Good morning from New Economy Brief.
Evidence suggests that the longevity of Labour’s ‘sandcastle majority’ depends on success in two key areas: the cost of living and the NHS. Voters want to see their finances improve. And they want to see it fast. Nearly a third of those who voted Labour expect the party to have made a noticeable difference to the cost of living in as little as a year. Another third expect to see a noticeable difference within two years. A significant chunk (10%) expect results within six months (they’ve had nearly four already). So when the Chancellor delivers her first Budget this week, voters will be watching and wondering “how will this make me better off?”
Today, we explore the Budget’s cost-of-living context, what action the new government may take on the issue, and the policies that campaigners are calling for to improve living standards.
The backdrop
The cost-of-living crisis has been a major feature of British politics over the last few years. Polling commissioned by campaign group Stop the Squeeze just before the election was called found that 86% of people felt that there was an ongoing cost of living crisis. At that point, inflation was hovering just above the Bank of England’s target rate of 2%. Now it has dipped to 1.7%, but the crisis feels as stubborn as ever. This week, Stop the Squeeze revealed that 43% actually feel worse off than they did this time last year. This research, carried out by YouGov, also found that 17% of people struggle to afford basic essentials either ‘often’ or ‘sometimes’. Meanwhile, 58% said that although they can afford essentials, they are having to cut back in other areas. This means Rachel Reeves will be delivering her first Budget to a nation where the vast majority are feeling the squeeze.
What could be done?
If the government can find money for cost-of-living support – either at this Budget or in the future – then what would be the most impactful way to improve living standards quickly? One obvious course of action is for the government to improve incomes, both from work and for those receiving social security payments. It may be true that wages are no longer as stagnant as they once were, but there is still a lot of catching up to do after they spent years falling in real-terms. In two thirds of the country, inflation-adjusted wages are still lower than in 2008. Campaigners have called for a ‘living income’ – a system that would set an ‘income floor’ (using the ‘minimum income standard’ calculation) beneath which nobody – whether in or out of work – could fall.
What to look out for
The recent dip in inflation made little difference to how people feel about their finances, and in many cases it could even make things worse. The September inflation rate is usually used to calculate benefit upratings, so unless the government decides otherwise, universal credit would increase by just 1.7% from April. With many predicting the dip in inflation to be temporary, this would likely mean a real-terms cut to social security. The Joseph Rowntree Foundation has said the increase will “barely touch the sides” of already insufficient universal credit levels and has called for urgent cost-of-living support in the Budget.
Action needed now
The last government had a particularly poor reputation on living standards. Labour will be keen to be the ones to reverse the trend and ultimately, need to succeed in order to be re-elected. The government’s current narrative focuses on investment and longer-term plans for growth – and they want to be given a chance to make this work. But with the cost of living continuing to bite as hard as ever and with public services under such strain, people will be eager to see a boost to current spending in the Budget alongside measures to end this crisis once and for all.
Scottish FM calls for PSNW. Scotland’s First Minister John Swinney is the latest political heavyweight to advocate for targeting rising Public Sector Net Worth instead of falling Public Sector Net Debt in the UK’s fiscal rules. He also called for a “sustained level of public investment” of at least 3% of GDP each year to bring the UK closer to the OECD average.
NWF compared to EIB. The UK has “potentially lost £44 billion” in investment from the European Investment Bank (EIB) after Brexit. Analysis from UK in a Changing Europe finds that “UK annual public investment [from public investment banks] could have, potentially, been 73% higher had the UK not left the EU.” It also notes that the National Wealth Fund is a “fairly trivial amount” and “cannot grow to EIB levels overnight”.
Bookkeepers or Changemakers? New polling from Persuasion UK and the Institute for Public Policy Research (IPPR) finds that voters won’t forgive the government if public services don’t improve, even if public debt is lower. There are other interesting results, such as that the public supports more borrowing to invest if it leads to better-funded public services and infrastructure – even if this means higher taxes.
Wealth Gap Risk Register. The UK’s wealth gap has increased by nearly 50% in less than 10 years. The Fairness Foundation have published an online resource collating evidence about the impacts of wealth inequality, how to reduce it and mitigate its impacts, and public attitudes to all the above.
Higher CGT benefits entrepreneurs. IPPR’s Pranesh Narayanan has published a blog explaining why a low Capital Gains Tax (CGT) rate is ineffective and poor value for money if the goal is supporting entrepreneurship. They find that equalising CGT with income tax could raise around £14bn a year, which could unlock opportunities for entrepreneurship if used to fix public services and infrastructure.
OBR methodology and child poverty. The New Economics Foundation’s Sam Tims argues that the wider economic benefits of reducing child poverty are being “significantly undervalued” by the government and OBR. He argues that if the latter’s methodology accounted properly for the gains that would come from scrapping the two-child limit and benefit cap – such as reducing demand on public services and increasing consumer spending in local economies – it would be much easier to make the political case for reducing child poverty.
Ringfencing preventative health investment. A letter to the Chancellor signed by the Health Foundation, Demos, Institute for Government and CIPFA has called for protecting a portion of current spending to invest in illness prevention. They argue this would strengthen the fiscal framework, “better hold government departments to account for long-term investment in prevention”, and would benefit the public finances in the long run by reducing demand for public services.
Debt profiteers. Private lenders are set to make $14bn in profits on loans to lower-income countries, even after agreeing limited debt relief. Research on debt restructuring in Chad, Ghana, Sri Lanka, Suriname, Ukraine and Zambia from Debt Justice uncovers the “huge profits” being “raked in” by finance companies. They are calling for new legislation in the UK to make private creditors comply with debt relief agreements.
A Lucas Plan for the 21st Century. What if the UK’s arms industry built green infrastructure instead? A new report from Common Wealth’s Khem Rogaly proposes reorienting the UK’s military industrial complex with an active green industrial strategy to address the climate crisis and deepen economic resilience.
Repurpose the arms industry for fighting climate change. As a first step, they argue the UK government set up an arm’s-length company to buy a shipbuilding site in Belfast which is currently in administration, and provide investment to create a supply chain for green energy. Check out their interactive map for other case studies that “indicate that a deeper transition is technologically viable, and that state coordination can repurpose military production towards green sectors”.
