The average pay packet in Britain in five years’ time will still be more than £20 lower than it was before the start of the financial crisis as the biggest squeeze on wages since the end of the Napoleonic Wars extends well into a second decade, a leading thinktank has warned.
The Resolution Foundation said that the downgrade to Britain’s future productivity performance expected in next week’s budget would have a negative impact on wage growth between now and 2022 and also limit the room for manoeuvre of the chancellor, Philip Hammond.
In its pre-budget report, the thinktank said it believed the independent Office for Budget Responsibility would cut its long-term estimate of productivity growth to 1% – half its level before the financial crisis broke in 2007.
The OBR has already signalled that it has given up on the notion that productivity will rebound to its pre-crisis levels and the Resolution Foundation said this would have an impact both on wages and on the state of the public finances.
The thinktank said wages were on course to be £24.50 a week lower in inflation-adjusted terms in 2022 than anticipated at the time of the March 2017 budget. This would leave them £22.70 or just over 4% below their level in 2007 and delay the return to their pre-crisis peak into later in the 2020s.
According to the Resolution Foundation, the last time Britain suffered a decade of productivity growth as weak as that since 2007 was in the 10-year period which started in 1812 – the year of Napoleon’s invasion of Russia. Wage growth over the past 10 years has been the worst since the period starting in 1825.
Matt Whittaker, the Resolution Foundation’s chief economist, said weaker productivity would mean the economy – as measured by gross domestic product – being £44bn smaller in 2022 than envisaged in the March budget. He added that GDP per person would be £650 lower in 2022 than the OBR was forecasting eight months ago due to the productivity downgrade.
Whittaker said:“Budget day looks set to bring bad news about what we have the potential to produce as a country. It looks likely that we are currently living through the worst decade for productivity growth since the start of the 19th century.
“The focus so far has been on what these terrible forecasts are likely to mean for the public finances, despite the recent better-than-expected performance on borrowing. That is understandable given that the chancellor is likely to be much closer to breaking his fiscal rules, with additional pressure from higher interest rates and reversals on planned tax rises and welfare cuts. However, the chancellor does not look set to be in a materially worse position than chancellors have been used to since 2010.
“While anxiety on the public finances may have been overdone, there has been nowhere near enough focus on family finances. Weekly pay is projected to be almost £25 lower in 2022 than previously expected, still £22.70 below the pre-crisis peak. Addressing this unprecedented living standards squeeze – with action on housing and social security – should be front and centre of the chancellor’s response.”
At the launch of the Resolution Foundation report, Rachel Reeves, chair of the Commons business committee, said only in London and the south-east had wages made up the ground lost during the financial crisis. “We need more well-paid jobs in the north of England,” she said.
Frank Field, chair of the work and pensions committee, said the budget should be used to reform universal credit, which he described as a “recruiter for destitution” by depriving claimants of income for “huge periods of time”.
Nicky Morgan, chair of the Treasury committee, said Hammond might need to consider delaying cuts in corporation tax as a result of the pressure on the public finances. “What I would like to see is a real vision of a post-Brexit Britain,” Morgan added.