Across Europe the left is losing. And Labour has not bucked that trend. The 2010 election delivered us the worst electoral result since 1983. We lost almost a million votes since 2005. We won 13 fewer seats than in 1992. Today, there are just 10 Labour MPs in the south, with a combined majority of 35,500. You can leave London at Edmonton, travel due north and not come to a Labour seat until you arrive in Grimsby.
So what on earth happened? The hard-won support among prosperous upper middle-class voters actually held up rather well. But the hard-pressed ‘squeezed middle’ group can offer some answers.
At the last election, two vital Labour constituencies – one old and one new – melted away. In some 28 seats – a third of those we lost – there was a predominance of young and middle-aged families, typically with children at school and university, who looked at us – and voted the other way. Many, if not most, came to New Labour in 1997 and stayed with us for three elections. But at this one they left.
The second constituency lost was perhaps less predicted. Labour’s traditional ‘blue-collar’ votes make up a good fifth of the British electorate. But in scores of once Labour-held constituencies they proved to hold the balance of power. For years Labour held a commanding lead among this group: in 1997, a clear half supported Labour. In 2010, our share of this vital constituency fell 23 percentage points – its biggest ever fall. That plunge cost swathes of seats. In over half the seats we lost these families made up one in six voters.
The pattern of losses we saw is part of a wider story that can be told across Europe.
The global crash, stagnating living standards, extreme new differences of wealth and wages, and, crucially, new worries about identity and immigration are conspiring, combining together to explode an earlier optimism about the new world we were creating at the end of the 1990s, and replacing it with a new age of anxiety, insecurity and fear.
As immigration minister for two years, I implemented the biggest shake-up of our immigration and border control system since the second world war. Yet, the harder I listened to voters, the more I sensed that the new anxiety was ultimately an economic insecurity.
That sense was reinforced by meeting Jared Bernstein, chief economist to Vice-President Joe Biden, in Washington in 2009. Bernstein’s book Crunch attempts to get a handle on what Time magazine recently labelled ‘the death of the American Dream’. Along with Bernstein, writers like Paul Krugman and Robert Reich have set out how, since the early 1970s, the gigantic growth in American productivity has barely produced any improvement at all in the real income of the average American family. Wages are flat and the prizes are carried off by a richer and richer super-elite.
So at the Treasury in 2009, I set up a small team to study just what was happening to living standards. It soon became clear that beneath the happy arc of rising average incomes something else was going on, especially for the families on ‘median incomes’: what’s become known as the ‘squeezed middle’.
Let’s be clear. The UK, it appeared, had nothing like the problems of America. As world markets opened up, we attracted over $1.3 trillion of foreign investment – 10 per cent of the world’s total. Our aerospace industry became the second largest in the world. Our ICT industry became Europe’s largest, employing a million people. We’re Europe’s most popular home for pharmaceuticals. Great manufacturing firms – like Rolls-Royce – and innovators – like Vodafone – are up there in the new global premier league. GDP per head rose faster in Britain than anywhere in the G7. We have four of the 10 world-leading universities, low structural unemployment, and we scored the highest productivity growth on record over the last economic cycle. Employment grew and real wages rose. The result was that inequality did not rise in the UK, unlike almost every other OECD country. Britain’s success in new global markets was not simply down to financial services – overall, by 2006, the business services sector paid more tax than did financial services.
But the group I was worried about were the millions of workers who were small employers, sales assistants, cashiers, construction and factory workers, or working in routine jobs. Two-thirds of these workers operate in non-traded parts of our economy, but a good third, we calculated, could expect to feel competition in the jobs market from an unskilled newcomer. While this group had done well between 1997 and 2004 – when their incomes grew faster than the median – since 2005, the story has been very different.
Looking at the ‘squeezed middle’s’ ‘real disposable income’ (adjusted for tax, inflation and household composition), we found that this group only saw a 0.14 per cent increase each year – barely noticeable – and well behind the national average. Looking at social group D, that is semi-skilled or unskilled manual workers, we discovered their final incomes had actually stagnated between 2005-6 and 2007-8. There was no growth, and the gap with the rest of society had therefore grown. Overall, the hours people were working had not really changed. In other words, people were working just as hard as ever – but just were not getting on. With rising fuel, food and housing costs, they felt squeezed – because they were being squeezed.
Let us just assume UK growth is two per cent a year. Our ‘squeezed middle’ earners on average are only seeing rises in household income of 1.3 per cent. If that continues, it implies this group of workers will fall behind the trend rate of growth by 0.7 per cent every year. That is £2 billion a year – or 0.15 per cent of GDP. It’s a lot of money.
Labour has now begun to sketch out the bones of an answer to these challenges. Productivity – and wages – have to rise in the non-traded parts of our economy. This can help us tackle the challenge of long hours. Social care and childcare have to widen to let families work the hours they want, when they want. The tax system has to concentrate help on those doing the right thing and working. Our housing and pensions system need reform to help all, not just those at the top, build up wealth across their lives. The economic model of the 1990s is not going to be enough. In short, New Labour is going to need a new statecraft.
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