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.

Photo: Getty
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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