The UK economy is growing and at a faster rate than most people expected a year ago. Growth forecasts are still being upgraded and expansion can be seen across the economy. To add to this good news, the unemployment rate has fallen below seven per cent and wages are growing at an annual average of 1.7 per cent, the first time in years that wage increases have not lagged inflation. Has the cost of living crisis, on which Labour has campaigned so effectively, now disappeared?
 
The last set of PMI survey data showed a UK economy growing across manufacturing, construction, and services, though possibly at a slightly lower rate than a month or two previously. Employers are continuing to report tight labour markets. The actual economic data backs up these impressions, with industrial production up strongly in March, for example. Although we should be concerned that growth last year appeared to be driven by an increase in household borrowing, there are even some signs that business investment is beginning to pick up as businesspeople become more confident about the future. We also know that there will be a number of major revisions to GDP data in September. Some of these will be due to accounting changes (which will suggest households are better savers than we thought) and others will arise from new data and new ways of compiling GDP. The combined effect may be to increase the GDP estimates for 2012 and 2013, in the former case showing growth where previously we had thought GDP was unchanged. This may lead to higher reported productivity. With the future looking much brighter and with inflation low, it might seem at first glance that there has been a squeeze on Labour’s cost of living campaign.
 
However, while total pay increases are matching inflation, when bonuses are stripped out wages have only risen by 1.4 per cent over the past year. Salaries have been rising faster in the private sector, at 1.8 per cent excluding bonuses, but it is debatable how much lower the inflation rate will fall. While the numbers of people in employment have risen substantially, much of the increase since 2007 has been driven by an increase in the number of self-employed. Many of the newly self-employed may be earning very little at all. There is also some doubt about what the long-run trend rate of GDP growth is. The suspicion is that it is lower than before the financial crisis but it will be some time before we know for sure. Overall, the picture is a lot less clear than the headline figures suggest and a lot of people are struggling still. That is probably why Labour’s focus on the cost of living, with policies such as an energy price freeze, is resonating well with many voters.
 
Yet the political challenges are real. The average person with a mortgage – a swing voter? – is experiencing low borrowing rates and lower increases in food and fuel bills. That suggests that, with both earnings growth and the increases in the personal allowance, he or she will be feeling a bit better about the future and will have more income available for spending on discretionary items as opposed to essentials such as utility bills. With a growing economy, Labour could face a greater campaign challenge next year: a Tory pledge to ease the cost of living with a tax cut during the next parliament.
 
What is certain is that it would be very ‘courageous’ indeed, to put it mildly, if Labour’s response was to increase taxes on income, as was floated over the weekend. To go into the general election, on the back of a cost of living campaign, with a pledge to hike national insurance to pay for increased NHS spending risks plays into the renewed myth that Labour’s default inclination is to boost taxes and spending. That is not to say there is not a case for some tax to be hypothecated with a contributory element to support health and long-term care. It could make a lot of sense. But any pledge to increase spending should only be made if voters believe the money will be well spent. A lot of work needs to be done first. Labour’s credibility deficit was not only about financial markets and debt levels, it was about being credible with voters who have seen their own spending power fall over the past decade.
 
That is why we have pledged to match coalition spending plans at the beginning of the next parliament, though we need to avoid defaulting to pretty much following their plans for specific cuts.

The time is ripe to emphasise Labour’s role as a dynamic party focused on wealth creation for all and we need to do so before other labels are firmly attached to us. That means the story has to be about investment, in infrastructure, education and training, and support for business through an investment bank. This agenda needs to include fiscal credibility and a simple tax system to encourage enterprise. Labour can meet the cost of living challenge today while ensuring people are not left lagging behind as the economy grows.

This article was first published by Progress on 24 April 2014.