Nick Faith is Director of Communications at Policy Exchange.
If politicians were to rate the importance of issues to their constituents I’d wager that fuel duty would be high on the list. Why? Quite simply because everyone in the country who has ever owned a vehicle or indeed who has ever walked past a petrol station can see the price of petrol and diesel on the forecourt sign. When the price goes up, people can see the change and the effect such a cost increase has on their household budget. When the price goes down, there may be an extra £10 or £20 to pay off the gas bill or buy an extra treat for the kids.
Wages are also in the Champions League of issues. Every month people receive their pay cheque showing how much money they get to keep and how much of their salary is taken by the government in taxes. While the cost of petrol is something that this government has directly tackled by freezing the fuel duty escalator, driving up wages is an altogether different beast.
There are direct ways of helping people keep more of the money they earn. Raising the higher rate tax band is certainly something that many Conservative backbenchers – and indeed Liberals such as Jeremy Browne – have strongly advocated. But this government has decided, rightly, to focus its attention on raising the personal allowance, thereby taking the poorest out of tax altogether, and proposing a rise in the National Minimum Wage. People on low to middle incomes – those earning approximately £18,000 – who suffered the most from the economic downturn have been directly helped by this government’s actions.
Apart from the focus on low to middle earners, the government has decided that the best way to increase wages is to bet the house on reducing unemployment and increasing private sector job creation. Over time, the Treasury argues, we will see wages return to pre-recession levels as businesses take on more staff, output increases and employers then reward their workers with higher wages. There is intellectual merit to this argument. A Policy Exchange paper this year showed how wages have actually kept up with output. As productivity fell during the recession, wages fell in line across all regions of the country and in pretty much all industries.
However, an intellectual argument is not necessarily “retail friendly” – it’s very difficult to communicate your economic strategy to the public when they cannot see the benefits directly. Where’s the forecourt sign telling people how much better off they are?
There has recently been a spate of economic good news stories including last week’s forecast by the IMF that the UK is on course to grow at a faster rate than any other developed country and a report today suggesting Britain is on course to overtake Germany by achieving the highest rate of employment in the G7. But even though employment is increasing, unemployment decreasing and the deficit falling, an opinion poll over the weekend show that Labour – which saw its lead over the Tories cut to just 1 point a fortnight ago – has risen 3 points to 36 per cent while the Conservatives have dropped by 2 points to 30 per cent. Clearly much of this can be attributed to the Maria Miller expenses saga but there is a bigger issue at play. The difficulty of making sure successful economic policies cut through to the public.
All of this makes Wednesday a potentially defining day for the Coalition, and especially the Prime Minister and his Chancellor. Official figures are expected to reveal that wages have outstripped prices for the first time since 2010. If the forecasts are accurate then the government can claim that – as they predicted – their economic policies are beginning to improve living standards. If wages are picking up across the board, then that puts one almighty dent in Ed Miliband’s accusation that only the richest are seeing the benefits of economic growth.
Establishing the link between the government’s economic policies and the ability of employers to pay their staff higher salaries is critical to the election prospects of the Conservatives.
George Osborne realises this and has already set the scene to take the credit for this uptick in pay. His team have made a big effort with the media over the past fortnight. Stories have appeared showing how the government has made it easier for businesses to take on more staff by introducing a £2,000 Employment Allowance and by offering a cut in National Insurance for all companies that take on under 21 year olds.
More, of course, could be done and the government would be foolish to rely on one set of positive statistics. Policy Exchange argues, for example, that raising the National Insurance threshold for all businesses would make it easier for companies of all size to take on more staff. This would lead to further rises in pay as competition and therefore productivity in the workplace increases.
The government cannot afford to gloat when responding to tomorrow’s figures. Even if wages are ticking up and people are starting to see the benefits in their pay cheques, the salaries of the vast majority of people will not be as high as they were before the recession. Likewise the “cost of living” argument is far from over. Energy bills are still high and housing – both renting and buying – is increasingly unaffordable for a large section of the country. But the government should use this week’s figures to make the case as to why the hard decisions they took to bring down the deficit and make work pay are starting to have a direct positive impact on peoples’ lives.
Commentators poke fun at the Conservatives’ key message – that they, unlike Labour, have a long term economic plan. Maybe just maybe Cameron and Osborne will have the last laugh next May.