If the economy is recovering, isn’t Ed Miliband fighting the wrong battle? In fact, the Labour leader may be spot-on

There is no getting away from the fact that people feel worse off

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The Independent Online

Inflation is finally down to a reasonable level. The economy is growing at a healthy pace. Unemployment is declining. And yet the leader of the Labour Party, Ed Miliband, insists we are experiencing a crisis of middle-class living standards and that the British public yearns for a better functioning economy.

Is he badly out of date? Does the Official Opposition urgently need to adopt a new message in order to prevent Labour’s poll lead over the Tories evaporating? The answer is no.

Though inflation dipped to 2 per cent in December (finally hitting the Bank of England’s 2 per cent target after four years of overshoots) average pay is growing even more slowly. The net result is that real wages continue to fall. The middle is still being squeezed hard.

While GDP is expanding, the economy has been given a lift over the past year by the decision of households to spend more, after half a decade of retrenchment. Rising house prices seem to have made people more optimistic. But many households are still heavily indebted, by historic standards. There is a question over how this sort of growth can be sustained in the absence of a surge in exports and business investment, both of which are still very low.

There is no getting away from the fact that people feel worse off. Average disposable incomes are still flat. And a larger share of what households have left to spend after tax and benefit payments is being sucked up by soaring utility bills, rising rents and the costs of travelling to work. The proportion of household income accounted for by essentials went up from 20 per cent in 2003 to 27 per cent last year. And while the headline rate of unemployment now seems to be falling, a large number of people who do have jobs still say they want to work more hours, presumably in order to make ends meet.

It is dangerous to assume that things will get better automatically as the economy continues to grow. Living standards for those in the middle started to stagnate in around 2005, a time when the economy was still growing rapidly and those at the very top were seeing their incomes shoot through the roof. The traditional connection between GDP growth and the well-being of the middle classes seems to have frayed.

Investment by firms was weak even before the global financial crisis, pointing to a structural impediment. The way that firms – particularly large corporations – behave is understandably becoming a subject for vigorous public debate.

House-builders find themselves in the spotlight. Housing completions have been abysmally low for decades. And whatever David Cameron says, it is difficult to see the Government’s Help to Buy mortgage subsidies boosting supply sufficiently to keep house prices anchored. That is dangerous. Expensive housing distorts the wider economy. Ultimately, even middle-class homeowners lose out.

Mr Miliband suggests that the “promise of Britain” – that middle-class living standards will also rise – is in jeopardy. He has a point. And it is one that the unbalanced and fragile recovery we have experienced over the past year serves to underline, not undermine.