It’s been a while, but for the first time in two years pay is rising faster than prices. After being squeezed hard by the highest inflation in 40 years, living standards are increasing once more. For Rishi Sunak and Jeremy Hunt, this is welcome. It has been a tough year for the prime minister and the chancellor since the end of Liz Truss’s ill-starred premiership, but the idea that the Tories are about to be rewarded for their stewardship of the economy is for the birds.
Governments that are re-elected tend to have certain things going for them. One is that voters are better off at the end of a parliament than they were at the start, and that will certainly not be the case between 2019 and 2024.
Much of the recent wage growth has been among better-off City workers, and the Resolution Foundation thinktank estimates workers overall will be 4% worse off by the time of the next general election than they were when Boris Johnson won his 80-seat majority. The government’s own spending watchdog, the Office for Budget Responsibility (OBR), says that this year and next the UK will suffer its biggest two-year fall in living standards on record.
This is part of a longer-term trend. There have been ups and downs along the way, but real wages are no higher now than they were at the time of the global financial crisis 15 years ago. The Conservatives have been in power for most of that period.
Hunt remains optimistic that voters will ignore what has happened to living standards provided he and Sunak can sketch out a convincing vision of an economy that will be thriving in the next parliament, but this may be the triumph of hope over experience. Labour’s three-term period in power between 1997 and 2010 is a case in point. Rapidly rising living standards in its first term resulted in a landslide victory in 2001. A more modest increase in its second term delivered victory by a smaller margin in 2005. After presiding over falling living standards in its third term, Labour lost the 2010 election.
Getting the bad news out of the way early in a parliament is also key to electoral success, so there is a chance the public will feel the benefits of tough decisions or will have forgotten about the pain by the time it votes again. For that reason, chancellors much prefer to raise taxes in the first budget after an election than to take unpopular decisions shortly before polling day.
This government has done the opposite, albeit as a result of circumstances rather than choice. The economic and political cycles were thrown out of sync when the Covid-19 pandemic arrived only months after the 2019 election.
Sunak, when chancellor under Johnson, had no alternative but to spend hundreds of billions of pounds to prevent the economy from collapsing during lockdown. Unsurprisingly, his approval ratings were much higher when he was subsidising the wages of furloughed workers, and providing grants, loans and tax breaks to keep businesses open, than they are now that action has been taken to reduce the biggest peacetime budget deficit in the UK’s history.
There is a school of economics, modern monetary theory (MMT), which says a government that issues its own currency doesn’t need to worry about deficits and debt because it can always print money to cover its spending. Suffice to say that Sunak and Hunt are not big fans of MMT, and both see the adverse financial market reaction to the Truss experiment as evidence of the perils of deviating from fiscal conservatism.
Hunt has a blunt message for Tory MPs clamouring for tax cuts in next month’s autumn statement: there is currently no money to pay for them. Instead, higher debt-interest payments and a flatlining economy mean there are “difficult decisions” ahead, he insists.
Some money will presumably be found from somewhere to fund tax cuts in next spring’s budget, but the scrutiny provided by the OBR means it is not as easy as it once was for chancellors to play fast and loose with the public finances. As it is, the government will go into an election year with taxes as a share of national income set to rise to their highest level in 70 years. Paying for the pandemic and the energy subsidies that resulted from the war in Ukraine have required a six-year freeze on income tax allowances and thresholds – which will raise £52bn but means there will be 6.5 million more taxpayers and 4.5 million more higher-rate taxpayers in 2027 than there were in 2020.
Ideally, Sunak and Hunt would like to have a booming economy, rising house prices, declining unemployment, a sustained increase in living standards and lower taxes going into an election year. They currently have none of these things, which leaves them with only one option: to seek to persuade voters that however miserable things have been recently, life under Labour would be worse.
This may just work, although the odds are stacked against it. Voters are not scared of having Rachel Reeves as chancellor, and appear to have come to the conclusion that life could scarcely be tougher under Labour than it is now.
So, for now, Hunt will stick to his plan, which involves slow-burn measures such as planning reform and providing incentives for business investment, in the hope that something will turn up. But after 13 years of failure, many voters have stopped listening to the Conservatives. They have zoned out, and it’s easy to see why.
Larry Elliott is the Guardian’s economics editor
