Episode Two: Listen to Reagan
Most of the time, the question that decides an election is the one everyone remembers being put by Ronald Reagan: ‘Are you better off than you were four years ago?’ It’s a good question, but at the moment in the UK it’s also a difficult one to answer. Yesterday, George Osborne triumphantly tweeted about the latest numbers. ‘GDP revised upwards from 2.6% to 2.8% for 2014,’ he said, and also: ‘Real household disposable income per capita up strongly on quarter & year... Living standards higher than in May 2010.’ That might sound like a clear answer to Reagan’s question. But the numbers are squidgier than they look at first sight.
Larry Elliott points out in the Guardian that GDP per capita is more than 1 per cent below where it was at the start of the recession. Also, some of that GDP flows abroad, thanks to overseas ownership of British companies, just as some overseas income flows into the UK thanks to British ownership of foreign companies. This is part of the overall current account, which you hardly ever hear spoken about in the media mainly because by the time you’ve finished explaining it there’s no room left to say anything else.
The current account shows whether, and how much, a country is either borrowing from or lending to the rest of the world. It consists of three things: the balance of trade between imports and exports, plus net transfers such as remittances overseas, plus net investment income. The UK’s current account is the worst it has ever been since modern records began in 1948: a deficit of 5.5 per cent. That means that a lot of GDP is heading somewhere else, which in turn means that numbers measuring individual well-offness give a different picture from those measuring national GDP. National Net Disposable Income, NNDI, measures the amount of income available to individuals, and gives a gloomier picture than GDP per capita: it’s been flat for a while and is still 5 per cent below its pre-recession high. And then as Larry Elliott explains:
Just to complicate matters, the ONS has a third measure of living standards, real household disposable income (RHDI) per head, which takes into account changes in mortgage rates, taxes and benefits. RHDI per capita actually rose strongly during the recession, because interest rates were slashed to 0.5%, the amount paid in taxes fell, and benefits increased.
But by 2011 the impact of these factors had worn off and real incomes were eroded by inflation. After bouncing around, RHDI is just about back to where it was when the coalition came to power in 2010, and is 2.2% above where it was when the recession began.
That point about inflation rates is important. Anyone with a variable rate mortgage (two-thirds of all mortgage borrowers) has done well from years of crazy-low interest rates; add to that the fact that house prices have shot up in and around London, and there are a lot of winners from the Coalition’s policies. Also, while median wages overall haven’t kept pace with inflation, median wages for employees who have been in work for more than a year – i.e. most of the workforce – have not just matched inflation but exceeded it.
Put it all together, and the statistics give no clear answer to Reagan’s question. Maybe it’s time to think about the less famous, but equally pertinent, other things he went on to say:
It might be well if you would ask yourself, are you better off than you were four years ago? Is it easier for you to go and buy things in the stores than it was four years ago? Is there more or less unemployment in the country than there was four years ago? Is America as respected throughout the world as it was? Do you feel that our security is as safe, that we're as strong as we were four years ago? And if you answer all of those questions yes, why then, I think your choice is very obvious as to whom you will vote for. If you don't agree, if you don't think that this course that we've been on for the last four years is what you would like to see us follow for the next four, then I could suggest another choice that you have.