The Economist October 9th 2021 55
BritainTheeconomyFlattened
B
ritain, proclaimed Boris Johnson,
the prime minister, is a country in tran
sition, away from “the same old broken
model” to a “highwage, highskill, high
productivity” economy. On October 6th,
addressing the party faithful gathered in
Manchester for the Conservatives’ annual
conference, he promised that workers
would soon begin to feel better off. Wages
are indeed rising. But so too are prices.
Moreover, payroll taxes are due to rise in
the spring. And on the same day as Mr
Johnson’s speech the main workingage
benefit, universal credit, was cut by £20
($27.10) a week. Britons look set to experi
ence a tight squeeze on disposable in
comes in the months ahead.
An analysis by The Economist based on
government forecasts that predate some of
these changes suggests that total house
hold income, after tax and corrected for in
flation, will fall in both 2022 and 2023 (see
chart on next page). After two years in
which household incomes fell because of
the pandemic and Brexit, the result will be
the longest decline since the mid1970s.
First to feel the squeeze will be the 5.5mlowincome households in receipt of uni
versal credit, which is both an outofwork
benefit and a supplement to the earnings
of the lowpaid. The loss of £1,040 a year is
the biggest single cut to social security
since the foundation of the modern wel
fare state. The Joseph Rowntree Founda
tion, a charity, estimates that more than
500,000 people, of whom 200,000 are
children, will fall into poverty. More than a
third of those affected are in work.
The cut to universal credit, which un
winds a temporary increase at the begin
ning of the pandemic, at least featured in
projections by the Office for Budget Re
sponsibility (obr), an official forecaster,
when it last ran the numbers for household
income in March. Since then the govern
ment has announced a 1.25% rise in both
employer and employee payroll taxes, to
take effect next April, in order to pay for so
cial care and help clear a postpandemic
healthcare backlog. And the obr, like the
Bank of England, underestimated how
quickly inflation would increase as the
economy recovered.
Mr Johnson points to rising wages asevidence that voters will soon feel better
off despite rising prices. And he has sought
to draw a political dividing line with the
Labour Party over the issue of immigra
tion. In his speech he brushed aside con
cerns about stretched supply chains that
have seen petrol pumps run dry and super
markets struggle to fill shelves in recent
weeks. This is part of a remarkable pivot:
having previously said that staff shortages
were nothing to do with Brexit, he now ar
gues that these shortages are in fact among
Brexit’s main benefits. The logic is that
without an endless supply of European im
migrants, firms will be forced to raise wag
es and improve working conditions in or
der to attract British workers.
Such claims helped the prime minister
win good headlines from his party’s con
ference. But in the longer term he may
come to regret making higher living stan
dards so central a measure of his success.
As he emphasised in conferenceseason
interviews, recent data on real wages has
indeed been strong. According to the Office
for National Statistics (ons), real wages
grew by 5.1% in the year to July. Over the
late spring and early summer, the annual
rate of growth in real weekly earnings was
the highest in two decades.
But the numbers require careful han
dling and the onshas plastered its recent
releases with more than the usual number
of caveats. At the moment, annual figures
are artificially boosted by “base effects” be
cause current readings are being compared
with those from mid2020, when the ecoWages are rising, but so are prices and taxes. Meanwhile, benefits are being cut→Alsointhissection
56 Luringskilledimmigrants
57 Bagehot:Defininglevellingup
— Read more at: Economist.com/Britain