Under Robert Chote, the Institute of Fiscal Studies (IFS) was meticulous about positioning itself as politically neutral. Since he left to run the Office of Budgetary Responsibility (OBR) and Paul Johnson took over it has been far more relaxed about its political position. Increasingly it comes across as yet another centre-left think tank attacking the government’s ‘austerity’ policies.
Today, the IFS put out a projection of wage growth over the next four years, taking into account yesterday’s autumn statement. The eye-catching headline is that real earnings will be lower in 2020/21 than they were in 2007/08, at the beginning of the financial crash. Johnson claimed that: “One cannot stress how dreadful that is – more than a decade without real earnings growth. We have certainly not seen a period remotely like it in the last 70 years.”
How much notice any of us should take of economic forecasts is highly questionable, given their poor record. But even if you are minded to believe what is in the IFS’s crystal ball, still Johnson’s words come across as having something of a interesting spin. You can read the IFS’ analysis here.
One thing which becomes clear straight away is that the decline in real terms earnings – that is adjusted for inflation – occurred between 2009/10 and 2012/13. Since then, real earnings have grown, and the IFS projects that they will continue to grow all the way from now until 2020/21. The IFS’s analysis has been widely interpreted as a damning indictment on Brexit – which is maybe what was intended. But what the IFS is really predicting is that real earnings will grow by around five per cent between now and 2020/21 – just not quite enough to make up for the decline which occurred between 2008/09 and 2012/13.
As Downing Street protested this afternoon, quoting real earnings is a little misleading as it doesn’t take account of changes in the tax system. The substantial rise in the tax-free threshold from £6475 in 2009/10 to £11,000 this year – and to £12,500 by 2020 – has allowed people to keep more of the money they earned. A graph of real disposable income – that is what people have to left to spend after tax, adjusted for inflation – would show a different story.
None of this detracts from the severe shock to earnings which resulted from the economic crisis of 2008/09 and the period of very low growth which followed it. That was indeed unprecedented during the past 70 years. But to interpret the IFS’ forecast for the next four years as a calamity caused by the vote for Brexit – as some have done – rather misses the point. The era when people were becoming poorer year-on-year, is in the past according to the IFS’ model. In the next few years it predicts we will individually grow richer, just not at a very exciting rate.
But what happens between now and 2021 is, of course, only prediction. Given the non-arrival of the recession which the Treasury and others forecast would happen in the wake of a vote for Brexit, I am inclined to treat it as guesswork which will almost certainly prove to be wrong.