Friday, 23 November 2012

You are 2.1% poorer

The ONS yesterday released stats saying that average earnings of over the last year grew by 1.4%.

Unfortunately prices went up by 3.5%.

The difference, 2.1%, is therefore how much poorer you are this year compared to last year. And this is by no means the first year you are poorer. In fact you are exactly as rich as you were in 1999! Assuming of course that you are a completely average UK resident.

So how can the economy grow if the consumers keep getting poorer? Answer: it can't. This year you will buy less stuff and so the economy will produce less stuff and producers will make less money and employ fewer people and the whole system will wind down.

What we need is those two numbers to be reversed. If inflation has been 1.4% and earnings had grown by 3.5% you would be 2.1% richer - then the economy would be motoring ahead. So, how can the government made this happen?

Well, they cannot make your pay go up very easily. In the private sector your pay depends on what people are earning in Germany and Japan and China. You cannot earn much more than them or your private sector employer would go out of business. In the public sector every extra pound you earn is an extra pound that must be taxed out of the private sector so the net effect is to slow the economy.

What they can control is inflation. Average earnings growth of 1.4% would be fine if inflation were zero. Then the economy would be leaping ahead. And imagine if inflation were negative, say -0.2%, then you would be 1.6% richer this year. Why -0.2%? Well,  because that happens to be the current inflation rate in Switzerland. How come they can control inflation and we cannot?

No comments: