The IFS says living standards have fallen under the coaliton, but Ed Miliband knows he must broaden the debate
Harold Wilson knew it. Margaret Thatcher knew it. George Osborne and Ed Balls both know it. When it comes to deciding the results of general elections, the cost of living matters.
The political message is as follows: governments that preside over an economy where wages rise more quickly than prices have a fighting chance of being re-elected. Those that don't tend to get kicked out.
That was true of Wilson, turfed out of office in 1970 as a result of the post-devaluation squeeze on living standards, and it was true of Thatcher, whose success in the 1983 and 1987 elections owed much to rising real earnings for those in work.
Little wonder, then, that the debate over the cost of living is hotting up as the next election starts to loom. Labour has been saying for months that real wages have fallen by £1,600 a year, on average, since the election. The Treasury has responded with its own analysis showing that take-home pay increased between April 2012 and April 2013 once tax changes were taken into account. Now it has made the additional claim that real earnings have been going up for those in the same job for more than a year.
Labour has one big advantage in this row: it has the Institute for Fiscal Studies on its side. The IFS is a thinktank with no political affiliation, and has been a thorn in the side of governments of both right and left over the years. Its analysis shows living standards fell for households rich, poor and middling in the first three years of the coalition's life. This extends a period of decline that began for all but the poorest 10% in 2007, when Labour was in power.
The IFS figures provide the truest picture because they take into account changes in earnings, prices, taxes and benefits. That cannot be said of the Treasury numbers, which seek to put the best possible gloss on the data by excluding part-time workers, the self-employed and those moving jobs from its analysis. Adjusting for the increase in the personal tax allowance but not the cuts to tax credits is also a sleight of hand.
No question, then, that living standards have been falling. Between 2010 and 2013 the hit was biggest for those at the bottom (a 5% drop), but over the entire period since the start of the financial crisis in 2007 the top 10% of the income distribution fared worst of all (a decline of almost 9%).
For those on low and middle incomes, the factors depressing living standards have been weak earnings growth and the rising cost of staples such as food and domestic energy. The top 10% of earners have been clobbered by higher taxes.
For Osborne, the good news is that the IFS is forecasting a pickup in real incomes growth during 2014. Inflation is coming down and lower unemployment should result in wage growth improving. The less good news is that the recovery will be too little, too late to compensate for the reductions in living standards earlier in the parliament.
The government therefore will fail the Ronald Reagan test. In 1980, when running for president against Jimmy Carter, Reagan put the question to the American people: are you better or worse off than you were four years ago? In 2015, the average Briton will be worse off than they were in 2010, and no better off than they were in 2005.
If history is any guide, this "lost decade" should make Ed Miliband a shoo-in to become prime minister next spring. So why then is the opposition leader trying to broaden the argument out from the cost of living to inequality? Simple: Miliband knows he can't entirely rely on past falls in living standards alone to deliver him the keys to Downing Street.
The decline in living standards was not triggered when Osborne marched into the Treasury in May 2010, it began on Labour's watch. And if voters blame Gordon Brown's administration for the economic horrors since 2007, the modest increase in living standards during 2014 may have a greater influence on the election outcome than the years of decline that went before.