James Meadway on
the great escape
that really wasn’t

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News last week that the UK had narrowly avoided a much-anticipated recession in the last half of 2022 was grabbed at by its government. “Our economy is more resilient than many feared,” claimed Chancellor Jeremy Hunt. This is desperate – whilst every other major developed economy has recovered its losses during the pandemic, Britain’s economy remains smaller than it was at the end of 2019.

Every reputable forecaster expects Britain to fall into a recession next year. But perhaps most telling, although official figures show inflation still at over 10 per cent, the same official stats show wages rising by only 6.4 per cent – meaning almost all of us are being made worse off as prices rise faster than our pay. “Resilient” is not the first word that springs to mind.

A recession has a technical definition in economics, referring to two successive three-month periods of falling output, as measured by gross domestic product (GDP). GDP is meant to capture the total value of economic activity in an economy. But none of us actually live off GDP – it is just a statistic.

However useful this statistic might be at assessing where an economy is going overall, what matters for most of us is our day-to-day experience, and our future prospects. If most people’s incomes are falling in real terms, as they are now, GDP going up or down a bit doesn’t matter. If the NHS is falling apart and school buildings are so neglected that some of them have been declared unsafe, that is a more immediate fact than whatever GDP is doing. A tiny percentage added to or taken away from this very big, abstract figure really won’t make much difference to most people’s lives.

In fact, despite the political focus on growing GDP (which is what politicians mean when they talk about “economic growth”), the link between GDP going up and most people’s lives becoming better has become quite tenuous. Since the austerity spending cuts began in 2010, the UK’s GDP has risen a bit – there has been a little bit of economic growth, although much slower than in the past. But people’s incomes, after allowing for inflation, barely improved. We had growth, but few people saw much change in their circumstances, and, with benefits cuts, insecure work and worsening public services, many people’s lives clearly became worse. The economy has grown after the huge crash during the pandemic, but people’s incomes, again after taking account of inflation, have actually fallen.

There is no instant relationship between GDP rising and most people’s lives getting better. Unfortunately, this is unlikely to work the other way round: if GDP falls in recession, particularly a bad recession, most of us will find our circumstances getting worse. We will be more likely to lose our jobs, or to find our pay falling even further behind price rises, as businesses fail or try to cut their own costs.

The UK, like many other countries, is forecast to enter a fairly shallow recession next year – meaning economic forecasters, including the Bank of England, expect GDP to fall a little. But against circumstances that are already bad for so many, this may not be very noticeable. Rising prices are far more of a concern today, with food prices, in particular, expected to continue rising rapidly over the next few months, even if overall inflation comes down. It is much more important to focus on the economic indicators that matter to people’s lives – like pay, inflation, unemployment – than it is to look at economic growth.

Focusing on the outcomes that matter, especially pay, should lead to better economic policies. Typically, however, when the government does choose to focus on pay, it manages to look down the wrong end of the telescope. A leaked paper from the Treasury this week says it cannot allow public sector pay rises of more than 5 per cent because anything higher, the mandarins believe, will set off demands for higher pay in the private sector too, and so drive up inflation.

This is absurd thinking: if inflation is already at 10 per cent, a 5 per cent pay rise in money terms would actually leave people 5 per cent worse off. The Treasury is arguing for a huge pay cut – as if the way to deal with rising prices was lower pay! And with the recruitment crisis across the public sector, including a shortage of 47,000 NHS nurses, public sector pay should be rising by more than inflation. We will not recruit the doctors, nurses, or teachers we need without paying people properly.

But the leaked Treasury document also shows the government’s real fear. Whilst most people’s pay has been falling, after allowing for inflation, the profits of some, typically very large, companies have gone through the roof. Higher prices have been very good for the profiteers running oil companies, with Shell and BP reporting all-time record profits. Other large businesses are also reporting very substantial profits.

There’s plenty of money out there to pay people properly. And by paying people enough to live on, we can ward off a recession, since higher paid people have more to spend and so help keep businesses going. It would slow the sad loss of local pubs, for instance, with record numbers closing last year, if people had a bit more to spend on going out. But that’s not how the current government is thinking. Let’s hope the public sector strikes can change its mind.

James Meadway is an economist and director of the Progressive Economy Forum, an independent thinktank (progressiveeconomyforum.com)

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