'This is what failure looks like' – Britain's unprecedented wage stagnation

If you are visiting London on a city break for the first time in ten years, you will hardly notice the difference given the prices in the British capital. However, compared to a German household, the average British household looks significantly worse today than it did ten years ago.

Even then, an average German visitor was ahead in disposable household income by 591 pounds (676 euros). But since then the gap has widened considerably: the difference is now 4,068 pounds, more than six times as much, according to current figures from the think tank Resolution Foundation.

The UK has been treading water in terms of real income for years. Economists at the Resolution Foundation have calculated that if wages in the country had developed as they did before the financial crisis, every household would now be able to earn £11,000 more a year.

And it gets worse: The Office for Budget Responsibility (OBR), a kind of independent audit office whose forecasts the Treasury Department uses as the basis for its budget, warned last week that disposable incomes will shrink by six percent in the current year and next . The level of 2008 will not be reached again until 2026.

The situation is "highly depressing," said Paul Johnson, head of the Institute for Fiscal Studies. "We are in the middle of a decade in which incomes are hardly increasing, and we see only very weak growth for two whole decades." Torsten Bell, Managing Director of the Resolution Foundation, described the stagnation of salaries in the past decade and a half as "unprecedented".

"No one living and working in the UK economy today has ever seen anything like it before." Jumana Saleheen, chief economist at Vanguard Europe, pointed out that three key measures of living standards - gross domestic income per capita, household income and real wages - have fallen since March 15 stagnate for years.

That's not normal, stressed Torsten Bell. "This is what failure looks like and we urgently need an economic strategy to turn the tide."

In Westminster's political life, the pandemic, the war in Ukraine and high inflation are usually cited as justification for the currently less than encouraging situation in terms of living costs and income.

When the budget was presented last week, Chancellor of the Exchequer Jeremy Hunt pointed out that the situation in the country is better than expected six months ago. The deep recession feared at the time now seems unlikely. "The prophets of doom were wrong."

But he also acknowledged that the economy could be in better shape. The problems are now to be tackled with a “budget for growth”. The measures announced are intended to promote investment, strengthen training and attract more people into employment.

That goes in the right direction to strengthen the economy a little, Johnson judged. However, growth is expected to remain meager in the coming years.

Observers are convinced that numerous reasons for the weak performance of the British economy go back much further than the outbreak of Covid.

A lack of growth in productivity is considered to be an important factor for the weakening growth. To put it simply, the key figure measures the value that an employed person generates within an hour. From 2008 to 2020, this figure increased by 0.4 percent each year in Great Britain.

The average for the industrialized nations in the OECD was 0.9 percent. In other words: In 2021, an employee in Germany created goods or services worth 47.57 pounds per hour. In the UK it was £43.59, or 8.3 per cent, down.

The weakening productivity growth also has structural reasons, including the great importance of services for the British economy. But this discrepancy cannot explain everything, and economists have been researching the causes of the so-called productivity puzzle for years.

The comparatively low level of investments is also striking. They have been significantly subdued, especially since the Brexit referendum. Since 2016, investment activity has been virtually flat while it has increased in more or less all comparable countries, Jonathan Haskel, a member of the Bank of England's Monetary Policy Committee, recently pointed out.

At the end of last year, after a Covid-related decline, corporate investment expenditure was around the level of 2016, the year of the Brexit referendum. By comparison, annual investments in the United States have increased by 24 percent over the same period.

Chancellor of the Exchequer Hunt is not upset. Great Britain should become the wealthiest country in Europe. He identifies optimism as the most important ingredient for this, "it's rather scarce at the moment".

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