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22 March 2022updated 23 Mar 2022 6:24pm

Leader: The return of stagflation

Rather than poorly targeted tax cuts, the UK needs a more generous welfare state to protect individuals from the living standards crisis.

By New Statesman

The living standards crisis was not in the British ­government’s economic script. As Covid-19 restrictions were ended, the promise was that we would collectively accelerate ­towards the sunlit uplands of recovery.

Yet even before Russia’s invasion of Ukraine, this was wishful thinking. The pandemic, and the inflation triggered by supply shortages, was always likely to continue to depress growth. Far from enjoying the fruits of the “high-wage economy” promised by Boris Johnson, UK households are forecast to suffer the biggest fall in living standards since the 1970s (around £1,000 a year). And, it bears remembering, average real weekly wages are already below their pre-crash 2008 level. Even if the British economy avoids a formal recession, families will suffer the equivalent of one. We have entered a grim new era of stagflation.

Cabinet ministers have been swift to reframe the squeeze as an economic “sacrifice” in solidarity with the Ukrainian people. But the truth, as Martin Lewis, the founder of the website Money Saving Expert, has observed, is that the cost-of-living crisis long predated the war: “The rises in energy, heating, oil, water, council tax, broadband and mobiles, food, National Insurance, were all in place before [Russia invaded] Ukraine.”

The UK government cannot be blamed for the global surge in inflation (which could now peak at 10 per cent in the UK). But it is culpable for its complacent response. It chose to reverse the £20-a-week increase in Universal Credit, despite the inevitable strain doing so would place on household finances. It chose to tax work by increasing National Insurance – a move that will hit workers earning as little as £9,880 – rather than taxing unearned wealth. And it chose to offer only minimal support to households faced with a £693 rise in the energy price cap (to £1,971).

Rather than ill-targeted or environmentally harmful tax cuts – such as further reductions in fuel duty – the government should be boosting the incomes of the poorest. The bottom tenth of households spend proportionately three times as much on energy as the richest tenth and are too often forced to choose between heating their homes and feeding their families. The number of children growing up in the UK in deep poverty has risen to 1.8 million. Despite this, benefits for working-age people and pensioners are due to rise by just 3.1 per cent next month – far below ­forecast inflation – leaving both groups unprotected against price spikes.

The Chancellor, Rishi Sunak, must ensure benefits do not fall in real terms and should build a more resilient social security system by raising Universal Credit to the European average. For too long, governments have outsourced the job of sustaining living standards to credit-lenders – a system of “privatised Keynesianism” under which individuals, rather than the state, take on debt.

Mr Sunak, a passionate fiscal conservative, will plead that the public finances cannot bear the weight of higher spending. But government borrowing this financial year is £26bn lower than forecast and – as the Chancellor knows but won’t say – higher inflation reduces the value of debt, meaning he has more room to support households. Should Mr Sunak nevertheless wish to prioritise deficit reduction, there are alternative sources of revenue available to him. Rather than squeezing employees after a decade of pay stagnation, the government could, finally, adequately tax the UK’s immense housing wealth. (Since the 1970s, house prices have risen by 166 per cent across the country and by 513 per cent in London.)

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Britain’s living standards crisis did not begin with the pandemic or with the Conservative austerity of the last decade. Rather, it reflects deep-rooted flaws: an economy that is too unproductive, too unbalanced and too unequal.

When Mr Johnson declared in his Tory conference speech last year that “we are not going back to the same old broken model with low wages, low growth, low skills and low productivity”, his diagnosis of Britain’s economic defects was correct. But, as was the case under his predecessor, Theresa May, analysis has not been equalled by prescription. The UK will not achieve its ambition of a high-wage economy simply by reducing low-wage immigration. But before renewing Britain’s economic model, the government’s first duty is to end the financial emergency confronting families. If it fails to do so, we will pay the price for years in untold social ills.

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This article appears in the 23 Mar 2022 issue of the New Statesman, A Dream of Britain