Politics and Economics

Why are Living Standards Dropping in the UK?

Let’s take a toy model analogy.

I earn £30,000 per year and spend £25,000 on consumption and £5,000 investing in the future.

I entrust my financial affairs to a Labour Chancellor who assures me I can spend £30,000 per year on consumption and £5,000 on investing in the future because “I’m worth it”.   So I borrow £5,000 a year for 10 years.

For 10 years I feel like I’m earning £35,000 per year.  I consume £30,000, invest £5,000 and life feels pretty good.

What I’ve not spotted, until it is too late, is that after 10 years I owe £50,000 and the interest is costing me 10% or £5,000 per year.

The financial crisis hits me, causing my income to drop to £28,000 (drop in GDP) and my consumption has increased to £32,000 per year (to pay increased unemployment benefits).  I am now also paying £5,000 in interest.

My consumption (£32,000) + interest (£5,000) is £37,000 without paying off any debt. My costs are now £9,000 more than my income (£28,000). And I have no money for investment.

Because I feel like an incompetent fool I hand over all my finances to a Coalition Minister.

He painfully cuts my consumption to £25,000 (what it should have been) but I still have to pay £5,000 interest on the debt and therefore need to borrow £2,000.  I have no money for investment.  Debt rises from £50,000 to £52,000.

Immediate effect:  I now have £5,000 less per year to spend on consumption and prices have risen – so I feel much worse off  (“cost-of-living crisis”) – and my debt has still gone up by £2,000 therefore my interest payments rise by another £200.  I still have no money for investment.

In the Autumn statement my income goes back to £30,000 (GDP growth) giving me an extra £2,000 to spend.  £200 goes on interest and £1,800 on investments.

Compared to 10 years of Labour Government this is how I feel:

1. My consumption has gone from £30,000 to £25,000 despite inflationary price increases, so my standard of living has fallen and I worry about paying fuel bills.

Of course my living standard is falling!  I’m comparing my current standard of living to a period when it was held artificially high by borrowing!

2.  My investments have gone down from £5,000 to £1,800 which will slow the pace of future economic growth.

3.  Interest is now £5,200 and rising

4. Deficit is down from £5,000 to £2,000 but…..

5……my debt is still going up.

Can anybody spot where the problem started?