28 July 2018

The needless cost of living crisis


Even by the standards of the Resolution Foundation, a centre-left think tank that has become something of a one-stop shop for depressing discoveries about low-income Britain, their annual Living Standards Audit, published this week, contained some gloomy statistics.

It wasn’t the headline macroeconomic numbers that grabbed my attention (not least because they contradict the Office for National Statistics data). Rather, it was self-reported details of how difficult it is for so many households to make ends meet.

Consider, for example, that a staggering two-fifths of low to middle income families report that they cannot afford to save at least £10 a month. That excludes workless households (for whom the number is over 50 per cent).

The finding is yet another reminder of the troubling rise of in-work poverty. While work remains the best route out of poverty – the risk of being poor is far, far higher if you are out of work – it isn’t the panacea it should be.

For the left, this is a straightforward question of insufficient generosity on the part of the government. According to their account of recent economic history, eight years of Conservative-led austerity has left us with a shrivelled state unable to offer the support it should.

That theory runs aground on the awkward reality of just how much the government still does. And how much money it gobbles up.

According to the TaxPayers’ Alliance, the UK’s tax burden will reach a 49-year high this year, with taxes accounting for 34.3 per cent of GDP. Shockingly, the TPA also found that for the bottom 10 per cent of earners, nearly half of their income goes to the government as some form of taxation.

They may not pay much income tax, but all sorts of charges, VAT and council tax foremost among them, make life harder for low earners. That would suggest it’s government action – not inaction – that’s the problem.

As Ben Ramanauskas pointed out for CapX this week, the argument that the government is responsible for the squeeze being felt by so many becomes stronger still when you factor in the ways in which regulation – particularly the rules that constrain the supply of housing – pushes up the price of essentials.

The debate over Britain’s cost of living crisis would therefore seem to follow predictable ideological lines. Not enough government according to the left. Too much government according to the right.

It won’t surprise you to learn that I find the latter more persuasive. But perhaps the real problem is that the UK is caught in no man’s land between two alternative models of helping working families get by:  neither offering more support nor bringing down the cost of living so such support isn’t necessary.

Samuel Hammond has argued on CapX that the free market and social welfare are mutually reinforcing. He is right. A safety net for those at the sharp end of capitalism’s creative destruction makes the whole system more durable.

A similar logic applies to those in work but feeling the squeeze. If capitalism does not deliver for households doing everything they have been told they should do to get on in life, then the alternatives will inevitably start to look more appealing.

A largely government-induced cost of living crisis creates the illusion of a broken economic system. In truth, it isn’t an inevitable consequence of capitalism, but the result of a thousand misjudged political decisions.

This article is taken from CapX’s Weekly Briefing email. Sign up here.

Oliver Wiseman is Editor of CapX.