16 October 2017

There’s a simple solution to the cost of living crisis


When Theresa May stood on the steps of 10 Downing Street as the new Prime Minister back in July last year, she promised that social justice would be at the very heart of her policies. This was followed by her first conference speech as leader where “the good that government can do” was the repeated refrain with a raft of policies designed to make life easier for those on low and middle incomes.

This all seems like a long time ago now, and although she has sung the praises of free markets more recently, it is clear that Theresa May still feels as though the most effective way to tackle poverty and to improve living standards is through government intervention. Take the energy market, where this Conservative government is going to intervene by introducing price caps. On housing, the government is going to intervene further by extending Help to Buy.

There is now a consensus among the three main political parties which is driven by both compassion and opportunism: many people in the UK are struggling to make ends meet, therefore the government should intervene in order to reduce the cost of living. With millions of people finding it increasingly difficult to pay for life’s essentials, it makes perfect sense for politicians to place the cost of living at the heart of their offering.

This morning I left my house (the rent for which takes a significant chunk out of my income) and found that I needed to top up my Oyster card yet again as I travelled to do my weekly food shop (the cost of which is getting increasingly expensive). This evening I will find myself spending quite a lot of money on a few drinks and dinner with some friends in a restaurant in order to discuss our upcoming trip to Germany. Tomorrow morning I will be topping up my Oyster card yet again as I travel to work, knowing that on payday (which often feels a long way away), a proportion of my earnings will be confiscated in the form of income tax and national insurance.

This is a story which will be familiar for many people. For many more, however, going out for a meal or going on holiday are luxuries which they simply cannot afford.

However, as my new paper for the TaxPayers’ Alliance reveals, far from ameliorating this problem, government intervention only makes things worse. And the major parties’ proposes solutions will compound it further.

In almost every area of life, government intervention and taxation is making us all poorer. Housing, transport, grabbing a drink with friends and going on holiday are all things made more expensive by government.

For example, rental prices in the UK are the highest in the EU and among of the highest in the world. I have written before for CapX on how planning regulations result in limiting the supply of housing which results in it being incredibly expensive. This, coupled with stamp duty, means that home ownership is an unaffordable dream for millions of young people in the UK.

The price of food is inflated as a result of the EU’s Common Agricultural Policy and Common Fisheries Policy. The Common External Tariff acts as a tax on food from outside the European Economic Area, pushing up prices for UK consumers. Furthermore, subsidies to EU farmers not only places an extra burden on UK taxpayers, but means the agricultural sector has become sluggish and uncompetitive. Again, the victim here is the British consumer.

When New Zealand drastically cut subsidies to its farmers, they became more efficient and sold their produce at a lower price. Compare this with Switzerland, which heavily subsidises its agricultural sector and where prices are very high. Then there are the misguided safety concerns which result in UK consumers being prevented from purchasing cheaper food products even though they perfectly safe to consume.

Childcare, despite being heavily subsidised by taxpayers, is more expensive in Britain than almost anywhere else. That is partly thanks to government regulation. For example, when compared to other advanced economies, the UK has very stringent regulations about child to adult ratios and the level of education required for staff. Research conducted by Thomas & Gorry found that these regulations have a significant impact on childcare costs.

During her time as Parliamentary Undersecretary of State for Education and Childcare, Liz Truss recognised that these regulations were placing pressure on household budgets and suggested relaxing them. She was blocked by the then Deputy Prime Minister Nick Clegg, who erroneously claimed that it would not lower childcare costs. As the new paper argues, if the UK relaxed the regulations about childcare, then households could save thousands of pounds each year.

These are just a few examples of how government regulations increase costs for households in the UK. The government also places extra pressure on household budgets through taxation. For example, motorists are hit particularly hard as Fuel Duty in the UK is one of the highest in the world and they also have to pay Vehicle Excise Duty and Insurance Premium Tax. Going on holiday is also made more expensive by the government, with Air Passenger Duty for flights from the UK among the highest in the world.

The government also levies Pigouvian taxes on tobacco and alcohol consumption which increases the price and places an extra burden on households. Tobacco duty hurts the most vulnerable in society to a disproportionate extent. Those on low incomes, the unemployed, the homeless, and people suffering from mental health conditions such as depression and schizophrenia are far more likely to smoke than the general population.

More obviously, before we can even think of spending our hard earned money, the government takes some of it away in the form of income tax and national insurance contributions. This places yet further pressure on households who are struggling to make ends meet.

The Conservatives are right to be concerned about the high cost of living in the UK. The fact that millions of people are struggling to make ends meet is wrong – and could cost them dearly in the next election.

But their existing policies will only make things worse. Government intervention in transport, housing, food, and energy has resulted in increased prices for consumers. Moreover, high levels of taxation place increased pressure on household budgets and often hit the poorest and most vulnerable in society hardest. Although often well intentioned, government regulations exacerbate the high cost of living in the UK. As Ronald Reagan said in his Inaugural Address in 1981: “In this present crisis, government is not the solution to our problem; government is the problem”.

If Theresa May and the Conservative Party are serious about tackling the cost of living crisis in the UK then they will abolish many of the unnecessary regulations and reduce the tax burden, both of which place undue pressure on British households’ budgets.

Ben Ramanauskas is a Policy Analyst at the Taxpayers' Alliance