British wage growth looks ‘dreadful’ after Brexit: IFS

Monday, 28 November 2016 00:01 - - {{hitsCtrl.values.hits}}

Reuters: Britain’s wage growth prospects look “dreadful”, a leading think tank said on Thursday, after official economic forecasts showed workers were unlikely to recoup losses suffered after the financial crisis within the next five years.

The Institute for Fiscal Studies - a think tank focused on budget issues - said Wednesday’s forecasts showed wages in 2021 would be lower than in 2008, after adjusting for inflation - a stagnation with no precedent since at least World War Two.

At a briefing to analyse the forecasts and Finance Minister Philip Hammond’s first budget statement, IFS director Paul Johnson said: “I cannot stress enough how extraordinary and dreadful that is.”

Britain’s new budget forecasts run until 2021, during which period Prime Minister Theresa May plans to withdraw Britain from the European Union following June’s referendum. Two years of exit talks start next year.

A chart from the Resolution Foundation, which looks at low pay, suggested the fall in real wages in the 10 years to 2021 would be the biggest since about 1810, when Britain was fighting a lengthy war to stop Napoleon Bonaparte’s France from conquering Europe.

Sterling has fallen by more than 15% against the U.S. dollar since the Brexit vote, triggering inflation pressures that play a big role in the weaker real wage growth forecasts.

However, a spokeswoman for May dismissed the idea that Britain was suffering a near-unprecedented stagnation in living standards. A broader measure than real wages - real disposable household income - was forecast to rise by 2021, she said.

The broader measure includes pensioner households, whose publicly funded retirement benefits have risen faster than wages since the 2007/2008 financial crisis.

“Since 2010 we have been taking action to look at how can we support growth in wages, for example through the introduction of the national living wage,” May’s spokeswoman said, referring to an increase in minimum hourly pay for those aged 25 and over.

Public concerns about a “cost of living crisis” affected Hammond’s predecessor, George Osborne, the last time British inflation picked up sharply in 2011.

On Wednesday, Hammond said he would replace Osborne’s goal of a budget surplus by 2019/20 with a new budget rule that took more account of weak growth and would allow a deficit of 2% of GDP in 2020/21, down from about 4% last year.

The IFS said British finance ministers’ fiscal rules had a poor track record. Twelve had been introduced since 1997, and 10 had either been broken or abandoned, and Hammond might well need the large amount of flexibility built into his latest version.

“Given the still very considerable uncertainties over the direction of the economy, (Hammond) may well find he needs all of the headroom he has left himself,” Johnson said.

The IFS said that another part of Hammond’s rule - for public debt to fall as a share of GDP in 2020/21 - seemed “rigged” to take advantage of a statistical quirk whereby Bank of England lending dropped out of public debt numbers that year.