What's your answer?

What's your answer?


At the end of June the Chancellor Alistair Darling warned that inflationary wage rises are confined to the past, and calling for wage restraints, he stated the Exchequer had learned from previous periods of financial concern and would not allow rising costs to be ultimately crippling for the economy; wages increases would therefore be below inflation. Despite those on the lowest salaries being most severely affected in their daily living expenses, Mr Darling claims that we mustn’t let the fear from financial hardship surpass common sense.

With the predictions of the rising rates of inflation from Mervyn King to in excess of 4% by the end of the year, there does not appear to be an imminent end in sight to the current state of the financial market. Indeed, as investors lose faith in the sustainability of any positive market period, much needed injections of capital are not forthcoming. This in itself perpetuates the cycle of financial uncertainty, and further, causes the downward spiral to gather pace.

The stability afforded by the hold on the base rate has further been undermined by the banks, with the major lenders showing reluctance to pass on this hold for the benefit of the consumers; lenders rates reached a record high in May this year. This led to a 28% fall in approved home loans in the same month, despite the special liquidity scheme put in place in April to ease the costs of inter bank lending, and reopen the markets following a severe tightening of lending criteria. With loans therefore beyond the grasp of many people, and with wages restraints amounting to the equivalent of a pay reduction for many unions it is unsurprising that reactions to Alistair Darlings comments have been resounding in criticism.

However, in navigating a path through the current economic slowdown, the reactions to every action must be given full consideration. If wage restraints are lifted inflation in turn increases, causing interest rates to be raised. Although this can reaffirm a healthy competition to the markets, in the midst of a credit crunch this can perpetuate the cycle of increased prices. This ultimately leads consumers back to the same issue: wages are not sufficient to cover the cost of everyday living to a standard expected from this economy, thus allowing inflation to become a rampant factor embedded in the financial markets.

By contrast, if wage restraints are enforced and inflationary pay rises are rejected, there is no respite from the daily effects of the credit crunch. Considering the price of oil is continuing to hover around $150 a barrel, and with food prices globally causing huge inflation increases, coping on a salary that no longer covers an expected standard of living is a situation that is understandably unacceptable to the majority. In our culture of immediacy it is easy to understand the impatience for a turn in financial fortunes. But have we become a society that is only prepared to ride the crest of the wave, without actually learning to surf?

The balance between an economic slowdown and rising inflation rates is something that is currently being thrashed out between politicians, analysts and journalists alike; the common concern being the standard of living being afforded by everyday people, and the sustainability of the commercial sector on which our economy so heavily relies. This concern is further perpetuated by announcements this week that Mervyn King has rejected a pay increase of almost 40%. Some would consider this appropriate, and indeed it has been reported that Mr King undertook this decision as a way of leading by example in not accepting an above inflation pay rise. However, according to the government’s National Statistics Survey the average disposable household income was £13,800 in 2007, which has arguably decreased during the credit crunch, whilst Mr. King enjoys a salary of over £290,000 with a pension of just under £5m; in light of this, Mr. King’s gesture seems at best without merit, and at worst wholly insulting to the millions of Britons who face daily struggles during this turbulent time.

Ultimately, the question is therefore one of a solution that will simultaneously satisfy the majority of the population and restore the financial markets to a position of prosperity. What’s your answer?

Tori Roberts

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