Shoppers couldn’t quite believe their eyes when UK supermarkets put security tags on 1kg packs of Lurpak butter last year because it had become a high-value item with the price reaching up to £9.35 in some stores. Food prices weren’t the only shock. Energy bills skyrocketed and although they have since fallen a little, they remain high. The cost of living crisis is in full swing, but what caused it?
Things started to go wrong when the pandemic happened. All of those lockdowns caused a dislocation in the global supply chain, which meant that fewer goods and services could be manufactured and distributed to those who wanted them. Added to that, Governments around the world were handing out money that they largely borrowed and central banks, such as the Bank of England, were printing money. As we know, prices are influenced by supply and demand. Less supply and increased demand made rising prices inevitable.
Russia’s invasion of Ukraine made a tricky economic situation much worse because it caused a huge spike in energy and food prices. It’s been a perfect storm to push inflation up in Western economies like ours that aren’t net energy producers. I know people think we’re pumping loads of oil and gas out of the North Sea, but the reality is that we’re not.
Shell made a profit of 30bn Euros last year and its UK corporation tax bill, including windfall tax, was zero. The reason for this is that Parliament taxes international companies on their UK profits and have no jurisdiction to tax anything they make elsewhere. The windfall tax really is just political posturing.
We shouldn’t really be surprised by the current situation because as a nation, the UK has been in a state of managed decline for a long period now. It’s all to do with the structure of our economy. We don’t manufacture much these days, we have become a services economy and inflationary forces have made labour more expensive.
The after-effects of the pandemic continue
During the pandemic, we were lulled into a false sense of security. People cut back on spending because they weren’t leaving the house and put the money into savings. When the lockdown restrictions came to an end in 2021, people started to spend again. This led to a surge in demand, but businesses couldn’t meet this because they’d cut back on staff and investment. What happens when demand outstrips supply? Prices go up.
The pandemic may be over but due to its effect on inflation, we’re in a situation where prices are rising faster than wages even though the cost of commodities are falling. In essence, people are costing more. If we were a manufacturing economy it would be happy days, but salaries only go up, they don’t go down, and added to that, there’s a problem in the UK in terms of a shortage of people who want to work. There is more power in the hands of the workers than there has been for decades.
The tax burden is as high as it has ever been since WWII. Successful professionals have been really squeezed and are retiring because at the top end of their income, they only get to keep 44% of what they make. Why bother if they’ve already saved enough for a comfortable retirement? That creates more pressure on the supply of labour. Then, you’ve got Brexit which further reduced the workforce. So, you have this situation where people want more money because their living costs have gone up and they feel empowered because the labour market is tight. This dependence on labour is what has caused problems. If we just made widgets and our costs were raw materials, things would be getting a lot better by now.
The lag effect means energy prices are still high
People and businesses are still being hit with huge utility bills and that is also having an impact on prices. Energy prices are still high due to the lag effect. There is a good six months between what’s happening with wholesale energy prices and what’s happening in the retail market. Prices will continue to fall and the energy companies can’t continue to charge these higher prices. The only way prices will stay high is if there are a lot of green levies coming through as they contribute quite a bit to energy price inflation.
The energy companies won’t get away with profiteering, or at least they shouldn’t. The reality is, you are tied into a monopoly when it comes to energy. You can change providers, but you can’t change the infrastructure. It’s somewhere we fall short as a nation. We hand our utilities over to these huge monopolies that are cash-generative. They take out a lot of offshore debt so that it looks as if they’re not making any profit at all meaning they have this wonderful tax-free revenue stream that makes no contribution to the Exchequer. The only thing stopping them from behaving well is the standard of regulation in this country. However, as we’ve recently seen with our water companies, our regulators are often outwitted.
In the private sector, wages have gone up by 8% and while increases in public sector pay look quite miserly on paper, the elephant in the room is the cost of the pension schemes for Government employees, for example, the NHS and Civil Service. It’s very generous, worth an extra 22% of your salary and I would argue that the money isn’t there to buy meaningful increases in pay at a time when people really need it. A solution might be to strike a better balance between the money you get on retirement with the pay you get while you’re working. This is never discussed for some reason.
What we need now is economic growth
There isn’t an easy answer to the cost of living crisis. What we need as a nation is economic growth and that is a tough thing to achieve. We’ve had austerity but I think we overdid it and now we have this scenario where we need a complete change of strategy. The trouble is, as a nation we’ve lost our credibility so its harder than ever to borrow money to bridge the gap between what we make and what we spend as a nation.
I’ve noticed that the Labour party has modified its promises now they realise they are likely to be in power. They’re waking up to the fact that they won’t really be in charge, the financial markets will. They effectively run the country which I know sounds a bit scary when you consider that our national debt is now 100% of GDP. That ill-fated Liz Truss/Kwasi Kwarteng budget was like Laurel and Hardy being at the helm. The financial markets refused to play ball when they promised to give away £50bn in tax breaks using money they didn’t actually have.
Why? The thing is, the financial markets pay for everything. There isn’t enough tax revenue, and we want too much in terms of the NHS, good schools, decent roads, etc. We want everything but we want somebody else to pay for it.
The financial markets refused to give the government the money because there was no credible plan to repay it. Interest rates went up and the value of government bonds fell. This happened all over the world, but while they went down by 10 – 15% everywhere else, they dropped by 30% in the UK.
We think we’re swashbuckling and significant in the UK, but we’re not
We have this government that is borrowing too much money, they handled Brexit badly and there’s been a new prime minister every five minutes. The world lost confidence in us and anything with UK on it was worth less money. We have this false sense of ourselves in the UK that we are swashbuckling and significant, but we are becoming increasingly less so and until we wake up to that fact, we’re going to have to try even harder to prevent that decline.
In my opinion, the only way to grow the tax base is to make the cake bigger, so rather than the Government increasing the slice it takes, we all need to make the cake bigger. That means politicians need to be honest and open with the electorate in terms of what is required. I also believe that all of us need to feel a little bit of ownership in the country and I think everyone should pay tax, even if it’s only a few pence. Of course, those who earn more should pay more, but when you pay zero, you’re not going to care so much if you don’t turn up for a hospital appointment because you’re not paying for it.
The UK is brilliant at financial services
The UK needs to find a way to be confident in what we’re good at. While we’re totally useless at regulating the energy and water companies, we’re good at financial services. However, the government has been constraining the one thing that generates a lot of revenue as a kind of vendetta for the banking crisis. It was over 15 years ago and they now need to get over it. The Americans were tough on their banks but bailed out those that needed it and then supported them. Here in the UK, we wanted to obliterate them. RBS used to be the third largest investment bank in the world and now we haven’t got one in the top 10. We decided that bankers were bad and when they all go somewhere else and stop paying the millions that they do in UK tax, we wonder where the money has gone.
It’s not just the banks. Big companies have started to drift away from London. You can have a chief executive earning £5 million in London and if the company they run moves to New York, it’s automatically worth a lot more, and his or her salary doubles. And they are no longer a pariah, when they walk into a room, people will clap rather than hiss.
We need to get real. Businesses don’t need to be here and if we keep attacking them rather than supporting them, many will vote with their feet. Then who’s going to pay to keep the nation’s lights on?