Living standards are set to fall at their fastest rate since records began in the mid-1950s. Last month, the Office for Budget Responsibility predicted that real household incomes will fall by 2.2% this year, as energy and food prices increase but wages fail to keep pace with rising bills.
The impact will not be felt equally. For some, it will barely register. For other families, it will mean difficult decisions about what to cut back on. For others still, it will be profound, stretching precarious budgets in which there is already no give, forcing impossible choices between essentials such as putting food on the table and keeping the heating on, and sharpening the fear of the unexpected outlay that can trigger a debt spiral from which there is no escape. One estimate suggests lower-income households will face a drop in income of £1,300 this year.
Last week, the latest thinking from ministers on how to address this crisis in living standards trickled into the headlines after a cabinet “brainstorming” meeting. Grant Shapps, the transport minister, proposed moving car MOTs from once a year to once every 24 months, saving a one-car household a paltry £23 a year, at the risk of jeopardising road safety. The education secretary, Nadhim Zahawi, suggested increasing the maximum number of children an early-years worker can be responsible for in order to modestly reduce the cost of childcare. Others around the table reportedly suggested unilaterally scrapping tariffs on food imports, which would weaken Britain’s hand in trade negotiations, and scrapping government commitments to reduce carbon emissions, a move that would create significant long-term economic and environmental costs for the UK.
The shallow suggestions reveal the government’s desperation to give voters the impression it is taking action to address these harsh economic circumstances, but without spending any money. They are not serious policies, but fodder for press releases before the local elections.
Britain is experiencing a prolonged economic malaise. Wages have been mostly stagnant since the financial crisis, productivity has barely grown since then and sits 15% below the United States, Germany and France, and external shocks – the self-inflicted pain of leaving the EU’s single market and customs union, and the war in Ukraine – have sent prices rocketing.
There are no shortcuts to increasing living standards. Any approach has to be three-pronged. First, economic policy needs to target rising productivity and to ensure the spoils are shared evenly with employees through increased wages, particularly for those in low-paid work. One of the reasons in-work poverty rates have risen is that there are too many jobs that simply do not pay enough to enable people, particularly those with children, to ensure a minimum standard of living. That can be achieved only by narrowing the growth gap between London and the south-east and the rest of the country. It would take, at the very minimum, a radical rebalancing of government investment in transport, infrastructure and skills away from the richest regions of the country, which already receive more investment per capita, towards the poorest. Brexit has only made this task harder; it is forecast to significantly reduce exports and to increase regional inequalities over the long term.
Second, the real-terms cuts to benefits and tax credits of the past decade for low-income families with children must be reversed. In an economy with significant amounts of low-paid work, there will always be a need for government to redistribute income towards low-income parents. Yet successive Conservative chancellors have reduced the value of benefits and tax credits over time, with some families losing the equivalent of thousands of pounds a year from their household budgets, while delivering expensive income tax cuts that have disproportionately benefited more affluent households. This is another key reason why in-work poverty rates have increased and why, in a country as rich as ours, there are people, including those in work, relying on food banks to feed their children. The support that the chancellor, Rishi Sunak, has announced to help families with energy bills is too thinly spread, including across households for whom it is not critical, leaving the poorest families horribly exposed.
Last, the government needs to implement structural reforms to tackle the high cost of living. The most important of these is housing, the costs of which erode too much of people’s pay cheques in one fell swoop. The UK has never built enough housing without significant public sector investment into social housing; yet social housebuilding levels have dropped dramatically since the 1980s, leaving the social housing stock to dwindle as a result of demolitions and the right to buy. This has pushed more and more people who have little hope of ever buying their own home into an overpriced private rented sector. Britain urgently needs a programme of public investment in housebuilding to create more affordable homes for rent.
These are long-term economic reforms that require sustained investment. Even if put in place immediately, they will take time to fully deliver for the economy. Yet this is a government that swings from crisis to crisis, with little willing or capacity to plan for the next decade and a dearth of ideas to address Britain’s very real and structural economic problems. This lackadaisical approach will probably consign us to years more of sluggish growth that drives increasing numbers of families with children into poverty.