trouble is the bill falls on everyone, and through inflation the least able to bear the cost.

      • waramess
        Posted January 21, 2010 at 1:14 pm | Permalink

        You are right. Am I really expecting anything else? Not really.

        Sanity in politics is always relegated to the back benches; it's far too much for the ill educated unwashed electorate to take in.

        Now bribery…………..

  6. Brian Tomkinson
    Posted January 21, 2010 at 11:15 am | Permalink

    It seems that every day the BBC tells us how much better things are getting and how dangerous it would be to cut public spending. These people live in their own cosy cocoon, paid for by the licence fee payers. Things are about to become a whole lot worse as far as I can see, except of course for bankers and the "political elite". Brown should be (punished-ed) for the damage he has inflicted on this country but he will be rewarded for failure, whilst millions pay the consequences of his incompetence for years to come. Whether the Conservatives have the policies to help restore this country’s fortunes is an open question.

  7. Norman
    Posted January 21, 2010 at 11:15 am | Permalink

    I heard on the headlines today that the Chinese economy is now back roaring ahead – the figure of over 10% growth for the last quarter was mentioned and 9% overall for the year.

    I don't understand the complex economics behind such things but it seems to me that if we are now importing virtually all of our consumables from an economy growing at 10% while we, at the same time, are effectively shrinking (growth lower than inflation) this further compounds the problem.

    It still angers me to think of the statements that were flowing from Ministers, who should know better, that they refuse to cut public spending as it would make the recession worse. Have these people not the slightest understanding of economic history? It is impossible to fuel growth by the public sector, it is a consumer of wealth, not a creator.

    Need to have a cup of tea now and let the blood pressure go down.

  8. David B
    Posted January 21, 2010 at 11:33 am | Permalink

    The only shock in your blog is that people are shocked by it. Printing money leads to inflation if that money is then lent to the non productive public sector it does not earn anything (and in many cases leads to larger cash outflow as it is spent on imported goods) meaning inflation goes higher but income remains fixed in absolute terms and falls in real terms. Leaving standards are a function of real incomes, if real income falls living standards fall. It is simple economics and a blind man on a galloping horse could see it.

  9. A.Sedgwick
    Posted January 21, 2010 at 11:42 am | Permalink

    Further signs of things to come and the unrealistic bank rate is the Skipton BS increasing its SVR. They seem to be taking some flak in the press but they are taking the right course. Your question about the MPC is relevant, they seem to have got it wrong for years and continue to do so. The Bank Rate should be about 3%. The BOE is about as independent as the politburo as seen with QE, for me no banker in their right mind would get involved with printing phony money.

  10. Michael Lewis
    Posted January 21, 2010 at 11:54 am | Permalink

    Given the mess in the economy, do you think Gordon Brown was wrong to delay the election to the last possible moment? It seems, bizarrely, as if, losing the next election may be a good thing: as the country is heading toward a bailout or default via inflation. To fix will cause massive pain, and voters will blame the incumbent. The major problem, as far as I can see, is the amount of people employed by a state that can no longer afford to employ these people. It seems as if Brown's strategy of kicking the can down the street until after the election is coming down to the wire …

  11. Neil Craig
    Posted January 21, 2010 at 11:58 am | Permalink

    We simply have to cut back the above 50% of the economy that is state spending. I think that with the hardship among the majority who still work in the productive sector there is little sympathy for those in the public sector with index linked pensions not getting raises.

    However even more valuable than cutting the money used by the public sector would be cutting the regulations that prevent the use of new technology & artificially increase the cost of doing everything. That is the ultimate reason we are being bypassed.

  12. Javelin
    Posted January 21, 2010 at 12:03 pm | Permalink

    Well said John.

    I've been posting the same thing in the comments and on Iain Dales site for a few years now.

    Nobody wants falling living standards – but they are entirely predictable. I would say, given the Labour Government's softly softly appraoch to business and protecting the UK they are now inevitable for the next 5-10 years.

    I was sitting in Royal Bank of Canada 5 years ago predicting exactly this siutation – Program Trading on FX and Fixed income . My head was deep in global currency movements and Government spending.

    I said

    * A crash in the retail sector, 2006, based mortgages, but I had no idea on the trigger. I guessed then rising interest rates could be the trigger – but it turned out to be the rising oil prices. I never dreamed in my worst prediction that QE (Keynsianism would return).

    * Rising Government spending. I thought Gordon Brown would spend and spend on infrastructure in the North before the Tories got in. That was true to a large extent, but he also spent it on absolute non-productive aspects of our economy.

    * Rising Global Demand for resources. Oil at 150 would be the norm in the US, making the US less competitive. That price was what triggered the recent crash, and it looks like they will go up even more. That looks true. The Global Warming alarmists may make this worse.

    * Unemployment will keep rising in the non-global competitive workforce. The UK is going to be divided into the global workforce who can demand high salaries and the rest who can't. I said then the Government is destroying it's base up North by not being really tough on education and creating Government jobs. I still believe that the Labour Government has destroyed the North already by not creating a globally competitive work force. The reality simply has to manifest itself when Government savings are made and jobs go. It will be super grim up North

    * Imported inflation will lower our standard of living. We will not be able to control it and global employment competition will mean supressed incomes. The vast majority of the UK will have to compete with India and China for middle income information based jobs. I advised a guy with a child to go intot a job that required a lot of training and was either a globally competitive job or a face-2-face job like a lawyer or sparky.

    * Having said all of that I was unsure about quality of life. But over all said we would have to work harder and the political world would gradually move to the right as people realised they had to compete to maintain even a reasonable standard of living. I think we just saw this in the recent Republican swing in Boston.

  13. Steve Tierney
    Posted January 21, 2010 at 12:06 pm | Permalink

    I appreciate why you choose to spin in this way, John, but I think this time you are being a little disingenious.

    This isn't a fall in living standards, its a correction to what the real living standards would have been without a ten year illusion created by a debt binge and housing bubble.

    My personal opinion is that the correction is far from over. Market forces, long held in a straitjacket, are asserting themselves and the consquences – a return to reality – are going to be difficult in the extreme.

    It is *certainly* Gordon's Brown's fault we are in this mess. But it is ihs false gold prophies that have led us here – rather than mismanagement since the banking crisis began. This is a decade-long mistake come to fruition.

  14. gac
    Posted January 21, 2010 at 12:13 pm | Permalink

    Mr Cameron seems to be shooting himself in the foot – allowing himself to be mocked, and his backbenchers to ask questions which lead to a Brown rant. This goes down well in the left media and with the BBC who probably fear a Conservative Government.

    It is also playing well in the country as a whole as the polls now suggest.

    Whomever he is paying to advise him needs to be fired and replaced by someone who not only realise that Mr Cameron is losing the election, not GB wining it, but also how to reverse the trend.

  15. Ian Jones
    Posted January 21, 2010 at 12:42 pm | Permalink

    Those with savings and fixed incomes have also seen big cuts in their living standards as QE has slashed interest rates and transferred wealth to those with assets.
    The Govt has created almost 300K new public sector jobs in the last year alone which are now significantly higher paid with much better pensions and holidays than the private sector. Employment is now skewed to public sector delivery which means the private sector and therefore living standards suffers.
    Not to mention the fact the Govt is crowding out the private sector in the debt market.

    This is a perfect storm, no growth, inflation and big cuts in spending. We are well and truly in the 1970's, still at least Harman wants us all to be equally poor (except her and her friends of course).

    Any guesses as to how high inflation will peak this year. On RPIx my guess is 6%.

  16. Lindsay McDougall
    Posted January 21, 2010 at 12:45 pm | Permalink

    If a country's GDP falls by 6% pa in 18 months – some 9% below the long term growth trend line, it is NECESSARY that living standards fall in the corrective process. And we've seen nothing yet.

    This is the midnight – let no star
    Delude us – dawn is very far.
    This is the tempest long foretold –
    Slow to make head but sure to hold.

    Stand by! The lull 'twixt blast and blast
    Signals the storm is near, not past;
    And worse than present jeopardy
    May our forlorn tomorrow be.

  17. alan jutson
    Posted January 21, 2010 at 12:58 pm | Permalink

    I think for many it will be not just a belt tightening exercise, but a real task to survive still financially intact.

    In my view for the majority (and certainly for those in private industy), it will be many years of financial pain, where living standards are going to drop substantially from the levels of past years.

    Clearly those who borrowed most, or who have lost their jobs, will feel the pain more than others, but in the end we will all pay for this Governments Political dogma.

    The Labour Party is virtually Bankrupt.

    The Country is virtually Bankrupt.

    Many Politicians are Bankrupt of sensible ideas.

    Some hope !!!

  18. MarkE
    Posted January 21, 2010 at 4:00 pm | Permalink

    There can be no question that living standards are going to fall (it is too late for the alternative; standards remaining constant while our earnings catch up with our expenditure). Next year the treasury will be trying to sell £200bn of UK debt, at the same time as the Bank of England is selling a similar amount as it unwinds QE. When buyers decide this is not a secure investment Sterling will fall further and interest rates will rise. Very deep cuts in public expenditure and or large tax increases will reduce the former figure, perhaps enough to reduce the fear of default, and thus the pain we will suffer in exchanges and interest rates.

    The question we need answering before the election is how it is going to happen. We know Labour want to protect their clients in the public sector, so the pain will all fall on the productive sector; thus 80% of the population will take 100% of the pain.

    What worries is that Cameron, who used to talk about sharing the proceeds of growth, has been very quiet about sharing the pain of recession. I understand he doesn't want to scare the holders of Brown's sinecures, but this shows only his lack of understanding. No matter how much he reassures the sinecure holders, they will still vote Labour but by reassuring taxpayers he might just persuade a few of us that a vote for him is not just a vote for the status quo.

    Since 1997 the public payroll has increased by almost 1million. In the same period a similar number of jobs have been moved off balance sheet to private contractors, PFI "partners" and fake "charities". The absence of any visible improvement of public services implies all of these jobs can be shed, at vast savings to taxpayers and with no detriment to services. Is Cameron willing to move 2million from the public payroll to JSA where they really belong and save up to £40 Bn/year?

  19. Demetrius
    Posted January 21, 2010 at 4:00 pm | Permalink

    For some the real rate of inflation qua reduction in living standards and real incomes is rather worse then the official figures might assume. A good many pensioners are taking a real hammering at 10% or more down on a full calcuation, and this is mirrored amongst others in the poorer groups, notably the disabled.

  20. crowbait
    Posted January 21, 2010 at 4:12 pm | Permalink

    I have quoted this before but not on this site.

    Cabaret song from Berlin in the 20's.

    ''the left betrays,

    the right dismays,

    the country's broke

    and guess who pays''.

    Now remind yourself of the 20's aftermath.

    God help us all because no one else will.

  21. Dan T
    Posted January 21, 2010 at 4:34 pm | Permalink

    If you were the Tory Party why on earth would you want to win this election?

    Despite what pain has come so far, we really are only just beginning. When the pain from putting off the inevitable hangover by desperately downing another 5 bottles of vodka hits. It’s going to get really nasty.

    Yet as we stand now about 30% of people still think it is a good idea to vote Labour, practically 1 in 3! These people have no idea what is instore for them, if the Tories win when the inevitable hits they will bone headedly assume it was all Cameron’s fault, the same way some people still think hard times in the early 80’s were Thatcher’s fault.

    I know another Labour government would be horrendous. But it would demonstrate loud and clear what happens over a full economic cycle the result of voting labour. It could finish them completely, forever.

    I fear the Torys will win, get blamed for all the pain, and another Labour government will take over 5/10 years later. And I simply won’t go through it again, I will have to leave the country I love. Perverse as it sounds, I might prefer we hit rock bottom, if it killed the Socialist parasite in this country once and for all.

    • waramess
      Posted January 21, 2010 at 5:11 pm | Permalink

      No question that the desire to win the election is looking rather quaint right now but forget leaving the country, the pound in your pocket is shortly to be seriously devalued, again.

    • gac
      Posted January 21, 2010 at 5:22 pm | Permalink

      I agree with you and to the extent that Mr Cameron will only shed crocodile tears if he loses the election.

      Maybe this is why he seems not to be trying as hard as he was.

    • MarkE
      Posted January 22, 2010 at 12:42 pm | Permalink

      Dan

      I have been forecasting the Labour reaction for about a year to anyone who will listen. We still see Labour trolls on unmoderated blogs blaming the Thatcher government for the side effects of the medicine they had to administer to (only partly) undo the damage done by Wilson and Callaghan (and Heath who preferred selling the country out to the EU over making it strong enough to stand alone). The next Conservative government (which we may not see before 2015 and which will certainly not be lead by Cameron) will face greater problems than Thatcher faced in 1979 and the side effects of the medicine will be even more unpleasant. We have to get the message over that unemployment, inflation and currency crises are the inevitable price of left of centre policies and the cure is painfull.

      Cancer cures have very unpleasant side effects, but the disease they treat is worse. the same can be said for socialism.

  22. Olaf
    Posted January 21, 2010 at 5:08 pm | Permalink

    What is working for Gorgon is that although we all know inflation is going up and sterling is going down, when you go to get your travel currency the rate is better than it's been for months.

    Are the Eurozone and Us just as screwed as the rest of us.

    I fully expect get get bent over a barrel by the bank I own when it come time to re-mortgage. I'm getting quite used to it after being shafted by the taxman, the local authority, the energy companies, the supermarkets etc etc….

  23. Matthew Reynolds
    Posted January 21, 2010 at 8:49 pm | Permalink

    We should go for the CBI idea of £120 billion in public spending cuts in the next parliament to end this terrible national debt explosion.That would stop higher taxes being piled on top of excess personal and corporate debts and thus causing a double-dip recession or even worse a depression.The Tories need to work with accountancy firms like Price-Waterhouse-Cooper and think-tanks like the Adam Smith Institute to draw up the reforms needed to bring this about.For a party that aims for government – the more economic credibility the better !

  24. mikestallard
    Posted January 21, 2010 at 10:39 pm | Permalink

    "If we carry on importing our lifestyle from China, we have to find a way of paying off the debts we incur as we do so."
    Try opium again?

    • Adrian Peirson
      Posted January 25, 2010 at 12:21 am | Permalink

      Opium probably wiuldn't work, but who would care.

  25. Y Rhyfelwr Dewr
    Posted January 22, 2010 at 12:22 am | Permalink

    Why do I find myself thinking of (regime collapse-ed) every time I see Gordon Brown? Perhaps it's the sense of a brooding, resentful figure, huddled in his bunker with only a handful of cronies, deserted by his former faithful deputies, indulging in tactical fantasies while hoping that if he can just hang on long enough, a miracle will save him. Meanwhile, all around him, a once-great country is reduced to a heap of smoking rubble.

  26. Kevin Peat
    Posted January 22, 2010 at 1:22 am | Permalink

    It started in America alright. New York 9/11.

    We should have suffered the dot.com recession but instead interest rates were kept artificially low to counteract the terrorist attacks on the Twin Towers. That gave fresh impetus to the manic property 'boom' (started under Clinton) which drove property prices through the roof and on which we mortgaged our futures.

    Perhaps Bin Laden understood capitalism more than any of us.

    We now witness the usurpation of the West by the East and there's not a lot we can do about it whilst our living standards and expectations are so high.

    • John Maynard
      Posted January 22, 2010 at 7:43 pm | Permalink

      Hmm, "usurpation" what strange word usage !
      Do you mean out-competing by any chance, or is this the usual US whine that anybody beating them must be "cheating" ?
      Time to face facts Mr Peat.

  27. DavidL
    Posted January 22, 2010 at 10:23 am | Permalink

    I still think inflation is being underestimated. The VAT distortions will only fully come into play this month. Last month saw the year on year discrepancy fall out of the calculation but this month we will see the effect of the rise. Most estimates put this at about 1.4%. Unless there are compensating falls CPI inflation may touch 4%. It is going to be extremely difficult to freeze public sector pay in such circumstances. Unlike BA staff there is no real risk of their employee going insolvent.
    Interest rates are already going up as can be seen from the various mortgage suppliers claiming exceptional circumstances. The Government has lost control of short term rates as the Base rate is increasingly irrelevant. The Government is going to find it difficult to sell its gilts. Once again real interest rates will be higher with knock effects on the mortgage rates.
    To add to the fun there is great pressure to cut back on borrowing improving the spending rate. Some of this is involuntary.
    As usual your comments on falling standards of living are measured and responsible but I fear you are understating just how hard this year is going to be for us all.

  28. Adrian Peirson
    Posted January 25, 2010 at 12:17 am | Permalink

    Of course living standards are falling, you don't have life and death control of people who are independently wealthy that do not need to turn to the Govt.
    You must cut off all avenues of sustainence, including food, fuel, water, money, restrict trave, the ability to fish etc, Bring them to their knees, only then do you have control.
    Every thing this Govt does is designed to give the one worlders greater control over the lives of the people of the world.
    It's Communism, Totalitarianism.
    All these crises were designed for this purpose, Global Warming, a Global war on Terror, A Global pandemic, A Global Credit crisis.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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