Where is the UK's growth coming from?

A Public and Commercial Services Union report on wages and growth in the UK highlights a problem the Coalition have studiously avoided: with job losses and wage cuts, how exactly is the economy to grow? Public sector income is private sector demand.

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For some time now we’ve been told that the employment situation in the UK is improving and jobs are being created. Yet the economy persists in bumping along the bottom, slipping in and out of growth. So if employment is improving, why isn’t the economy growing?

The Public and Commercial Services Union (PCS) address this conundrum in their recent report: Britain Needs a Pay Rise. They arrive at the conclusion that stagnating wages are the devil in the detail. The report shows how the real value of UK pay has fallen by 7% since 2008. From the years 2001 - 2008 increases in earnings exceeded Consumer Price Index (CPI) inflation, however from 2008 - 2012 this trend went into reverse and CPI Inflation exceeded average earnings; real incomes have been falling.

Clearly rising costs and stagnating pay packets will mean that people are less able to spend, and if households are spending less then demand will remain weak and growth will stagnate. Other research backs this up. Recent Office of National Statistics data shows how discretionary household spending on items like new goods, furniture, cars and clothing has decreased. And a Which? consumer survey found that one in four people, more than ten million households, are feeling financially squeezed.

The PCS research mainly focuses on issues of public sector pay and the right to a living wage. The report argues that the government should use the levers at its disposal to try and kick start demand in the economy. It calls upon the government to admit that its austerity programme is failing, implement a public sector pay rise of 5% and ensure the living wage be written into any government contracts with the private sector.

The PCS doesn’t view public sector wages as a stand-alone issue and argues that reduced wages in the public sector open the floodgates for private employers to follow suit in a race to the bottom. They also note that public sector workers - a workforce of around six million - are also private sector consumers, something that the mainstream media seems to ignore when discussing wages.

The government has in recent years increased its rhetoric against public sector pay, stoking a ‘them and us’ split between the public and private sphere. But every wage capped, every job lost, every full-time worker forced to go part-time is one more person who can’t spend as much in the general economy. Demand is going to have to come from somewhere.

Consumer confidence and spending is of vital importance to most advanced nations. The US, for example, depends on consumer spending for over two thirds of its economic activity according to David Harvey. His work in the Enigma of Capital shows how massive reductions in spending power amongst workers across the developed world were plastered over by increased access to easy credit. In the US wages suffered a thirty-year stagnation in real terms. Now that the easy credit is gone, you have households struggling to pay down debt at a time of rising costs and falling living standards.

The PCS report asks us to think about the reasons behind our flat-lining economy. It clearly highlights the flaw in trying to separate the public and private spheres and it shows the lie behind the rhetoric that the public sector is cosseted and spoilt. However, it could be argued that the report doesn’t go far enough. It doesn’t tackle the massive issue of under employment in any depth. High value, full-time and secure jobs are going, only to be replaced by low paid, part-time and insecure work.

Neither does the report tackle the ideological reasons behind the current suppression of wages as a direct tool of austerity. As Professor Mark Blyth states austerity is all about loading the burden of this crisis onto the workers and the poorest so that the institutions of wealth can be protected.

It is however a good starting point for a debate that is urgently needed. As the PCS figures show, Osborne’s austerity is not even working at the most fundamental level, that of paying off the debt. The deficit and the debt are both increasing and our debt levels rose to 70.7% of GDP by the end of 2012.

This, of course, is of no surprise to anyone who knows the history of previous attempts at austerity. Martin Wolf recently wrote of the lessons to be gained. He showed how the UK’s attempt at austerity during the inter war years not only came at huge social and economic cost but also ultimately failed to pay down the debt. Now governments across the world are repeating this dangerous experiment.

Wolf ends the piece with a warning that without greater solidarity this will not end well and could even break up societies and nation states. And yet the great austerity experiment trundles on.

About the author

Rachel Graham worked in finance before moving into teaching, covering law, finance, marketing and organisational development. She currently studies journalism.