Low private sector pay has been a crucial issue behind the UK’s inability to deal with its high level of debt, Invesco Perpetual’s Jonathan Brown has said.
The UK equities manager said while the weaker-than-expected economic recovery had been partly to blame, a major issue for the country was the lower-than-predicted level of wages across the nation.
Pay has become a major issue in the election, with Labour leader Ed Miliband proposing a “living wage” and aiming to tackle zero-hours contracts, which are estimated to be more prevalent in low-paid work.
Prime minister David Cameron has claimed he would implement an income tax-free minimum wage as a way of boosting the amount of money people have in their pockets.
Mr Brown said that dealing with low pay would be key, whoever was in power. He argued its low level had held the country back from tackling its debt.
“The main reason for the persistent deficit… is tax receipts,” he said. “The make-up of [government] taxes has been different in this economic recovery.”
Roughly 700,000 jobs had been created in the private sector during the recovery, Mr Brown added, pointing to research by Capital Economics.
However, given the fact tax receipts had been lower than the government had hoped for, this suggested many of these jobs had been created in sectors of the economy that paid below-average wages.
Tax receipts had fallen from around £700bn at the start of this government to roughly £650bn this year, leaving a fiscal deficit of £88bn between the government’s tax revenue and its overall spend of £738bn, he said. This left analysts questioning why the government had fallen short of its initial forecasts by £50bn.
“One explanation is that this recovery has been weaker than anticipated,” Mr Brown said.
“If economic growth had followed the Office for Budget Responsibility’s expected path, then nominal GDP would have been about 7 per cent higher than the outcome.
“This higher level of activity would have generated – as a natural consequence – the majority of the missing £50bn, with an extra tax-take of £35bn.”
The outstanding £15bn would have been recouped if the recovery had been distributed across higher-paying sectors, he said.
Recent months have seen a tentative rise in pay buoyed by a pick-up in employment. But as recent research conducted by the Resolution Foundation pointed out: “Real wages do not seem to be responding as much to unemployment falling as they did in previous recessions.”
However, Mr Brown said he anticipated a return to decent wage growth during the next parliament.
“As an investor in sectors exposed to the UK consumer, I would expect this unusual situation to normalise,” he added.
“If so, the recovery should help to benefit the consumer sector rather more under the next government than it has under this one.”
