4 Oct 2021

Can high-wage economy be delivered?

Economics Correspondent

Rishi Sunak was on characteristically optimistic form today, even finding an upside to the current supply chain crisis, suggesting it could lead to higher productivity.

As economists are fighting it out as to what is the better comparison, the 1970s or the war, for an economy embattled with so many chronic shortages, the chancellor has been delivering his own version of boosterism.

Is that high wage economy he claims to be the solution to the rising cost of living actually possible to deliver?

Wages have already gone up in manufacturing, construction and hospitality. Wages across the public sector and the private sector are going up 6.8%.

But there’s a problem. The real number is much closer to 4.4 percent if you strip out all the effects of furlough.

And the bigger issue is that the Bank of England is already forecasting that inflation goes above 4% this year, and that means that real wages are only going to nudge up 0.3%. That’s pretty paltry.

The other problem is that when I speak to companies, they’re talking about where this money is coming from that we’re going to pay these higher wages with?

Whether they’re big engineering firms or small retail firms, they’re pretty anxious about being squeezed and inevitably, they tell me, if they have to pay for a pay rise, they’re going to pass that cost on to consumers.

And that means higher prices for you and for me.

And one final thought, for a chancellor that’s launched the biggest fiscal spending programme in peacetime Britain on borrowing, it’s pretty punchy language to declare it is “immoral” to fall back on borrowing and stack up bills for future generations.

But that’s the crux of his problem. A fiscal conservative who said he’s a pragmatist now, he’s pushing against a two decade trend that no chancellor has been able to reverse.

You’ve got a situation where back in 2001, debt to GDP was just 27%. It went over 70% during the financial crisis and it is now set to top 107%.

The bill for future generations has been stacking up pretty badly for a while now.