Families: Cost of Living

Baroness Drake Excerpts

Thursday 31st October 2013 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I, too, thank my noble friend Lady Prosser for securing this debate. “Making work pay” in a world where,

“those who aspire to work hard and do the right thing are rewarded”,

is a challenging aspiration to achieve. Recent figures not only confirm the squeeze on living standards for low to middle-income households but also that it will be longer and deeper than previously projected. Despite job growth in the private sector, wages have fallen in real terms, many work fewer hours than they would like and the impact of changes to benefits and tax credits are all putting further downward pressure on those households. Although tax credits now make a smaller contribution to income for workers in the bottom half, it is still a significant contribution, and I speculate that deeper cuts to come in the welfare spend will be on in-work benefits.

To some extent, all families have been affected since the recession but households in work, on low and middle incomes, especially those with children, start with far less than the better-off, making the squeeze even harder to bear. They spend a greater proportion of their income on essentials such as food, fuel and transport, the costs of which have risen much faster than overall inflation, leaving them facing falling wages and an “inflation premium”. It is not surprising that calls to constrain energy bills have such resonance with the public. In addition, modest-income households are more prone to debt. According to the Resolution Foundation, among all households with some form of debt in the bottom half of the income distribution, 30% can be considered “debt-loaded”: their repayments account for more than a quarter of their gross household income.

The causes of the pressure on household budgets are both structural and cyclical, exacerbated no doubt by the events and policies of recent years. As my noble friend Lord Monks identified, it is also evident that many households benefited less from previous economic growth, when the wages of ordinary full-time workers barely grew and were negative for the lowest earners. Looking back even further, inequality increased at all points in the income distribution from 1979 to 1997.

The challenge for the Government is to ensure that the benefits of future growth are shared more equitably. To quote from the Commission on Living Standards’ Gaining from Growth report, only 12% of every £1 of UK GDP now goes to wages in the bottom half, down 25% in the past three decades. Polarisation of incomes is not unique to the UK but it is greater here than in most other developed countries, and so is the extent of low pay. To make up the ground left by the recession, wages for the low to middle-income groups have to grow by 1.1% a year in real terms over the next decade. That is without taking into account the reduced expenditure on tax credits and benefits. As my noble friend Lady Prosser said, that challenge has to make us consider how we can build on the current role of the Low Pay Commission and strengthen and broaden the contribution of the national minimum wage.

The factors contributing to low UK productivity are several and complex but they are neither new nor recent. Comparatively low labour productivity, low investment, lesser management skills and low company expenditure on training have been evident for decades, as has an institutional and cultural set-up that encourages many employers to seek low-paid low-skill routes to business success. Labour productivity has fallen further in the past three years.

A broad strategy to reduce the UK’s reliance on low pay must include a national minimum wage but setting that wage so as to avoid any perceived undue impact on employment and at a very modest level has not constrained growing income polarisation. There is a real danger that unless the national minimum wage is raised significantly, some firms will not need to be or become more innovative and more productive in absorbing higher wage costs. Those that are productive and could absorb the higher costs will simply continue to pay lower wages because they can.

Increased productivity is absolutely essential for sustainable rises in living standards but if we do not take a more radical approach to the national minimum wage and the role of the Low Pay Commission, we risk accepting that either the taxpayer must subsidise the wage bill of UK companies with low productivity with in-work benefits or, if in-work benefits are reduced, family budgets will become even more polarised. People who do the right thing will not be rewarded. Just over half of low to middle-income households have no savings at all, and two-thirds have less than a month’s income in savings. Yet the Government want people to save for their retirement and be less dependent on the state in so many ways. On the other side of that equation is that government must address the squeeze on living standards that is the reciprocal responsibility of government on a call to its citizens to accept that level of responsibility in return.

Time constrains my comments on employment levels and working hours as the driver of living standards, but I shall make a quick point. Yes, dual earnings act as an important source of protection for household budgets, but figures reveal that female employment has plateaued in recent years. Comparatively, the UK is distinguished by underperformance of women with children in their 30s and women over 50 due to the combination of intolerably high childcare costs, the lack of high-quality part-time work and the design of the tax and benefits system.

I refer to the point made by the noble Lord, Lord Horam, on the Gini coefficient, which is a measure of inequality, a statistical measure of which I am particularly fond, as it borrows my name. We need to be careful how we interpret statistics. If poverty is expressed as a percentage of earnings, and if earnings fall, there is a perception of there being a reduction in poverty, but the poor are still very poor. Although there has been a decline in the highest earnings, that will not be sustained, but the pressure on low to middle incomes will, because the fundamentals delivering income polarisation are still there—they are not the same as what comes to play in the rise of the highest levels of earnings.

The market alone will not address income polarisation. It requires intrusion by Governments with labour market policies. Economic policy that ensures not only steady growth but that those in the bottom half receive a fair share of the benefits of that growth will be one of the biggest challenges for all political parties and Governments in the following decade.