Hamish McRae: Living standards will start to get better sooner than you think

Debt will loom over us for years, but the squeeze on living standards is ending

Share

Must seven fat years be followed by seven lean? Or, to apply the Biblical reference to the current state of the British economy, how long will it be before the excesses of the credit boom are worked off, debts are under control, and such growth as we get can start to feed through to higher living standards? Or, to look at the problem from a different perspective, how long will the need to pay down debt hold down growth itself?

These are questions obviously raised by the threat of a downgrade of UK national debt by the rating agency Moody's. But they are also raised, in a rather warmer light, by the fall in inflation, carrying with it the possibility that inflation will be below 2 per cent by the end of this year. A quick reaction to these two bits of news would be that the debt mountain will loom over us for many years but the extreme squeeze on living standards is coming to an end.

Most people are not aware that, despite the start the Coalition has made on reducing the deficit, the Government is still spending £12 for every £10 it raises in taxation. The rest has to be borrowed, and it is unsurprising that rating agencies should be a bit concerned about this, particularly since growth has been disappointing.

But while the period needed to close the gap has lengthened a little from the Coalition's initial projections, it has only slipped a year or so, and this financial year the numbers may be a bit ahead of the plan. But remember, the plan this parliament is simply to stop the national debt rising by 2015, not to start to pay it back. So you would not be far out if you said that it will be seven years from the fiscal catastrophe of 2008/9 through to making a start on repaying the national debt.

That is public debt; what about personal debt? The outlook is not so different. For many people, the largest single issue affecting their household balance sheet – their debts and assets – will be what happens to house prices. I have been looking at some work by Chris Watling at Longview Economics, who notes that the ratio between earnings and house prices has averaged 4.1 over the past 25 years. In the mid-1990s it was 3.1 times, and it peaked at 5.7 times in 2007/8. It is now back to 4.4 times, and he projects that it will be back to the long-term average in another year, maybe two, as a result of increases in earnings and some shading back of prices.

The question then will be whether house prices overshoot on the downside and go back to the mid-1990s level. If so, the bottom will be around 2016. You could say that this will have been a seven-year slog, too.

That is all rather dispiriting. However, anyone feeling anger at the previous government for landing us in this situation should perhaps temper that with the acknowledgement that we as individuals went on a borrowing binge, too. While nothing can change the maths very much, at least we emerge, both as a country and as individuals, in much better shape by the second half of this decade.

On the consumption and, I expect, growth fronts, the picture is quite a bit brighter. It is over-simplifying again, but I think it is fair to say that the single thing that has clobbered living standards most over the past 18 months has been the surge in inflation. That has been partly our own fault: the Bank of England's quantitative easing has contributed to inflation, we have had some pretty costly decisions on energy policy and, of course, there was the VAT rise. As a result, we have had significantly higher inflation than the Continent and the US. Still, a fair chunk of the inflation is the result of external factors, including raw material and energy prices. Those pressures seem to be easing.

So it is plausible that, by the autumn, inflation will be 1.8 per cent, while earnings will be up 2.5 per cent. So real incomes will be rising and consumption will be climbing, too. That, in turn, will help fuel growth. Conclusion: seven more lean years of debt repayment, sure, but perhaps only seven more months of falling living standards.

And it's good news in the US

Amid the preoccupation with Greece, try this statistic. Every three months, China creates another economy the size of the Greek one. That does not mean Greece is unimportant, and my view remains that the treatment of the country by its eurozone partners is disgraceful and self-defeating. But from a global perspective – if you are interested in demand for goods and services around the world, the price of oil, new cars being built, whatever – it is irrelevant.

So what should anyone interested in the big picture be focusing on? There is China, of course, and all the projections I have seen are that growth will be steady at around 8 per cent, with consumption running a little ahead of that. The other big thing is US consumption. The latest figures seem quite strong and Goldman Sachs has recently suggested that the housing market is at last turning up. Put these together, and the outlook for global growth is really quite strong.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Project Coordinator

Competitive: The Green Recruitment Company: The Organisation: The Green Recrui...

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Embedded Linux Engineer

£40000 - £50000 per annum + competitive: Progressive Recruitment: Embedded Sof...

Senior Hardware Design Engineer - Broadcast

£50000 - £65000 per annum + Benefits: Progressive Recruitment: Working for a m...

Day In a Page

Read Next
The Lada became a symbol of Russia’s failure to keep up with Western economies  

Our sanctions will not cripple Russia. It is doing a lot of the dirty work itself

Hamish McRae
The Israeli ambassador to the US, Ron Dermer, has been dubbed ‘Bibi’s brain’  

Patrick Cockburn: Israel's propaganda machine is finally starting to misfire

Patrick Cockburn
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments