In his Conservative conference speech last year, Boris Johnson broke with free-market orthodoxy by vowing to build a “high-wage” economy. After a decade of stagnant living standards, few quarrelled with this aspiration. But, as we have come to expect, the Prime Minister’s rhetoric has not been matched by action.
Because of higher prices and higher taxes, UK households are now facing the biggest annual fall in living standards since comparable records began (the average family will be £2,417 worse off this year). Far from advancing towards the high-wage society promised by Mr Johnson, workers have been instructed by Andrew Bailey, the governor of the Bank of England, to moderate their pay demands for fear of stoking further inflation.
Consumer prices are surging across the West owing to supply chain disruption and the post-pandemic recovery in some countries. UK inflation is at a 30-year high of 5.4 per cent. Mr Johnson’s government cannot be blamed for this. But it can be blamed for its inept response.
With the energy price cap about to rise by £693 (or 54 per cent) from April, the government should have intervened decisively, as it did during the Covid-19 crisis. An increasing number of UK households are being forced to choose between heating their homes and feeding their families. The number of children growing up in deep poverty has risen to 1.8 million.
Yet the Chancellor, Rishi Sunak, has merely offered a £150 council tax rebate and a £200 energy loan from October (by which time prices will have risen further).
Instead of this incoherent package, the government should have raised Universal Credit, as it did at the height of the pandemic. This would have concentrated support on low-income households and avoided burdening them with future loan repayments. But ministers, who removed the £20-a-week Universal Credit uplift last autumn, have an ideological aversion to increasing benefits and strengthening the welfare state.
At no point since the pandemic began have workers been less protected from its economic consequences. As the Resolution Foundation think tank has noted, owing to the end of the furlough scheme and the withdrawal of the Universal Credit increase, a single earner on £15,000 who loses their job now will see their income fall to 30 per cent of their previous earnings, compared to 40 per cent if they’d lost their job earlier in the pandemic.
What’s more, the government has confirmed that workers will pay hundreds of pounds more in tax with the rise in National Insurance contributions (from 12 per cent to 13.25 per cent) this year, and the freeze in tax thresholds until 2026. As a consequence, as Duncan Weldon writes on page 22, the UK will move from “the bottom third of the OECD group of advanced economies, in terms of tax levels, to the top half”. Indeed, by the mid-2020s the tax burden will rise to its highest rate since the early 1950s (at 36.2 per cent).
This, despite 12 years of Conservative-led government, is unsurprising. An ageing population, the climate crisis and heightened voter expectations all exert upwards pressure on taxation. The debate is no longer over whether governments should tax and spend more, but how they should do so.
By raising taxes on workers – including those earning as little as £9,880 a year – Mr Johnson made the wrong choice. The government should have taxed the UK’s vast housing wealth to pay for social care, rather than squeezing employees after a decade of pay stagnation.
Since the 1970s, house prices have risen by 166 per cent across the country and by 513 per cent in London. And yet for decades politicians have refused to tax this windfall. Even now the council tax bands are based on property valuations set in 1991 and no capital gains tax is paid on the sale of primary properties. Before raising taxes on work, the government should raise them on wealth.
The UK will not achieve its ambition of a high-wage economy simply by reducing low-wage immigration. Rather, Britain needs to learn from the strategies successfully pursued in Germany and the Nordic states: export-rich industries, high-quality public services and empowered trade unions that act as social partners.
As families face the grim prospect of two lost decades of living standards growth, the state’s duty is to protect them – or bear the cost of grave social consequences.
This article appears in the 09 Feb 2022 issue of the New Statesman, Sunak's Game