Here’s why ordinary people aren’t feeling the economic recovery

A sustainable economy can’t be built on a shrinking share of GDP for ordinary people, but political parties are not offering any alternatives

As political parties spar for our votes, there are recurring questions about why ordinary people are not benefiting from economic recovery. The answer is provided by the latest government statistics which show that UK workers now receive only 50.5 per cent of GDP (see Table D), compared to 65.1 per cent in 1976. This rate of decline is unmatched by any other industrialised economy. The comparative figure for the US is 52.7 per cent.

How has this happened? Let’s start by looking at the 1970s, a period when some 13 million workers (55.6 per cent of the work force) were members of trade unions and free collective bargaining covered most sectors of the economy. In 1976, 65.1 per cent of GDP went to workers as wages and salaries, which includes employer pension contributions.

But all this changed in 1979. The Conservative government promoted the idea that future prosperity lay in weakening trade unions and cheapening labour. The government neglected the manufacturing sector and many skilled and better-paid disappeared. Privatised industries rehired staff at lower wages. By 1997 only 52.6per cent of GDP went to workers.

In 1997, the incoming Labour administration introduced the National Minimum Wage (NMW), but did not reverse the Conservative policies. The worker’s share of GDP stabilised at around 53/54 per cent of GDP.

Since 2010, the Conservative-Liberal coalition government has been committed to so-called ‘flexible labour’ policies, a jargon for cheapening labour. About 700,000 employees are on zero contract hours with no guaranteed income. The minimum wage has remained low and age discrimination is institutionalised as those under 20 are not entitled to the full minimum wage.

The closure of good pension schemes has chipped away at the amounts paid to workers. Trade unions are a shadow of their former selves. Their current membership is around 6.5 million and only 16 per cent of private sector employees and 63 per cent of public sector workers are covered by collective bargaining agreements.

By the third quarter of 2014, employees’ share of the economic pie has shrunk to 50.5 per cent (see Table D), the lowest ever recorded. This figure is, however, misleading because it includes the remuneration of company executives and other fat cats who have been collecting exorbitant rewards. So the share of economic pie going to ordinary workers is probably well below 50 percent of GDP.

But the less well-off aren’t so easily let off. The corporation tax rate has declined from 52 per cent of taxable profits in 1982 to 20 per cent in 2015. The top marginal rate of income tax has declined from 83 per cent, plus a surcharge of 15 per cent on investment income, in 1978-79, to 45 per cent now.

Successive governments have shifted taxes through hikes in VAT and National Insurance Contributions. The result is that the poorest bear the highest burden of taxation. In 1979, the poorest 10 per cent of households paid 35 per cent of their income in direct/indirect taxes, compared to 37 per cent for the richest 10 per cent. Now the poorest 10 per cent pay 47 per cent of their income in taxes, compared to 35 per cent for the richest 10 per cent.

So it is hardly surprising that average person does not feel the benefit of Britain’s economic miracle. In the mid-70s the average rate of corporate profitability before interest and tax at current replacement prices was around 3.9 per cent. Now, despite a deep recession, it is around 11.3 per cent.

Some 13 million people live below the poverty line and the biggest increase is in those in paid employment. Wealth has been sucked upwards. The richest one per cent have as much wealth as the poorest 55 per cent of the population, and the poorest half have barely 9 per cent.

A sustainable economy can’t be built on a shrinking share of GDP for ordinary people. Yet political parties are not offering any worthwhile policies to check the above trends. These could be checked by the introduction of a living wage. Workers’ bargaining position could be strengthened by empowering trade unions and collective bargaining.

Other countries, most notably Scandinavian countries, have worker representatives on company boards so that meaningful discussions about sharing corporate wealth can take place. Sharing wealth equitably should be part of corporate social responsibility and those eschewing it should not be given any taxpayer funded contracts.

Governments need to embrace progressive taxation so that no one on living wage pays any income tax. Everyday essential goods and services should be freed from VAT, a highly regressive tax. A decent state pension should be paid, funded by corporate profits. It is a matter of national shame that at around 32 per cent of average earnings, the UK state pension is one of lowest in industrialised economies, compared to an average of 54 per cent across the rest of the OECD countries. Only Mexicans receive a lower state pension than the UK citizens.

The likelihood of above reforms is low as political parties are in awe of giant corporations and wealthy elites. So the prospect is that of exclusion, alienation, social unrest and instability.

Prem Sikka is professor of accounting at the University of Essex

43 Responses to “Here’s why ordinary people aren’t feeling the economic recovery”

  1. Jack

    “Everyday essential goods and services should be freed from VAT.”

    This is a partial list of the current VAT treatment.

    Food -zero rated
    Rental of domestic dwellings -exempt
    Passenger transport -zero rated
    Books/Newspapers -zero rated
    Children clothes / babywear -zero rated
    Postage -outside the scope
    Education -exempt
    Sporting activities -exempt
    Equipment for disabled people -exempt
    Healthcare -exempt
    Fuel and power -5% reduced rate

    The list goes on. Which other everyday essentials were you thinking of? I can only think of petrol, phones/internet and clothes. Even then, how does one differentiate in law between a Gucci suit costing £4000 and a pair of jeans from Primark? There’s no mechanism in VAT law that allows this distinction.

    I disagree with your assertion that VAT is a regressive tax. Someone who buys a yacht at a £1M would pay £200,000 VAT on it. That person has paid more VAT on just one purchase than hundreds of low-income people put together. It’s weighted against the rich. Also, to say that VAT forms a higher proportion of a low income is true of anything that a low-income earner buys: a low income person spends proportionally more on shoes than a millionaire. But if you zero-rate shoes, you also subsidize the millionaire. The problem is not VAT, it’s the low income. Much better to simply increase the income of the lower-paid. Tweaking VAT is just fiddling around the edges of the problem.

  2. Prem Sikka

    Clothes, shoes ….. Gucci suit – No – because limits can be placed

  3. Jack

    What do you mean -limits can be placed? Limits cannot be placed. If you think they can then you don’t understand VAT law. Classes of goods and services are either subject to VAT or they’re not. There is no possible mechanism within VAT law to apply VAT to goods within the same category only upto a certain value.

  4. Prem Sikka

    VAT is regressive and a major reason why the less well-off bear a higher share of taxes. A quick trip down the history lane would show you that UK used to have multiple rates of VAT, including basic and higher rates. Some things can be defined as basic or luxury and subjected to different rates. No you need not subsidise millionaires by zero-rating essentials because other rates of taxes can be adjusted to nullify some of the gains. What is the government doing now? What did the last Labour government do? It introduced a mechanism for clawing back
    some of the personal allowances from the rich. So, adjustment can be made at the top-end.
    But I am not just arguing for VAT adjustments, but also for redistribution. It would be great to hear your suggestions.

  5. nodbod

    How many of these yachts is this person going to buy? Is this person chosing between food and his yacht? Is this person going to buy another yacht next year or will he stick with this one? What percentage of his income is this yacht and associated VAT? Is he registered abroad so that he can claim the VAT back? Is this person buying it out of his income (personal wealth) or is it a company tax loss?

    Everything that I read or hear says that VAT is a regressive tax and I am afraid that your argument does not convince me that it is not. If it was not regressive then the Conservatives would not use it as they do.

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