“Average wages are down by 1,600 a year since the election.”
Ed Miliband, 22 January 2014
“Because the leader of the opposition keeps quoting the figure without the tax cuts that we have put in place, he’s not recognising that actually this year people are better off.”
David Cameron, 22 January 2014
This week’s edition of prime minister’s questions coincided with good news on jobs, with unemployment falling to 7.1 per cent.
Nevertheless, Ed Miliband was determined to attack the government over the economy, and he returned to the key Labour theme of the “cost of living crisis”.
The Labour leader said annual earnings have fallen by £1,600 since 2010. Mr Cameron insisted the opposition were only telling half the story. Time for a FactCheck.
Labour’s “cost of living bombshell” has been a key line of attack for the party since last year.
The calculation comes from a fact no one disputes: inflation has risen faster than wages in the wake of the recession, causing wages to fall in real terms.
The drop of £1,600 comes from comparing average weekly earnings in May 2010, the month of the election, with the most recent figure from September 2013.
Wages grew by 5.8 per cent from £449 to £475, but RPI inflation inflation rose by almost 13 per cent in the same period, leaving real earnings down by just over 6 per cent: that’s £31 a week or £1,600 a year.
It’s worth pointing out that this spell of negative growth did not begin the month David Cameron entered Downing Street. Office for National Statistics figures show negative real earnings growth began in the middle of 2008.
We can raise some objections to the way Labour has come up with these sums. The party has used RPI inflation, no doubt to give the highest possible figure for loss of earnings.
RPI is no longer used as an official measure of inflation by the ONS, and other ways of measuring inflation like CPI tend to be lower, giving Labour a less dramatic number.
Nevertheless, the Institute for Fiscal Studies (IFS) backs the thrust of Labour’s calculation, saying it “does not give a misleading picture of the magnitude of falls in living standards likely seen during this period”.
Mr Cameron’s defence is that we would expect wages to stagnate or fall in the aftermath of a major recession, and of course he blames Labour for the financial crisis. That is a political argument that would take a book, not a FactCheck, to settle.
The Prime Minister also points out that Labour are dwelling on falling real wages, but a family’s income is affected by other things like taxes and benefits.
This is a view the IFS also endorses, although it’s unclear to what extent how much government policies have helped to mitigate falling earnings.
Part of the problem is that everyone’s circumstances are different, and the various tax and benefit changes affect different groups in different ways.
IFS calculations appear to back the Prime Minister’s position that there was a small net giveaway for most people in the latest tranche of economic policy.
The think tank suggests that people in all income groups except the very poorest will have seen their net incomes rise very slightly thanks to the measures announced in last year’s Autumn Statement (the blue line).
This has to be set against the IFS’s calculations for the whole parliament of 2010-2015, in which the totality of changes (the purple line) see income falling.
Both sides are right, essentially. Labour’s cost of living “bombshell” has a basis in fact, but is only half the story.
And Mr Cameron is arguably right to say “this year people are better off”, in that the government has tinkered with the fiscal levers to create a very slight giveaway for most earners.
But the percentages are small and people will probably want to consider the government’s whole record on how changes to the tax and benefit system have affected incomes.