The UK has suffered a ‘lost decade’ in economic and earnings growth, according to the Institute for Fiscal Studies (IFS).
Paul Johnson, a director at the independent think tank, singled out one comment from the Office for Budget Responsibility’s (OBR) in its analysis leading up to this week’s Budget announcement as particularly significant.
In its economic and fiscal outlook document the budget watchdog said the UK economy was ‘running slightly above potential’, helping to explain why the OBR had upped its growth forecast for 2017 to 2% from 1.4% in November.
While the comment was positive in theory, Johnson suggested taking a step back and looking at economic growth from a broader perspective, given that UK GDP per capita was barely 2% above its 2008 level.
‘That’s nine years to grow as much as it would normally grow in one. What the OBR is saying is that despite that truly dismal record all of the productivity – and with it earnings growth – we would normally expect has been lost forever,’ he explained.
According to Johnson, this summed up the story of the past 10 years which hadn’t gained much air time during the Budget coverage.
‘This remains the big story of the last decade – a decade without growth, a decade without precedent in the UK in modern times,’ he added.
While chancellor Philip Hammond (pictured) told the House of Commons that wages had grown for the past 27 months, Jonathan Cribb, a senior research economist at the IFS, said this was not impressive when compared to where earnings were in 2007.
‘Real median earnings are still 7% below pre-recession levels,’ said Cribb.
The UK’s top earners – which the IFS defines as those with higher earnings than 99% of the UK’s workforce – have seen the biggest fall in earnings in comparison to 2007 levels. Within this segment, earnings have fallen by 12%, the IFS said.
This trend is set to continue. Between 2018 and 2022, the IFS expects earnings to lag the average by 0.25% because top earners stand to lose out the most from the UK’s planned exit from the European Union. This is linked to the fact that this segment is dominated by those who work in finance.
This trend is particularly relevant because the UK’s top earners account for a large share of tax revenues, making it harder for the government to forecast tax take at the top end.