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23 March 2022

Rishi Sunak could stop the living standards squeeze if he wanted to

The government's deference to the market is transforming inflation into a full-blown crisis.

By James Meadway

The Spring Statement this week, like so many other “fiscal events” staged by the government in the past two years, arrives at point of a deepening crisis. After a year of consistently rising prices across the developed world, the aftershocks from Russia’s brutal invasion of Ukraine have caused prices of essentials such as wheat and natural gas to soar still higher. Even the conservative Bank of England forecasts inflation to reach as much as 7 per cent this year.

Next month, with the raising of the energy price cap, a typical household in Britain will face a 56 per cent rise in their energy bills, up nearly £700 a year. There will be an increase in people’s National Insurance Contributions, and increases in the price of food and transport will continue to run well ahead of the headline inflation rate. The stage is set for what could plausibly be the worst decline in living standards in Britain since the early years of the Industrial Revolution.

Yet Rishi Sunak, the Chancellor, gives every impression of sleepwalking through the crisis. A cut to fuel duty would grab headlines but 5p off the current rate (as is being floated) will have little effect when the price of a litre of petrol has risen by four times that much since January. Worse, reducing the amount the government collects from the sale of a litre of petrol does nothing about the profiteering of companies such as BP, whose chief executive described the company as a “cash machine”.

There is no economic justification for the super-profits the oil and gas producers are raking in from rising global prices: they have introduced no new technology, changed nothing about their business model, discovered no major new sources of oil. None of these usual justifications for profit-making apply. Under these circumstances, the oil and gas companies should be squeezed hard by government.

This could be in the form of taxes. The UK’s tax regime for North Sea oil is “one of the most favourable in the world” — the government takes in $2 per barrel produced compared with $22 levied by Norway — so there is plenty of scope here. Labour’s proposed windfall tax at least understands this.

But taxes would not directly address the crisis, which is being driven by price rises. A legal limitation, perhaps setting a maximum price for fuel, would halt them. The oil companies and their ideological apologists would squeal blue murder about such an offence to the sacred Laws of the Market (and oil company profits), but hard-pressed families that rely on their cars would thank the government for it. Government finances would be unaffected, but car drivers would pay less and oil companies would make less profit.

Of course, we want to reduce gas-guzzling car use, which would be best done with clean, cheap, accessible public transport. We want better-insulated, more fuel-efficient houses, too, and heating run from renewable electricity rather than natural gas. All of this takes not only money but time. This is the problem that some of the progressive responses to the cost-of-living crisis have run into. It is true that we need to rapidly move away from carbon-intensive energy production, and that in Britain wind farms are the way to make this happen. Cheaper than natural gas and even coal, wind is the future for British electricity production, but it takes two years to move a wind farm proposal from an initial feasibility study, through planning to construction and operation. Investing in the clean, green future does precisely nothing for a crisis hitting pockets today. We need action whose effects will be immediate. This should include controls on the price of essentials.

The central problem is that the cost-of-living crisis is the product of two major forces. The first of these is well known and uncontentious. The global instability of the last few years, from the catastrophic disruption caused by Covid, through a series of smaller environmental crises like wildfires and droughts affecting food production, to Russia’s invasion of Ukraine, has clearly made it harder to produce and distribute some essential goods.

The second factor is referred to much less frequently. This is the conflict over how society distributes the resources it can produce. Shocks to the supply of goods only result in price rises because of the way we organise our economy. If the price paid by motorists for petrol has risen sharply, and oil producers are making massive profits, the supply shock has provoked a distributional conflict that the oil producers are winning. They are merely exploiting their market power in a crisis.

Historically, struggles over distribution have played out as both higher inflation and higher wages. The classic period of this struggle was the late 1960 and 1970s, when inflation was significantly higher than today but, because wages rose faster still, living standards improved in Britain, at least until the mid 1970s. The struggle over how society’s resources should be distributed played out as a struggle over wage rises because, at the time, trade unions were far stronger than today and could demand higher wages. Governments across the world tried to manage the conflict between wages and profits with loose monetary policy, cutting interest rates and making borrowing easier. Everyone, in theory, could then get more money in the form of wages or profits — at the cost of that money becoming less valuable via inflation.

The same conditions do not apply today, and talk of either raising interest rates or restraining pay to deal with inflation addresses the problems of decades past, not those of 2022. Instead, with much weaker trade unions, the distributional struggle is resulting in those with market power — meaning larger companies — making super-profits through higher prices.

Some of these higher prices are directly under government control. Ofgem is a government agency that could easily set a lower energy price cap, with the government nationalising smaller, loss-making gas suppliers as they did in November with Bulb Energy. Sunak could halt the increase in the cap with the stroke of a pen.

There are other important prices already regulated by government, which sets a price “floor” for the cost of labour, otherwise known as the minimum wage, introduced by Labour in 1999 and then reinforced by the Tory chancellor George Osborne with the introduction of the National Living Wage. For some time the Tories have been bragging about their inflation-busting increases in its level, with a 6.6 per cent rise pencilled in for April. This looked much better at the time of its announcement, when the rate of inflation was 4.2 per cent. It is plainly too low now. A double-digit increase would be more appropriate, with employment tax cuts for smaller employers to compensate for the extra costs.

Sunak looks set to fail the test of the crisis, offering a fuel duty cut that will squeeze government tax revenues while removing scarcely a week’s worth of price increases. The raising of the energy cap will go ahead. The National Insurance increase will probably still come into force. National Living Wage rises will fall behind inflation. The government’s dogged commitment to market mechanisms will fail millions over the next 12 months. We have already seen mass protests in Europe against high prices, in France’s gilets jaunes movement in 2018 and, more recently, demonstrations in Spain. With its government drifting into a cost-of-living catastrophe, Britain is surely ripe for the same.

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