Rishi Sunak, it is clear, intends to make the economy the centre of his election campaign. He went to see the King last week after the release of figures showing inflation dropped to just above the official 2 per cent target, and following data this month that revealed the economy had an unexpectedly strong start to the year.
He believes that, as a former chancellor, he will have the upper hand in any debates with Sir Keir Starmer on the economy, although that belief let him down when he fought Liz Truss for the Tory leadership.
To understand how he will frame the economic argument, it is useful to think of three distinct periods that the Tories will draw on to defend their record and seek to convince voters that sticking with them is the right thing to do.
The first is the period since 2010, when David Cameron was elected prime minister, initially in a coalition government with the Liberal Democrats.
The second is the “stabilising the economy” period beginning on October 25, 2022, when Sunak succeeded Truss.
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The final period is the “turning a corner” episode over the past few months, when the economy returned to growth after a “technical” recession in the second half of last year and inflation fell.
There will be rather less emphasis on the record of the whole of this parliament, from December 2019, which included the Boris Johnson and Truss premierships, though when Sunak announced the election he was keen to emphasise his part in launching the furlough scheme during the pandemic and providing energy support during the cost-of-living crisis.
So how does the record stack up, and will voters be persuaded, as the prime minister claims, that “the plan is working”? A striking feature of both the past 14 years and the current parliament is the squeeze on the incomes of ordinary people.
Astonishingly, real average earnings, adjusted for inflation, have only just risen above where they were in the early part of 2008. It is hard to find a comparable period in modern history with anything approaching this kind of prolonged squeeze.
Workers at the bottom have been helped by increases in the national living wage, including a 9.8 per cent rise just last month. Those in the middle have not.
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Real wages have been recovering since October as inflation has come down, but people will remember the long squeeze. They will also know instinctively that this is shaping up to be the weakest parliament on record for real household disposable incomes, which have been hit by higher taxes and rising prices.
Real incomes at the end of last year were more than 1 per cent lower than at the end of 2019. Many people, understandably, find this hard to square with government boasts about its economic record. It helps to explain why consumer spending is still below pre-pandemic levels.
While middle earners have struggled, the prolonged period of near-zero interest rates through the 2010s and beyond, which only started coming to an end less than three years ago, led to a gilded age for the very wealthy.
The Sunday Times Rich List, which dates to the late 1980s, shows very clearly this process at work. In 2010, the combined wealth of the top 100 in the list was £172 billion. This year it is £594 billion, an increase of 245 per cent. There has been inflation over that period, a cumulative 49 per cent increase in the consumer prices index, but this has been dwarfed by the increases in wealth.
Since 2019, the wealth of the Rich List top 100 has risen by 28 per cent and that of the top 10 by 46 per cent. Inflation has been a cumulative 23 per cent.
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The period since 2010 has been one of weak growth, averaging 1.4 per cent a year as the economy struggled to overcome the effects of the financial crisis and was hit by shocks including the referendum and Brexit itself, the pandemic and the Ukraine invasion. Growth has been weaker than in the turbulent 1970s and the period from 1997 to 2010, which ended with the global financial crisis and what was the biggest postwar UK recession.
Underlying this weak growth has been stagnation in productivity — output per person or per hour worked — the ultimate driver of prosperity. Most countries have suffered a productivity slowdown, but few as dramatic as the UK’s.
Growth during this parliament has been even weaker, averaging out at just 0.4 per cent a year, barely better than flatlining. Even more striking has been the performance of GDP per head, which many people regard as a better growth measure.
Since spring 2010 it has grown by just over 10 per cent in total, comfortably less than 1 per cent a year. In the previous 14 years it rose by 26 per cent. In this parliament, GDP per head in the first quarter was 1.2 per cent lower than in the final three months of 2019.
Sunak has been celebrating the economy’s return to growth in the early months of this year, when GDP rose by an unexpectedly strong 0.6 per cent. But that came after two successive quarterly falls and meant it showed a rise of only 0.2 per cent on a year earlier.
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GDP per head rose by 0.4 per cent but was down by 0.7 per cent on a year earlier. On June 12, figures will be released for April. The risk is they will be disappointing, following Friday’s announcement of a 2.3 per cent slump in retail sales during the month.
Politicians were surprised by Sunak’s decision to call an election on the back of the latest inflation figures; economists even more so. The figures, which showed a drop in the inflation rate from 3.2 to 2.3 per cent, were good but not great. Financial markets and the Bank of England had expected a drop to 2.1 per cent or below.
Markets had suggested the chances of an interest rate cut on June 20, the next meeting of the Bank’s monetary policy committee, had diminished, with the most likely timing of the next cut not until November. Diminished hopes of significant pre-election interest rate cuts before an autumn poll may have helped swing the prime minister’s decision.
Although inflation has fallen from its peak of 11.1 per cent when Sunak succeeded Truss, prices have risen by 21 per cent over the past three years. This includes much higher food and energy prices. Energy is a lot more expensive than it was, despite Friday’s announcement of a 7 per cent cut in the energy price cap.
Official figures, based on a survey of households by the Office for National Statistics, showed that 87 per cent cited the cost of living as their chief concern last month, bigger than any other issue. More than half, 55 per cent, said their cost of living had risen in the past month, 42 per cent said it had stayed the same and only 3 per cent reported a fall.
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The slower official interest rates fall, the more people with mortgages face higher costs as they renegotiate. About 1.6 million homeowners are re-fixing their mortgages this year and some banks have been increasing their mortgage rates.
When it comes to jobs, Conservatives like to focus on their record since 2010, not 2019. From 2010 to 2019, the UK had a successful labour market, generating almost four million new jobs.
There was a rise in employment among workers born outside the UK, mainly from the European Union, but employment among UK-born workers increased in tandem, rising by two million to a record 27.2 million.
Since December 2019, however, the UK has had a dysfunctional job market, characterised by the worst labour shortages in modern times, which have held back many businesses and reduced economic growth. Unemployment, normally a bellwether economic issue for elections, has gone up to 4.3 per cent of the workforce, from 3.9 per cent at the last election.
More troublingly, economic inactivity — people of working age (16-64) who are not in work, nor immediately available or looking for it — has increased significantly. The inactivity rate has gone up from 20.7 to 22.1 per cent, while the number of economically inactive people has risen from 8.6 million to 9.4 million. More than 2.8 million say they are economically inactive because of long-term sickness, with almost 200,000 citing temporary sickness.
Employment is roughly where it was at the end of 2019, but the number of UK-born people in jobs is down by a million to 26.2 million. Employment among people born outside the UK, largely non-EU workers, is up from 5.8 to 6.8 million. The government wants to reduce net migration, which last year was a huge 685,000, but it is clear that migrant workers have been driving employment.
While insisting its instincts are to cut taxes, the government has presided over a sharply rising tax burden, which this year will be the highest since 1949. Taxes as a proportion of GDP have risen from 33.1 per cent in 2019-20 to an estimated 36.5 per cent in the current fiscal year, 2024-25. This is despite two two-point reductions in employee national insurance, announced in November and March.
For businesses, the main tax increase has been a rise in corporation tax from 19 to 25 per cent, partly offset by more generous investment allowances. For individuals it is the prolonged freeze on income tax allowances and thresholds, described as the biggest stealth tax in history.
The effect will be to bring 3.7 million more people into the income tax system and create 2.7 million more higher-rate taxpayers and 600,000 more who are paying the top 45 per cent rate of tax.
Despite higher taxes, and the revenue this has brought in, polling shows widespread unhappiness with public services. Research by Ipsos showed Labour leads the Tories by four to one on who has the best policies for public services.
Whoever inherits the current situation faces significant challenges, however. A few days ago, the International Monetary Fund warned the “pressing service delivery and investment needs” were unlikely to be met within existing public spending plans and further tax increases and scrapping the “triple lock” for the state pension could be necessary.
