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Philip Hammond must not use rising wages as an excuse for hiking taxes

16 October 2018

12:47 PM

16 October 2018

12:47 PM

In two weeks’ time, Philip Hammond is expected to declare an ‘end to austerity’. Today’s figures on wage growth are a reminder of why he needs to tread extremely carefully on this. What he will mean is that austerity is over for the public finances – he is confident enough to start increasing government spending again. Many individuals and families, on the other hand, remain deep in personal austerity. There is very little room for tax rises without making people feel poorer.

News that wages are growing at their highest rate – 3.1 per cent – since the economic crash of 2008/09 is, on the face of it, a cause for celebration. It will also confound the doom-laden predictions which continue to be made by pro-Remain think tanks – in January, for example, the Resolution Foundation claimed that real wage growth in 2018 would be zero. Take into account CPI inflation at 2.4 and wages in the three months to August were growing at a rate of 0.7 per cent a year.

That is comfortably above zero, but it really isn’t very good. In fact, real wage growth was higher as recently as 2015 when – helped by very low inflation at that point – it briefly reached 2.7 per cent, peaking, conveniently enough for the Conservatives, just at the time of the general election. That surge in real wages proved however to be only a brief respite from the general picture of falling real wages over the past decade. Real wages fell continuously between the summer of 2008 and the autumn of 2014, and then again throughout 2017.

Prior to 2008, real wage growth of around two per cent was normal. At that rate, Britons were on course to double their living standards in around 35 years – just over a generation. With real wage growth of 0.7 per cent – as at present – it would take 100 years for Britons to double their living standards. And that is dependent on there being no real increase in taxes in the meantime.

There may be room for Hammond to nibble around the edges, perhaps trimming pension tax relief here and introducing extra bands of council tax for high-end properties there. But any taxes which affect the incomes of the mass population – such as by freezing tax allowances – will be in danger of countering what little real wage growth people have been enjoying of late. The age of government austerity may be over but the age of personal austerity most certainly is not.


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