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Family wages have slumped in the aftermath of the global financial crisis in 2008 and the collapse of Lehman Brothers bank. Now the threat of an interest rate rise next spring means things could get worse before they get better.
This week Mark Carney, the governor of the Bank of England, acknowledged the catastrophic impact of the great recession on wages, telling the TUC conference that workers have been forced to share the burden of higher overall employment and economic growth in the form of lower pay.
Over the past five years, households have faced a relentless squeeze, the worst in almost a century. Research by the Centre for Economic and Business Research thinktank shows that if wages had continued to climb since 2008 as they did in the six years before, the average worker would now be earning £5,000 more every year than they currently do – £29,796 instead of £24,960.
What’s more, even an expected recovery in wage growth over the next eight years will not recoup this devastating loss of income. By 2022, CEBR forecasts that the average worker will be earning over £10,000 less every year than if wages have continued to rise at their pre-2008 pace.
The problem for families isn’t only that their wages have been frozen year after year. Inflation has soared, too. As a result, wages in real terms – adjusted for inflation – have actually fallen. At one point inflation hit 5%, while wages were growing at around 1%. Even now, wages are growing by just 0.6%, while inflation is at 1.6%.
The squeeze on wages has left millions drowning in debt, only just able to get by. Low interest rates, government assistance and leniency by banks have kept households afloat.
But far from getting easier, things are set to get even tougher for these families. Carney has warned that interest rates will rise before wages increase in real terms, which the Bank does not expect to happen until later next year.
An increase in interest rates could push some families into a spiral of indebtedness, charities have warned. An alarming report by the Resolution Foundation released in July found that interest rate rises over the coming years would lead to more than 1 million households facing a problem with debt repayments.
What can families do to protect their finances from a rate hike?
The good news is that inflation is finally coming down and will continue to fall for the rest of the year. And the prices of some goods, such as groceries, have been falling even faster than the headline figures suggest, as our biggest supermarkets battle to attract hard-pressed shoppers.
But that will not ease the pain of higher interest rates. An increase in Britain’s key interest rate from 0.5%, where the Bank rate currently stands, to 0.75% or more will reverberate across the economy, sending all our borrowing costs spiralling upwards.
So if your mortgage has a variable rate of 4%, it will suddenly cost you 4.25% instead (assuming your bank passes on an increase in interest rates – which it probably will). On a £175,000 mortgage, your repayments could increase by almost £40 a month, or almost £500 a year. Families can avoid the sting of a rate rise by switching to a fixed-rate mortgage deal instead. Millions of households have done so already this year.
Debt charities also suggest drawing up a provisional household budget now, which takes higher interest rate payments into account.
Sit down and look at all your household bills. If you haven’t switched your energy supplier, landline and mobile phone provider or insurer in a while, you can probably save money by doing so today. Also, find out what your bill is actually paying for. Are you paying extra for services like call waiting or extra TV channels you don’t need? If you are in credit with your energy supplier, try to reduce your monthly payment (if you can’t switch deals).
It is also worth looking at other debts, which could be harder to repay when interest rates are rising. Consolidating a wallet full of credit card balances in one place could help you manage repayments, but double check the costs of taking out a new personal loan or another interest-free credit card. Transferring balances usually results in a fee, sometimes running to hundreds of pounds.
What can the government do to tackle the low wage crisis?
In his speech to the TUC, Carney highlighted moves by the Bank to ensure all its employees were earning the living wage, currently £8.80 an hour in London and £7.65 in the rest of the country.
Frances O’Grady, the general secretary of the TUC, took the opportunity to call on the government to extend the living wage to all employees in the public sector. But it could go further still. The biggest single difference the government could make is to incorporate the living wage into the procurement process, so that private sector companies bidding for state contracts are not penalised for paying their staff a living wage.
The government could also introduce a hike in the national minimum wage. High inflation in the years since the start of the recession means the full-time salary of an adult on the minimum wage is now worth £770 less in real terms. The minimum wage is going up to £6.50 next month, but the government should move to increase to at least £7 as soon as possible.
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