Growth has returned to the economy but average real wages have fallen for the fifth consecutive year writes James Meadway

George Osborne, returning to a preferred theme, has promised another £25bn will be scraped from the welfare budget after 2015. Backed up by a virulent campaign against “benefits”, with Channel 4’s lynch-mob friendly Benefits Street as the latest salvo, ministers are preparing to slice the remnants of our welfare state down to the bone. It’s poisonous nonsense, of course: as Kat points out in this blog, the biggest single slice of welfare payments, £144bn, goes on pensions. Just 2.6% of the total welfare bill is spent on unemployment benefit.

Osborne’s “hard truths” are not new. He had already announced further swings of the axe in last year’s Autumn Statement. The difference now is that he is proposing to take that axe to welfare spending directly, rather than spreading the blows around. The political advantages of this no doubt appear obvious: a persistent campaign of demonisation has set public opinion against welfare spending and those in receipt of it. Blame for the crisis has been diverted away from those most responsible for it – the heads of our banks and financial institutions – and onto those least responsible, the poorest in society. Osborne is setting the political terrain on which he wants to fight the 2015 general election.

Underneath the politicking lurks the economy. Over the last six months or so, economic growth has definitively returned to the UK. Not much of it, by historic standards: the economy as a whole is still smaller than it was in 2008, prior to the crash. Nor is this growth benefitting most people: average real wages have fallen for the fifth consecutive year – the longest sustained fall in living standards since the 1870s.

Doldrums

There are no reasons to celebrate here. After the 2008 crash, households were trying to pay down their debts and increase their savings. With earnings falling and access to credit becoming tight, on an individual basis this made perfect sense. But for the whole economy, it was disastrous. When less money was spent by households, less money was earned by firms. And firms, too, clamped down sharply on their own spending. With a new government in 2010 committing to drastic spending cuts, this impact was reinforced.

The net result was that the whole economy, until 2013, was left in the doldrums. It was only when enough households stopped trying to pay down debts and run up savings, and began spending again that any semblance of recovery began to appear. And, given the weakness of real wages, that recovery in household spending had to rapidly translate into an increase in borrowing. By the end of the year, this certainly appeared to be well in train. Spurred on by increases in house prices, consumer borrowing has begun to increase.

In this respect, the economy has resembled a seesaw. If government was pushing down on its spending on one side, consumer spending had to rise on the other for the seesaw to move. If both were pushing down, as happened over 2010 to early 2013, we remained stuck.

It’s not quite as simple as that. In practice, the economy has been so weak that, even as it tried to cut its spending, the government has ended up borrowing more and more. In nominal terms, they’ve borrowed more in the last three years than the previous government borrowed in thirteen. One way or another, the economy is dependent on the generation of debt for anything much to happen – either government debt, or private sector debt.

Permanent austerity

Osborne’s plan, it is now clear, is to break the dependency on government debt creation. That’s why he’s talking about aiming for a budget surplus – an excess of taxes over spending – by 2018. It’s why Cameron, standing by a golden throne in the City of London, declared the need for “permanent austerity”. The risk, however, is that the economy as a whole is so hobbled that it cannot function without someone, somewhere borrowing to keep the show on the road. And if government isn’t borrowing – or trying not to – it means the rest of us have to. But the more debt we pile up, the greater the risk of another crash. This is the vicious circle Osborne and the Coalition are trapping us into.

From nef