25 July 2018

A greedy government is the biggest problem for struggling families


Millions of families are no better off than they were back in 2003. According to a new report from the Resolution Foundation, incomes for all households in 2017/18 increased by just 0.9 per cent, the lowest rise for four years and less than half the average between 1994 and 2007, just before the financial crisis.

This has led to some troubling consequences for what households can afford to spend, with the impact being felt particularly hard by children in low and middle income families. For example, over 40 per cent of low to middle income households cannot afford to save £10 or more each month. What is more, holidays, school trips, and sports activities for children are simply unaffordable for the poorest families.

Something has clearly gone very badly wrong if so many people are struggling in one of the richest countries on the planet. So, what is the root of the problem and how do we fix it?

First, according to the Resolution Foundation it is the families with non-working adults who are the worst off. This, in a way, is unsurprising. The OECD, the Joseph Rowntree Foundation, and the Centre for Social Justice have all carried out research which shows that, while not a panacea, work provides the best route out of poverty and allows people to increase their standard of living.

Given the UK is experiencing a record low level of unemployment and a skills shortage, the job market should be wide open for those trying to find work. Of course, things are not quite that simple. In the past, many households would actually have been in a more precarious financial situation if they moved from unemployment benefits and started to work.  Despite well-publicised problems with its implementation, the rollout of universal credit should put a stop to this.

There are also concerns about the high cost of childcare which prevent many parents from working. Those who can work should be encouraged to do so, but the Government should ensure that those who do are not worse off as a result.

But what of those on low and middle incomes who are still struggling? It cannot be right that those who are working hard should face such difficulties. In the vast majority of cases it is the Government which is to blame.

New research from the TaxPayers’ Alliance has found that the tax burden is at a 49-year high. Staggeringly, the bottom ten per cent of earners in the UK pay 49.5 per cent of their income in tax. It is clearly immoral, not to mention counter-productive, for the Government to take so much money from those who have so little.

There is a cost of living crisis in the UK, and taxes are a big part of this. Not only are households paying income tax, national insurance contributions, and council tax, they are also paying duty on fuel, tobacco, and alcohol, VAT, and taxes for simply driving a car. Many of these taxes hit the poorest households hardest.

And it’s not just the taxes paid directly by households which exacerbates the cost of living crisis; taxes levied on businesses such as corporation tax and employers’ national insurance contributions also result in lower wages.

Despite the heavy burden placed on households by the tax system, too often the Government devotes itself to thinking up new schemes to squeeze more money out of people, rather than making life easier for the worst off by cutting taxes.

It’s not just taxes which contribute to our high cost of living. A thicket of red tape in pretty much every area of life also loads on extra costs to both families and businesses.

The most obvious one is housing. As has been pointed out on CapX and elsewhere, a very restrictive planning system results in very high house prices. Childcare is also incredibly expensive when compared to other highly developed countries, mainly thanks to strict rules relating to child-to-staff ratios and also qualification ratios. Simply changing the rules to match the best continental systems would slash the cost of childcare.

If the Government simply lowered and abolished some taxes, liberalised the planning system and imposed less onerous restrictions on childcare providers, we would start to see the cost of living decrease.

While these factors partly explain the difficulties many households face, they do not account for the sluggish wage growth the Resolution Foundation identifies.

Above all, low wages are the result of low productivity. By the same token, increased productivity is the driving force behind increased wages and a higher standard of living. As Nobel Laureate Paul Krugman once stated: “Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”.

Research by the TaxPayers’ Alliance has found that if we could increase productivity to US levels, British workers could expect an average yearly pay rise of some £8,540.

There are several ways in to tackle the issue. One has already been mentioned – liberalising the planning system. Not only does poor planning regulation make houses more expensive, it also hurts productivity and economic growth. Liberalising the planning system would mean people have more money to spend on things other than rent, as well has making it easier to move to a new area for work.

Then there is transport. Congestion on the roads and the railways lowers productivity by producing longer and less pleasant journeys. For starters, the Government should stop subsidising rail travel, which only makes the problem worse.

It should also abolish vehicle excise duty, reduce fuel duty and introduce a road pricing system. Wasteful and ineffective infrastructure schemes such as HS2 should be scrapped, with the funds being reallocated to more productive areas such as commuter railways and road improvements.

Ministers also need to look seriously at product regulation – a subject of intense debate as we prepare to leave the EU. As well as driving up the cost of production directly, compliance costs deter new entrants which weakens competition, protecting low-productivity incumbents.

For example, a 2012 paper found that increased regulation leads to a decrease in productivity and economic growth. A further report from the World Bank found that “the relationship between more business-friendly regulations and higher growth rates is consistently significant”.

These are just a few of the ways in which productivity can be increased in the UK. Others include cutting corporation tax and stamp duty, cutting government spending and removing barriers to international trade.

There is a cost of living crisis in the UK. If the government is serious about ending it then it should lower taxes and scrap regulations which exacerbate this problem.

Ben Ramanauskas is a Policy Analyst at The Taxpayers' Alliance