Campaigning hot air - or sound economic advice?

Campaigning hot air – or sound economic advice?

It’s easy to shrug off much of this as electioneering, but is David Cameron just issuing this request to win more favour from the voting public after many years of deficit-driven austerity? Or is there any sound basis for his economic advice?

There are a lot of pledges being made on an almost daily basis as David Cameron and Ed Miliband lead their respective political parties into the next election battle. And David Cameron’s recent headline news came from his request to UK businesses – to pay their employees more money.

It’s easy to shrug off much of this as electioneering, but is David Cameron just issuing this request to win more favour from the voting public after many years of deficit-driven austerity? Or is there any sound basis for his economic advice?

Interestingly, in July 2014, the CBI published a paper titled ‘Making Britain work for everyone’ which acknowledged several points. The first of which is that average pay could be measured in real terms at 7% lower than before the recession.

Secondly, it acknowledged that this reduction in pay had a net effect on consumer spending, which had accordingly reduced.

The crucial point made by the CBI report is that pay rises would help the overall economy in a number of ways. Primarily through increased consumer spend, but also by encouraging better productivity through reward. Something which is an essential underpinning within this recovery process.

What the CBI indicated, was these two changes could be instrumental in helping Britain to achieve greater economic growth, triggering higher levels of capital investment by companies, increased flexibility by workforces, facilitation of career-based training schemes and better opportunities for staff progression directly linked to company performance.

And this report is very helpful when we set out to evaluate the Prime Minister’s words.
Yes, many will argue that it simply polling hot air to win over the working masses. But there’s no doubt happy staff are more productive and well paid employees are more likely to stay. It is something which counters the expense of high levels of staff turnover.

However, the bigger picture is that consumer spend is a real solution to Britain’s economic recovery as outright reliance on flagging export markets will not be sufficient. The recovery of our economy will benefit businesses, which is a win-win situation. However, for this to happen – wages need to increase to fuel consumer demand.
And David Cameron fairly points out businesses are in a reasonably good overall position through low rates of inflation and falling oil prices, which is why he’s justifying the call to raise pay.

Without increasing wages, the only alternative route to generating consumer spend is not a good solution. This is because it would be through increased individual borrowing. And as UK household debt has quadrupled since 1990. So increased borrowing could simply push more people into bankruptcy or losing their homes – which would not benefit the economy!
So on this occasion, it looks as if this piece of electioneering is actually based on pretty sound economic advice.

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