UK’s families are benefiting from recovery, Treasury says

Treasury counters Labour fears on pay and growth

The tight link between economic growth and employee compensation has not broken, the Treasury has concluded in a briefing designed to counter Labour’s charge that ordinary families are not benefiting from the recovery.

Ahead of the Autumn Statement, officials have demonstrated that although the rise in typical living standards has fallen behind the growth of gross domestic product, the amount companies are paying their employees has kept pace.

Aides to George Osborne, the chancellor, say the research demonstrates that the economic growth already seen this year holds out prospects of better times ahead and undermines Labour’s concern that families are not feeling any better off.

The paper comes as the coalition feels acutely vulnerable to the charge that living standards are not rising. To counter the accusation, Thursday’s Autumn Statement will include measures that range from removing some green obligations from energy companies to keep bills down to universal free school meals for schoolchildren under seven years old.

The Treasury number crunching acknowledges that take home pay has slipped far behind GDP over the past decade but find this is not a result of exploitation of workers.

Companies have used money that previously would have gone into wages to fund pension deficits and increased employer national insurance bills, the calculations suggest. While take home pay fell behind productivity, employer costs of hiring workers did not.

The Treasury paper concludes that “output per worker and real compensation per employee increased broadly in line with each other in the run-up to the crisis. And since then, the share of output going to employees has actually increased”.

Using this analysis, the government will seek to pin much of the blame for stagnant living standards on Gordon Brown, who raised employer national insurance bills frequently as chancellor and increased the rate in 2003 to fund higher public spending.

The corporate costs of shoring up defined benefit pension funds, however, is the most important reason employers did not have the money to raise take-home wages, the Treasury data shows.

The importance of legacy pensions in hitting current employees’ net income was also found in a similar study last year by João Paulo Pessoa and John van Reenen of the Centre for Economic Performance at the London School of Economics. “Contributions to pension schemes are the major component behind this disparity,” they said.

The rise in pension contributions was partly caused by government policies forcing companies to rectify pension deficits, but these deficits have mostly grown as a result of increases in life-expectancy and a global fall in bond yields, which reduced the expected return on pension fund assets.

Ed Balls, shadow chancellor, said: “For all the welcome reports that the economy is finally growing again, for millions of families there is still no recovery at all.”

While the Treasury is optimistic that take-home pay will return to growth alongside the economy and rising productivity, other studies last week suggested that the coalition should be more cautious.

In a study of corporate pension deficits, the accountants PwC found that the funding position of British defined benefit pension schemes was still deteriorating. In a survey of 150 of the largest pension schemes, it found that it would take an average 11 years for companies to fill the shortfall in their pensions, suggesting that companies will continue to plug that gap rather than paying staff more.

Paul Kitson, partner in PwC’s pensions advisory team, said: “Despite early signs of economic recovery, companies are still ploughing considerable amounts of cash into their pension scheme just to manage the deficit.”

“This means money that could be reinvested in the business to promote growth, jobs or the strength of the company is too often being tied up in the pension scheme,” he added.

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