LONDON – Mark Carney is a man on a macroeconomic tightrope. On Aug. 7 the new governor of the Bank of England promised that interest rates will stay low until the unemployment rate, now 7.8 percent, has fallen to 7.0 percent or lower.
He gave himself two get-out clauses: His pledge is off if inflation gets out of hand or if Britain's banks start to wobble. Carney's announcement reflected the balancing act demanded of him: He must spur economic confidence without allowing inflation to erode wages and savings. The severity of the slump in British living standards shows just how tricky that task will be.
By some measures, the economy is moving from "rescue to recovery" — in the words of George Osborne, the Conservative chancellor of the exchequer. Gross domestic product grew by 0.6 percent in the second quarter of 2013 and house prices by almost 4 percent year-on-year. Yet the wallets of many, particularly those on lower and middle incomes, bear little evidence of it. Inflation is relatively modest, but wages lag far behind. A recent government-funded study found that 52 percent of Britons are struggling to keep up with the bills.
Even comfortable areas are pinched. In Solihull, a leafy suburb of Birmingham, unemployment is below average, but the cost-of-living crisis is acute. In 2010 only one client of its three Citizens Advice Bureaus (CAB) needed an emergency food parcel. Today they give out one every two days, some to people who work but run out of cash before payday. A record 16,000 people (nearly 8 percent of Solihull) passed through the charity's advice cubicles in 2012. Most frequently, they sought help with debt.
One such customer, David, used to make a decent living as a skilled tradesman, but is now unemployed. He is behind on once-affordable gas, water and rent bills. His Advice Bureau adviser reckons that he will never again earn what he used to, so is helping him cut costs he once considered essential, like Internet access and mobile phones, from his family's budget.
The future looks bleak for millions
A Spartan future awaits the 40 percent of working-age Britons who, like David, are falling behind. They are in the bottom half of the income scale but, unlike the poorest 10 percent, predominantly live off wages, not benefits. Their predicament dates to the early 2000s, when GDP and earnings peeled apart. Living costs have since left median wages far behind.
The plate tectonics of the labor market offer the best explanation for this. With a declining industrial base, the British economy needs fewer midlevel skilled workers. Most new posts are low- or high-paying ones. Many in the middle lack the skills to move up and are pushed toward the low-wage end of the economy. Machinists and tradesmen become cashiers and call center workers.
Solihull's economy is a microcosm of the national one. Job vacancies are up 2 percent from prerecession levels, but mortgage and secured-loan arrears are 30 percent higher. The collapse of a local truckmaker, LDV, pushed many into low-quality service jobs. A notice board in a local CAB is crammed with advertisements for part-time or temporary work in supermarkets and cleaning agencies. "It's hard for someone used to a job as a production manager on £25,000 [$40,000] to find themselves stacking shelves on minimum wage," says Kerry Turner, the local head of Citizens Advice.
Such struggling voters are electorally crucial, especially in the southern and Midlands seats that swing national results. Politicians are right to call the nationwide polls scheduled for 2015 the "living-standards election."
Coining a phrase is one thing, living up to it is another. The Labor Party's recent offensive on living costs was long on point-scoring and short on detailed solutions. The government boasts of its remedies (increasing the income-tax threshold and cutting the beer tax, for example), but most are more than offset by the fall in real incomes. Recent education and welfare reforms are commendable, but do little to change the fundamentals. Britons lack vocational skills and are underemployed. As the firms they work for invest at an alarmingly low rate, their productivity stagnates.
Ruminating on the state of the nation, Turner describes the increasing number of people who come to the CAB with plastic bags stuffed with unopened letters from creditors. They ignore the letters and take out more loans to make ends meet. Unable to kick the debt habit and unwilling to face reality, they are a reminder of what is wrong with Britain's recovery.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.