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The Chancellor Is Wrong and Disingenuous on Living Standards

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The Chancellor said something a bit odd today in his Autumn Statement. He told the country that "real household incomes are rising". According to him, all that talk about a cost-of-living crisis is just nonsense.

Confused? Well perhaps it's because we just haven't been paying attention to "the facts". Treasury aides spent the first part of this week briefing the intellectual case behind this counter-intuitive claim. It seems that it rests on two observations.

First, that when it comes to how much we get paid, we should take into account not just the wages we get, but other forms of compensation - in particular, contributions to our pension schemes. Wages may have fallen behind the cost of living since the Recession, but the fault for this lies with higher NICs and pension costs.

Second, the statistics are wrong, they say. If you think about average pay - sorry, average "compensation package" - you should think about 'means' instead of 'medians'. In other words, don't think about the family that would find itself right in the middle if all families were lined up according to how big their compensation packages were. Instead, think of the family whose compensation package is exactly the amount you get by adding up the value of all compensation packages, and dividing it by the number of families.

In short, if you realise that "wages" should mean "all forms of compensation", and "average" should mean "mean", you'll realise that our incomes are indeed keeping up with the cost of living, and your mistake will be rectified. The myth of the "squeezed middle" is exploded, and in its place we see the true face of Britain: the "unsqueezed mean".

All this was intriguing for a number of reasons. From a strategic point of view, it marked quite a change from the last few months. Since the early summer, the Tory leadership has responded to Labour's insistence on a government response to the cost-of-living crisis by saying it wasn't the right question to ask. The public didn't buy it. Then, in the last couple of weeks, George Osborne changed tack, and tried to prove he did care about the cost of living by taking steps to reduce energy bills a bit, and by finally intervening to regulate payday lending. Now he has changed tack again, and is trying to dispute the facts.

The fact that the Tories are now even engaging in this debate shows that they understand they have been losing the intellectual battle on the economy since the summer. But is a strange battle tactic to tell the British people that they are mistaken to think they are in the middle of a cost-of-living crisis. I look forward to Tory MPs returning to their constituencies this weekend armed with briefing notes from Tory Central Office, giving all the information needed to persuade their voters that their experience of tougher times is delusional.

But this new argument is intriguing for another reason. Because the attempt to redefine "real household income" in a way that makes the government look right and ordinary families mistaken tells you a lot about the Tories' political problem. Their response to widespread concern that they do not understand the lives of families in the squeezed middle is to say that the squeezed middle doesn't have the right data. Anything more confirming of the image of the Tories as out of touch is difficult to imagine.

Osborne's intellectual case falls down on not much more than a brief inspection. Arguing that people shouldn't worry about low wages because more money has gone into pension contributions ignores the fact that those contributions will have disproportionately benefited those on higher incomes. These contributions are often not going to the same people who find their pay stagnating, but instead go more to fund the pensions of those who have already retired.

Measuring household incomes in terms of mean-average compensation instead of median-average compensation also ignores the problem of inequality. It is a measure of compensation that is dragged upwards by rapidly rising pay at the very top, masking stagnating pay for everyone else. And rising incomes of the few cannot help the vast majority of families whose incomes are standing still or in decline pay their rising energy bills.

Median incomes are the right way to measure famiies in the real middle. And when you think of incomes in that way, the experience of the public is indeed borne out by the facts. The Resolution Foundation this week showed that since the downturn the median-average income of a British household has fallen from £37,900 to £32,600. The median income overall for all households has dropped by 3.8%. And median disposable income of a non-retired household fell by 6.4%.

So, Chancellor, I am afraid it is not true that a majority of people are better off but labouring under the misapprehension that they are worse off. It is one thing for a government to rebut the claims of their opponents. It is quite another to brief against the experiences of ordinary families across the country. "Brave" is one euphemism to describe that strategy. But the words "wrong" and "disingenuous" also spring to mind.

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