No pay recovery 'for two years'

Annual wage rises are not expected to return to their historic norm of around 2% for a couple of years, the head of the UK's official fiscal watchdog has told MPs.

3633fe28-60f7-11e3-ba6f-0a0c0223000020131210T084635
Office for Budget Responsibility (OBR) chairman Robert Chote says there is only a weak recovery in incomes.

Annual wage rises are not expected to return to their historic norm of around 2% for a couple of years, the head of the UK's official fiscal watchdog has told MPs.

Office for Budget Responsibility chairman Robert Chote said that falling real-terms wages, coupled with increasing house prices, were eating into household savings and holding down living standards.

Giving evidence to the House of Commons Treasury Committee, Mr Chote said that the improved economic growth reported by the OBR at last week's Autumn Statement had not been matched by the boost in productivity which would feed through into improved living standards.

"We have a relatively weak process of incomes recovering," said Mr Chote. "We are still waiting for productivity growth to pick up. The expectation would be that that would lead to earnings growth.

"In terms of real earnings, we don't get the sort of 2%-a-year real growth in wages and salaries that people would have been used to on past historical experience for a couple of years still.

"So we have consumption rising faster than that, leading to a relatively modest fall in the savings ratio."

The OBR makes no judgment on the level of saving which is best for the economy, said Mr Chote.

Last week's Autumn Statement saw the OBR upgrade its forecast of GDP growth for this year from 0.6% to 1.4% and for 2014 from 1.8% to 2.4%, but downgraded predictions for the following three years.

Mr Chote said that the improved growth in 2013 and 2014 appeared to be driven by consumption and housing factors, rather than business investment.

"In past recoveries you would expect to see robust investment rising as a share of GDP at this stage," he told the cross-party committee. "One reason that hasn't happened is that firms' expectations of profitability hasn't been high. That can be linked to the fact that there is weak productivity.

"In the absence of productivity growth, you don't get the growth in real incomes and living standards that most people would think of in this context."