We need a Budget that tackles the living standards crisis. This won't be it

Help for first-time buyers and childcare tax relief ignore Britain's fundamental supply side problems.

Though it may seem hard to remember a time before 'the crisis of living standards' tripped off the tongues of politicians and wonks, in truth it really only entered the economic lexicon after the crash. Economic forecasters believe the toxic cocktail of stagnating wages in the middle and lower part of the wage distribution since 2003; the lack of availability of cheap credit to boost incomes since the financial crisis in 2008; and increasing prices of big-ticket items like housing, transport and energy bills is not going away any time soon. The squeeze that families are experiencing in trying to make ends meet is one of the key issues that politicians from left and right have to grapple with. It doesn’t seem unreasonable to ask, therefore, what the Chancellor’s Budget tomorrow – the big economic set-piece policy event of the year – is going to do about it.

The Budget needs to meet both a short-term and a long-term living standards test. In the short-term, there’s not much available to the Chancellor save using the tax and benefit system to do what he can to ease the burden on families. It’s these short-term levers that all of the pre-Budget speculation has focused on: wealth taxes, childcare subsidies, accelerating planned increases in the personal allowance, and delaying the rise in fuel duty. Osborne’s problem though is that his hands are tied because he has indicated he won’t be budging from his Plan A: reducing public spending and increasing taxes as a way of trying to close the deficit – when from a macroeconomic perspective, he would be better off filling this gap by using demand-side policies to boost family incomes that would also ease the living standards squeeze, and by investing in infrastructure that could also immediately help to create jobs and demand at the same time as delivering long-term returns.

So the expected announcements on childcare tax breaks and fuel duty, even taking into account the increases in the personal allowance already announced, are very unlikely to outweigh the hit that families – particularly families with children – have taken since 2010 – cuts to child tax credits, working tax credits, other working and non-working benefits and child benefit. The majority of families will most likely be worse off as a result of overall changes to the tax and benefit system since the general election: a net negative effect on living standards.

A mansion tax – the most radical tax proposal on the table from both Labour and the Lib Dems – could be of huge symbolic significance: a sign that we are all genuinely in it together, and that it is not just for families of moderate means to bear the burden of spending cuts. Yet a tax of 1% on homes worth over £2m would only raise a modest £1.7bn, less than half of what it would cost to reduce the basic rate by 1p by the Treasury’s own calculations.

These sorts of figures show the issue with focusing on the tax-benefit system as more than a short-term solution to the living standards issue. Even pretty substantial changes to the tax-benefit system can only go so far to address the impacts of some of the long-term economic trends that sit at the heart of the living standard crisis. Wage inequality has grown over the past thirty years: if current trends continue, the High Pay Commission has predicted that by 2035 the top 1% of earners will take home 14% of national income, a ratio last seen in Victorian England. Wealth inequality and the cost of housing has increased, fuelled by a housing price bubble: for the first time in recent history, the majority of under 35s on low to middle incomes live in private rented property. Transport and energy bills are forecast to continue to rise, even though some of these companies’ profits seem to be healthier than ever.

In reality, using the tax-benefit system to fix growing inequality in living standards in the long term is not going to cut it – growing wage and wealth inequality cannot be fixed with ever-greater redistribution. Moreover, there is a renewed recognition, particularly on the centre-left, in the idea of the dignity of labour: that it is fundamentally wrong that people are not able to earn enough to support their families through working full-time, a situation many in minimum-wage jobs find themselves in.

What does that mean for tomorrow’s Budget? If it were really going to grapple with some of these long-term issues of predistribution, it would explicitly be trying to shift policy towards trying to boost real wages in the bottom half of the wage distribution and bringing down the costs of housing, childcare and energy.

There are two key problems with this approach. The first is that no politician – or indeed, economist – really has the answer on how to change the shape of the wage distribution. It probably needs to be some sort of mix of industrial policy, skills policy and policies to empower employees to demand a better deal in the workplace. Yet there is a big elephant in the room: our low skill, low-pay service sector that has grown as a result of the increase in the number of high-skill jobs that have been created in recent decades. The UK can be characterised as a relatively high wage inequality country with a moderately sized redistributive state.  There are other models around the world – Sweden, which has relatively high wage inequality but a larger redistributive state funded through higher progressive taxation, which makes possible the provision of universal free childcare; or Japan, which has low wage inequality and a relatively small state. We can look to Sweden or Japan as exemplars but the reality of trying to transition to a different model is there is no clear policy path to follow. It is much harder to predict the impact of a particular industrial policy on living standards than it is changes to the tax and benefit system.

The second is that while there are much clearer proposals for what to do on big-ticket spending items like housing, childcare, energy and transport, the solutions are radical for a Conservative Chancellor. For example, on housing, building more houses has to be a core part of the solution. On childcare, it would be more efficient to concentrate on expanding the supply of free childcare places. Yet in both of these areas, George Osborne will be announcing demand-side reforms, through help for first-time buyers and childcare tax relief. Neither address the fundamental supply side issues.

Unfortunately for Britain’s families this means the Budget tomorrow is likely to fail on both a short-term and long-term test.

The Treasury. Photograph: Getty Images

Sonia Sodha is head of policy and strategy at the Social Research Unit and a former senior policy adviser to Ed Miliband. She tweets @soniasodha.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump