Despite the political misery for Boris Johnson as he ends the year, he has a big hope: that salaries will boom in 2022. At Conservative party conference in October, he told fellow Tories what to expect. Yes, the country has gone through a phase of economic chaos — and as a result some supermarket shelves have been empty and truck drivers have been hard to find — but this was actually good news, he claimed, because it marked the start of a new, high-pay economic model.
‘We are not going back to the same old broken model with low wages, low growth, low skills and low productivity,’ he boasted. Change would ‘sometimes be difficult’ but it was ‘the change that people voted for in 2016’: bad for bosses who are dependent on cheap labour, but better, overall, for workers.
Johnson’s plan is to ride out the turbulence, the Downing Street scandals, and then draw voters’ attention to the economy. It’s the old Ronald Reagan question: ‘Are you better off now than you were four years ago?’ Johnson is banking on the answer being a resounding yes.
Others aren’t convinced. ‘I don’t know how we’re going to answer that question when it inevitably comes up,’ one Tory minister tells me. Even before the start of the new year, the numbers are worrying. ‘Unless we’re entirely trusting now that the state can solve all our problems — which it’s comprehensively, blatantly failed to do in the past — we’ve got very little to offer.’ Some wages are rising but inflation may increase just as fast. The Institute for Fiscal Studies predicts that, after inflation, average disposable income will only grow by 0.8 per cent per year for the next five years.
Economic growth in October was a measly 0.1 per cent — and that was before Omicron fears and new work-from-home guidance. ‘It’s not rocket science, but the government still doesn’t get it,’ complains one Tory MP. ‘The more you impose restrictions on the economy, the less wealth you’re going to generate.’ The economy is at risk of shrinking once again before it resumes its pre-pandemic levels, having already missed out on nearly two years of growth.
We can now see in a little more detail what was happening this year. There were labour shortages and subsequent pay rises in certain sectors. The average advertised salary of HGV drivers rose by 19 per cent between January and September this year. But the Office for Budget Responsibility highlights that in the same nine months advertised wages in the ‘wider jobs market’ only rose by 1.3 per cent. It may be hard for employers to find waiters and barmen, but other workers are in more plentiful supply. The IFS calculates that for two-thirds of unemployed workers, competition for jobs is actually greater than it was two years ago.
The pay hikes we’re seeing, for workers traditionally at the lower end of the pay spectrum, are long overdue after a decade’s worth of stagnation. But higher wages are only meaningful if people can afford more as a result — and next year’s price surges threaten to cancel out bigger payslips. As one red-wall Tory says: ‘If these wages don’t buy you better living standards, why would people think this government has made them better off?’
Inflation has become impossible to ignore. Politicians and central bankers spent most of this year dismissing rising prices as ‘transitory’ — a post-Covid blip. But the Bank of England’s deputy governor Ben Broadbent recently came out against the Bank’s most recent forecasts, predicting inflation will ‘comfortably exceed’ 5 per cent: a personal forecast that came true earlier than expected, as the Office for National Statistics confirmed that CPI hit 5.1 per cent in November. If this is sustained, then any pay rise of less than 5 per cent next year will, in effect, feel like a pay cut.
It’s not only inflation causing households financial strain. Johnson’s National Insurance tax rise will hit workers in April, taking the tax burden to its highest level in living memory. ‘Everyone is rightly focused on scandal right now,’ says a Tory MP. ‘But the big fear is that when it all dies down, we will find we have unknowingly strayed into an economic no man’s land. The public isn’t ready for what we find there, and [the government] has no plan to navigate us out.’
It has been quite some time since we’ve seen tax at nearly 34 per cent of national income alongside an inflation panic. The last time this happened was 1981-2. No worker in the UK under the age of 60 will have much experience of the tax-and-inflation double whammy set to hit next year. ‘People will be paying more for less,’ says one MP, ‘or if we’re really lucky, they’ll be paying more for the same. That’s not a great place to be in.’
Johnson could still opt for the more traditional — and proven — approach of boosting living standards by going for growth, but he seems to have given up on stimulating the economy with tax cuts. The most obvious policy area for reform — housing and planning — is deemed too politically toxic to touch. There is a growing sense among MPs that the easy policy reforms have already been done and future attempts to unleash economic growth are more likely to be incremental than transformative. Rishi Sunak has said he wants to cut taxes before the next election, but the restriction-led response to the Omicron variant, as well as inflation and a rise in interest rates, could well be so expensive that such tax cuts are impossible.
More than five years after the Brexit vote, the Prime Minister has a difficult question to answer: what was it all for? We have not seen much in the way of new free trade deals and the government has been more focused on industry bailouts than it has been on creating a business-friendly environment. If Johnson doesn’t deliver on his promise of higher wages, voters will move on to the next question: what are the Conservatives for? There is not yet an economic answer to that. Next year, it will be the Tories’ mission to find one.