Families: Cost of Living

Lord Monks Excerpts

Thursday 31st October 2013 Lords Chamber

[Lord Monks (Lab)]

My Lords, I, too, thank my noble friend Lady Prosser for initiating this very timely debate, which inevitably will be at the centre of the national conversations and debates as we come up to the next general election.

It is usually very nice to be part of an organisation that is top of the league. However, on this occasion it does not feel very comfortable to know that the UK is currently the EU’s inflation champion. Our rate last month of 2.7% was more than double the EU rate as a whole. In the wider OECD only three top us—Turkey, Mexico and Iceland. It is worth asking why we are in this uncomfortable position of being the EU inflation champion. Several factors have clearly played their part. One might be quantitative easing which boosts asset prices and thus favours the people who own the assets who are already wealthy, and in turn contributes to further rising inequality. It does nothing for most wage and salary earners who are the main source of effective demand and spending power. As the noble Lord, Lord Skidelsky, put it recently in the House, the winners are not the have-nots but “the have-yachts”.

What about the other factors behind inflation? Devaluation of sterling has certainly been a factor. The big fall in the pound in 2008 has probably mostly worked its way through now but there was a very strong inflationary effect, as one would expect given that we are a major importing economy.

The contrast with Ireland is stark. Ireland has had a very bad recession but it has also had some good things going for it. Whereas we have had a 20.7% increase in consumer prices over six years, Ireland’s rise was 3.2%. Food and drink prices have gone up by a hefty 35.9% in the UK in the past six years, but the Irish rise is 1%. The energy comparison is nearly as stark. The Irish rise is half ours and they do not have North Sea oil and indigenous sources such as we have.

I make it absolutely clear that I would not have liked the UK’s property bust to have been as severe as the Irish one has been. However, periodic devaluations have imposed big costs on us whereas that has not been the case with the euro. That is not a debate for today and I do not believe that the British economy was strong enough to hold its place in the euro in recent years. However, that situation shows that there is a cost to not belonging to a currency from which the Irish have benefited, at least as far as inflation is concerned.

My other concern is about pay, which other noble Lords have mentioned. Average real pay is down by 7.5% since 2008. Higher paid public sector jobs have been replaced with lower paid private sector jobs, which in turn have depressed demand. This problem was faced by many people before the recession, not just during it. Even when growth was healthy average wages barely grew and were negative for the lowest earners. Only the top 5% experienced faster earnings growth. The poorest half of the population has borne the brunt of the shrinking wage pie—a 25% drop since the late 1970s—with the winner being the increased share of profits in that pie. If profits had been ploughed back into investment, and therefore into growth, that might have been justifiable. However, that is not the case because the low rate of investment is another area where Britain is vying for top place in league tables in the European Union.

What can we do about all this? I know that the Minister thinks about these matters and I listen to his comments with great interest. However, can we not think about doing something about the following? What about the business culture in this country? The bonus system gives executives the incentive to use cash to buy back shares or to sell assets rather than invest in new capital and equipment. Bumping up the share price prompts executives to push up prices to keep profit margins high even when demand is weak and even though in the longer term the business is made rather anorexic. The bonus culture as it is creates an inbuilt bias against investment in new machinery, training and things that look like immediate costs but are benefits in the long term, and contributes towards inflation. This is not an insoluble problem. In Germany, after all, bonuses are tied not just to shareholder value but to growing market share, to organic growth. There is another factor in the bonus system and that is not the case in most outfits in this country.

How can we make an overdue change in that direction? The fact is that Britain needs a pay rise, as has just been said from across the House. Stagnating pay packets only depress demand and fuel borrowing on credit, and we have had too much of that in Britain in recent years. It also means reduced tax receipts and so intensifies our economic malaise. How about raising the minimum wage at least to its original real value? I know that the Government are beginning to look at this but can they accelerate that process and act on it urgently?

How about encouraging a new interest in the revival of collective bargaining in the private sector to help ensure that workers get a fair share—a fairer share than they are getting at the moment? One thing we do know is that inflation is not being wage-driven, which might have been the case in the 1970s but is certainly not the case now. As others have said, can we establish a mechanism involving collective bargaining for introducing the living wage concept? Trade union weakness has undoubtedly been a factor in the declining share of pay in the national income and in the growth of some undesirable things in the modern labour market such as zero-hours contracts, too much use of temps and agency staff, the ease of outsourcing and so on. The flexible labour market was supposed to generate faster growth and higher productivity. Does the Minister agree that it is now actually holding back growth, curbing demand, depressing purchasing power and making the economy go rather slower than it should be going in the right direction?

These are complex matters and I do not argue with that. They have been going for a long time and I do not argue with that either. I look forward to the Minister’s reply and hearing whether the Government are able to think strategically about what we do about a totally unsatisfactory situation.