Who Pays the Price for the Recession?

Households face the most dramatic squeeze in living standards since the 1920s, Mervyn King, the Governor of the Bank of England warned. Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis. With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years.

Households face the most dramatic squeeze in living standards since the 1920s, Mervyn King, the Governor of the Bank of England warned. Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis. With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years.“In 2011, real wages are likely to be no higher than they were in 2005,” he said. “One has to go back to the 1920s to find a time when real wages fell over a period of six years...The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011.

The governor warned that the Bank “neither can, nor should try to, prevent the squeeze in living standards”.
“The erosion of living standards would have been even greater. The idea that the MPC [Monetary Policy Committee] could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking... The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy. I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis...Households and small businesses with little housing equity may be unable to borrow at all or are able to borrow only in the unsecured market – where rates are much higher than before the crisis.”