Why the Conservatives may be nervous; most of us will be better off in 2009

January 12, 2009 by
Filed under: Credit crunch, Politics 


The state of voters’ finances will affect the Government’s popularity in 2009, but for reasons exactly opposite to those most people assume; on average, families will be much better off in 2009. In fact, this year will be the best for average disposable incomes for almost a decade. Why?

  • Pension and benefit increases for 2009 were set at last September’s RPI of 5% but will be implemented with inflation at virtually zero
  • Other tax and benefit changes will raise incomes, particularly for families on lower incomes
  • Mortgage holders are benefiting from falling interest rates, some families being hundreds of pounds a month better off
  • Although annual pay rises will be lower this year, many increases (particularly in the public sector) were agreed when inflation was higher and any, again, even small increases will lead to real improvements in living standards when set against zero inflation

Overall, the modal (most frequent) average improvement in disposable income in 2009 looks like it will be around 5%, a better figure than in any year since Labour took office. What will this mean? There are three broad possibilities. First, we simply won’t notice. Worried about losing our jobs and aware that tax increases are on the way, we may use the extra income to reduce our debts but not feel any better off. Second, the contrasting outcome; there is a general feel good factor which starts to show up in the opinion polls. Third, a phenomenon of which I have written in the past – the contrast between our personal optimism and our social pessimism – will become even more profound. We will blame the Government for the general background of bad economic news but assume that we are personally responsible for our own family finances improving.

The statistic on disposable incomes may also explain why David Cameron has decided to adopt such an aggressive and oppositional stance on the recession, even though, as many commentators have pointed out, the gap between Labour and Tory on policy substance is not as great as the rhetoric suggests. The Conservatives may judge that the biggest danger they face is public contentment in the face of rising average incomes and the possibility of the economy starting to pick up towards the end of the ear. By emphasising public debt and the position of savers Cameron is inviting the public to focus on two indicators that are unlikely to improve whatever happens in 2009.

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Comments

  • Jon

    This opinion goes against the forecasts of almost every other major financial analyst .

    Labour should stop attacking the Tories so much, and concentrate on governing us out of this mess, if they are to reduce the drubbing they will inevitably get at the next GE.

    • matthewtaylor

      I’m not sure it does Jon. For many many people 2009 will be very grim but for those with jobs and houses and who do not rely on savings it will be good, and that is quite a lot of us. Not that this means the Government deserves credit or will get it.

  • http://www.yourfbs.co.uk Ed Har

    I agree, the thing we fear most in 2009 is fear itself. The economic reality for the vast majority of us is a small improvement, but this is being distorted by the media’s coverage of doom and gloom stories.

    My blog is often along these lines… http://www.yourfbs.co.uk , if not quite as coherantly as yours!

    • matthewtaylor

      Thanks Ed, I’ll check it out. I would accuse you of false modesty but what then of my own tendency torwards self deprecation!

  • Victor, NW Kent

    That is excluding those who will lose their jobs.
    Are you echoing Polly Toynbee when she said that if 10% lose their jobs at least 90% will be working?
    This article is one which shows the unbearable smugness and political blindness of most Labour supporting writers. They are able to picture defeat as victory, disaster as a benefit.

    • matthewtaylor

      Hi Victor

      I am really not trying to make any value judgements. It is simply that I had not heard anyone else point out that many people will see rising incomes even while many others are having a terrible time. If the cycle kicks back in we may well see in 2010/11 the reverse of 2009 – an economy that is starting to recover whille we all end up with less to spend. After all, as I did say in the orginal blog, most of us have not enjoyed higher disposable incomes despite the economy growing for most of the last decade

      Thanks for the comment

  • J H Holloway

    MT – More Labour-cheerleading under the RSA banner. I really think that you should either drop the party politics or drop the ‘Royal’ banner. I think the Duke of Edinburgh should be reading you the riot act. If not, I’ll be writing to him to complain that an established institution for manufacture and design has been turned into a convenient, sinecured political think-tank for Tony Blair’s ex.

    • matthewtaylor

      Hi JH

      Oh dear. Looks like I’ve got it wrong again. As I said to Jonathan (above) I wasn’t trying to make a political point, only to explain the somewhat surprising facts. Indeed, it coud be argued that for pensions and benefits to be rising by 5% when inflation will soon be less than 1% is terrible profligacy. I thought the juxtaposition of a terrible recession with rising incomes for a lot of people was worth commenting on, but the political conclusions you draw from it will no doubt depend on your starting point

      But thanks anyway for commenting

  • http://www.toryradio.com Jonathan Sheppard

    Oh dear oh dear Matthew!

    I guess from what you write you could conceivably argue that hey, a recession is a price worth paying. You know – god forbid those small businesses going to wall. Chuck a few billion pounds of taxpayers money at it. No thought that the next generation will spend their working life paying it back.. You mention zero inflation – no mention of deflation? No mention of what the Governement has done to sterling? Oh that’s right.. there will be no change in the value of the pound in my pocket. I only did A level economics but I’m sure I recall that phrase somewhere else.

    The Government has embraked on economics of the madhouse and nothing can gloss over that.

    • matthewtaylor

      Hi Jonathan

      I must have written this blog reallly badly. I wasn’t for a moment saying the recession is good news. I was merely exapining why – paradoxically – many people will see their incomes rise even though are so tough. And also suggesting that the Conservatives may have noticed this. I thought it worth sharing the data with people becuase it is so counter intuitive.

      But thanks for commenting

  • http://www.toryradio.com Jonathan Sheppard

    You are definitely more gifted that me with regards interpreting data. All I can see is more and more people losing their jobs and people having to tighten their belts.

    Want to go abroad on holiday? It costs more.
    Want to put the fire on? It costs more
    Want to use public transport? It costs more
    Want to sell your house? Its worth less

    They always say statistics (and I guess data) is like a bikini. What it shows is all very interesting – but it’s what’s covered up that people are most interested in.

    But in all seriousness I really can’t believe that in spite of any data pointing to the contrary people will feel better off, and perhaps its that sentiment that will be all important?

  • http://blimpish.wordpress.com Blimpish

    Matthew, I see your point and I’d say not to worry about it being overly political , but surely we know from theory (and evidence) too that people’s assessment of their financial well-being, not to mention the decisions they make about consumption related to it, on the basis of their future income projects, given their asset portfolio (including human capital).

    The problem is that these have already taken a terrific knock, and seem likely to do so through 2009. Anybody with a house has lost money; anybody with a money-purchase pension has lost money; anybody with cash can only see years of tiny interest returns; if you’re younger and more reliant on your human capital, you can see companies engaging in recruitment freezes, stopping you getting on the ladder.

    Your comparison (comment #11) with the last decade is instructive here in a different sense, especially when compared with the period before. On ONS data, real HDI grew 15.2% from 1992 to 1997, and 8.3% from 2002 to 2007. You may not remember the 1992-1997 period in the same way as I did, because you were on the winning side, but every year we gnashed our teeth because the economy was great but there was no ‘Feelgood Factor’ (you will remember the endless news items on why there wasn’t). At the end of that period, the Major Government lost half its seats, whereas in 2005, the Blair Government lost seats but was still returned with a good majority.

    The difference is in wealth. House prices didn’t start to grow much at all until 1995, and took years to return to trend, and eliminate negative equity cases. The house price explosion from 1999-2000 onwards changed things massively. This also was a key factor behind the decisive rejection of any Tory arguments over limiting tax-and-spend – who cares about a few hundred quid of tax cuts when your housing equity has grown by £10,000?

    The problem for Labour is that this trend is now working in reverse – nothing that the Government can cut in taxes or raise in spending can compensate for the freefall in asset prices and (associated to them) earnings projections.

    One other thing. My feeling about the Tories in 1992-1997 was that people accepted their denial of responsibility for the recession, but it cut both ways – they got no credit for the positives. Labour are taking the same tack, and will face the same problem.

    • matthewtaylor

      Hi Blimpish

      Thanks for this. You are actually making points very similar to the ones I just heard from the incoming Chair of the RSA (and FT columnist), Luke Johnson; when it comes to voters attitudes, it’s wealth rather than income that matters. I suspect you are right. But one thing that could give Labour cause for hope; if incomes have been rising for several months any improvement in the economy late in 2009 could lead to an earlier feel good factor that we would normally expect. So the one off factors – like the pensions and benefit uplift – could help Labour avoid the lag between objective and subjective recovery.

      Thanks for the really useful comments, and I say, I suspect you are right about wealth

      Matthew

  • J H Holloway

    MT

    Thanks for the reply – perhaps you could explain how this blog relates to what the RSA is trying to do, or is this you speaking personally?

    • matthewtaylor

      I guess it’s me personally (and i should be cleaer about flagging this) . But the RSA is committed to informed debate as part of our broader mission of encouraging citiizens to engage with decision making.

      Not only do we have a wide variety of speakers here (more Tory front benchers than Labour since I became CEO) but I encourage many colleagues here to blog. Over the years I think I have had as many complaints from former colleagues (see, for example, my second blog today questioning the Government’s commitment to social mobility) as from those on the right. But it is always useful to be warned if I might be crossing the line.

      So thanks again for your comment

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  • http://blimpish.wordpress.com Blimpish

    Matthew: just one point in reply to your reply, which is that the two groups being directly helped (pensioners and benefit recipients) probably aren’t that help. Pensioners’ votes are quite difficult to move, and benefit recipients probably vote Labour in safe Labour seats if they vote at all. The other problem, in terms of reducing the subjective-objective lag is that the (broad) middle class won’t take their cues from these groups in setting their own mind – in fact, if they feel benefit recipients are prospering, it might confirm their worst prejudices, that “the Gov’ment” is on the side of “them” against “us”.