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25 November 2021

As inflation spikes, Labour must seize the agenda to argue for a fairer economy

A wage policy for the public sector and a new regime for household energy are needed.

By Paul Mason

Families all over Britain are facing a cost of living crunch. Consumer price index (CPI) inflation hit 4.2 per cent in October, with the broader retail price index (RPI) figure, including mortgage costs, now running at 6 per cent. And this is not being driven by wages. 

Staff shortages in the hospitality industry and among HGV drivers have fuelled some double-digit pay rises, however, overall wages have not kept up. Realtime calculations by the Trades Union Congress (TUC) show wages rising at just 2.2 per cent in the last quarter. If so, then for the first time since 2015 real wages in Britain are falling. 

What’s driving the inflation spike in the short term is clear: energy prices. Gas prices rose 28 per cent in the 12 months to October 2021, vehicle fuel by 22 per cent and household electricity bills by around 19 per cent. And this, in turn is bad news for the poorest, who spend around 35 per cent of their incomes on transport and housing costs.

On top of that there are tax rises. Even for someone earning £25,000 a year, says the Office for Budget Responsibility, the combined effect of recent tax rises and inflation will slice £180 a year off their real earnings.

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Until this month, economists (including a majority on the Bank of England’s monetary policy committee) were fairly relaxed about inflation. It’s a temporary spike, driven by surging global demand for everything from silicon chips to natural gas, and will work its way back to normal within 18 months, was the assumption.

Since 2008, when central banks flooded the global market with free money that has yet to be drained out again, we’ve been in an ultra-low inflationary world, compounded by the ever-present supply of labour from developing Asia and historically low levels of trade union membership and bargaining power.

It may not exactly be a “Goldilocks era” – for it’s the result of capitalism’s porridge gone permanently cold – but it’s survivable, went the argument.

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Now, however, there are pressures on policymakers to act – and according to the orthodox economic textbooks, there are only three things you can do if you want to stifle surging demand: raise taxes, cut public spending or change the policy of the central bank. 

Since the UK tax take is already at its highest since the 1950s, and the Tories are committed to spending their way out of the pandemic, it looks inevitable that the Bank of England will be forced into a token rate rise in December. 

The Bank of England’s official inflation target is 2 per cent – with a buffer zone between 1 per cent and 3 per cent after which, according to its remit, it is supposed to do something. Yet if it raises rates significantly – with December as the starting pistol for a series of 0.125 point nudges – the Bank will only worsen the crunch on household incomes, as mortgage payments (and with them rents) will start to rise.

We are, in short, reaching the end of the long period, beginning in the early 1990s, when economic management could be done primarily through interest rate decisions at the central bank. What the Bank does remains important and it should refrain from hiking interest rates next month, even as a token gesture.

But in pursuit of a more highly skilled, better paid and more productive economy – and a solution to the cost of living crisis – we’re going to need government, not the Bank, to take the lead.

Since the Labour Party conference Rachel Reeves, the shadow chancellor, has achieved that rare feat for an opposition: making the government and the press respond to Labour’s proposals, rather than vice versa. She argues that, as the CPI inflation figure grinds towards 5 per cent, the government should abolish VAT on fuel bills. That would slash around £60 off the average mid-sized household fuel bill (currently around £1,167): not earth-shattering but welcome, especially for the lowest paid who spend more of their incomes on energy. And it’s an argument that is gaining traction.

On top of that, Labour argues, the government should hike the minimum wage to £10 an hour immediately.

Reeves’ supporting argument is that working-class people are taxed too much full stop, because the tax take from transnational monopolies is so low that the working population has to bear the burden of public expenditure. She proposes to abolish business rates for brick-and-mortar businesses, and to hike taxes on the incomes of the wealthy, from shares, dividends and buy-to-let portfolios.

But Labour – and the labour movement – needs to go further. As Alfie Stirling, the director of research and chief economist at the New Economics Foundation, shows, Britain’s fundamental problem is the weakness of wage growth. Thirteen years on from the 2008 crisis, the real wages of British workers are still nowhere near reaching the level they were back then – and will not do so until 2026.

The atomised and insecure labour market created under Margaret Thatcher in the 1980s and sustained under Tony Blair and Gordon Brown after 1997 is to blame. Even in conditions of acute skills shortage, workers are not capable of forcing pay deals that match the rate of inflation.

One part of the solution would be for Labour to adopt an overt wage policy for the public sector, pledging – as a principle – to peg basic public-sector pay rises to (at the very least) CPI inflation. If enacted, this would discourage the private sector from draining the workforces of councils and care homes to meet their own shortages, leading instead to more investment in training. 

Another would be to design a new regime for household energy. The problem this autumn has not just been a surge in global gas prices. It has been the collapse of the energy retail companies, whose entire business model was based on unsustainably fixed pricing.

With Bulb’s 1.7 million customers now ditched back into the arms of the monopoly suppliers, and facing winter price hikes, we need something much more effective than the current price cap.

Energy supply companies claim that an “absolute” price cap, in a period of inflation, is a recipe for their own bankruptcy. They are lobbying hard for more frequent revisions of the cap, and for a move to “relative” targets – so that all household bills rise by a percentage of the global price rise.

The socially just answer lies in the opposite direction – a state energy company, with a monopoly of supply and distribution, removing dividends and speculative finance from the picture, and guaranteeing – at least for the poorest – an absolute maximum retail price for household energy, regardless of fluctuations in the global marketplace.

That would not only meet Labour’s principle of social justice, but also of climate justice. If, instead of being distributed by an artificially constructed marketplace, the UK’s wind, solar and nuclear generated electricity were earmarked for the poorest households, backed by a massive programme of state-funded insulation and renovation, it would be a major step towards abolishing energy poverty.

Labour leader Keir Starmer has spent the autumn nit-picking and retreating over his prior commitment to “common ownership” of the energy industry. But common ownership is ultimately the only solution for an industry that, in the first place, cannot function without repeated bankruptcies and shredding its own rule book, and in the second place, needs to cease burning carbon long before the middle of the century.

Labour, amid a welter of criticism from its left, has achieved something this autumn: it has begun to set the agenda – not just among the politically engaged, but among large numbers of hard-pressed people. They can see the logic of a VAT cut, of removing tax breaks from private schools, and of forcing the rich to pay tax at equal rates on their rents and dividends. 

How much better would it be if Labour could now, gloves off, make the case for the socialisation of energy – the insulation of the entire energy economy from the vagaries of the world market and from security of supply threats.

[See also: Labour has no hope of defeating the Conservatives until it answers the Brexit question]