Governments underestimate the power of celebrity at their peril. First it was Marcus Rashford and his campaign for hungry children. Now it is Jack Monroe pointing out how the official inflation figure bears no relation to the real cost of living increases facing the neediest households.
The footballer and the chef have performed an important public service by highlighting, in a way that official statistics and thinktank reports can’t, just how tough life is on or close to the breadline.
It is often said Britain is a wealthy country, which indeed it is. But if you rely on food banks it doesn’t really matter if house prices are going up and the stock market is booming. The poorest 10% of households in the UK have negative net wealth, because their debts are higher than the assets they own.
Monroe’s point about inflation is well made. The official measure of the cost of living does not reflect the lived experience of people across Britain and was never intended to. The consumer prices index doesn’t show whether those on low incomes are being affected by supermarkets cutting back on value ranges. Nor does it reflect the fact that richer households have savings to draw upon when times get tough. What’s more, as the Resolution Foundation has pointed out, soaring energy prices act as a form of deeply regressive tax, with the poorest households hit hardest.
This is the background to the deepening cost of living crisis and what the government should do about it. One thing is already obvious: a toxic brew of rising housing costs, dearer energy and higher taxes means ministers have to come up with something. Doing nothing is only an option if they are prepared to risk oblivion at the next election.
Certain things are set in stone. Next week, the regulator Ofgem will raise its price cap in response to the sharp rise in the global wholesale price of gas. Energy suppliers will be able to adjust their tariffs from April and the indications are the average household will be paying £600 a year more unless the government steps in to help.
Higher interest rates from the Bank of England are also inevitable and it would be a surprise if interest rates did not go up by 0.25 points to 0.5% this week. There is the likelihood of further increases as the year wears on.
Despite the opposition of many Tory MPs, the planned increase in national insurance contributions – the £12bn health and social care levy – also appears to be done and dusted. Rishi Sunak could use the better than expected public borrowing figures to delay the increase by a year or abandon it altogether. Indeed, there is an argument that the Treasury would do better to allow the economy to get up a head of steam after the damage caused by the coronavirus pandemic rather than putting the squeeze on too quickly. That was what George Osborne did after the financial crisis, with the result that the economy slowed and deficit-reduction targets were missed.
Neither option appeals to the chancellor. Delaying the national insurance increase until 2023 would bring its introduction a year closer to the next election, and Sunak would prefer to be cutting not raising taxes by then. Scrapping the increase altogether would represent the sort of fiscal laxity the Treasury has traditionally loathed: governments spending money but reluctant to impose the tax increases needed to pay for them. Sunak is definitely not a fan of the idea that the only real constraint on government spending is inflation, and that the Bank of England can always print more money to pay the state’s bills.
Boris Johnson sometimes gives the impression he is a fan of modern monetary theory and, in any case, has a different time horizon to that of the chancellor. But this weekend’s joint article by the prime minister and the chancellor in the Sunday Times saying the national insurance increase “must go ahead” puts the issue to bed. Sunak will have his way – but at a cost.
It will not be easy for the government to dig itself out of a deep hole but the priority should be to help those on low and middle incomes cope with rising energy bills. There is money available to do this because the scarring from the pandemic has been a lot less severe than originally feared. On some estimates, Sunak has £50bn to play with, easily enough to counter the energy crisis. Labour has proposed making the warm home discount more generous and expanding the number of people eligible to receive it. This makes sense, as does the idea of cutting VAT on energy bills, a move that would help all households.
Although Sunak will get his national insurance increase, it is bad economics as well as bad politics. The levy is a tax on jobs and inflationary, because businesses will either employ fewer workers or try to pass on higher costs to their customers.
Income inequality is high in the UK but wealth inequality is even higher, and it gets harder to make the case that capital gains should be taxed more lightly than income when those paid modest sums are being asked to pay more national insurance or are having their personal allowance frozen.
The cost of living crisis is happening and if the government is too timid in response, the economy will struggle to cope with rising energy bills, higher taxes and falling real incomes. There is a risk demand will slow from the spring onwards once the short-term boost from easing Covid-19 restrictions has played out. Concerns about higher debt interest payments that come from rising inflation may then be the least of the chancellor’s worries.