With millions struggling to afford life’s essentials, here’s how the chancellor can make a real difference on Wednesday
Not for the first time, the chancellor finds himself relying on a last minute policy response at a spring statement in an attempt to keep up with global events. If the weekend’s press briefings are to be believed, he is planning to respond to the worst real-terms incomes squeeze in 50 years with poorly targeted and expensive tax cuts. If this is all we get, it will do too little for the people struggling to afford life’s essentials today, while at the same time missing yet another opportunity to change the course of the 2020s for the better.
Some of the macroeconomic factors the government is contending with lie outside of their control. The pandemic has caused households to spend proportionately less on services and more on tradable goods, while at the same time disrupting the global supply chains needed to deliver them. With supply temporarily unable to keep pace with demand, inflation in the UK soared to a 30-year high of 5.5% in January, and is now expected to peak above 8% later this year, following Russia’s horrendous invasion of Ukraine and subsequent economic sanctions. The result is UK workers enduring an unprecedented fourth period of declining real wages in less than 10 years.
But this doesn’t leave the government free from culpability. A decade of bad political choices has left the UK almost uniquely exposed to shocks in incomes and prices. Low paid and insecure work has proliferated since 2010, exacerbated by workplace deregulation and tax incentives to avoid classing workers as employees. Family savings have been eroded, as the government has increasingly relied on private consumption rather than long-term investment to keep the economy moving. Meanwhile our energy security, in more ways than one, still sits at the mercy of volatile fossil fuel markets to an inexcusable degree – because we haven’t switched to renewables fast enough, our homes and businesses still have appalling energy-efficiency standards, and much of the country is served by slow and expensive public transport.
At the same time, the UK’s safety net, that’s supposed to provide a cushion against the effects of such shocks, has been pulled apart. Since 2010, unemployment payments have been steadily cut to the lowest level since world war two as a proportion of earnings, making them the lowest of 38 advanced economies in the OECD. Over the same period, cuts have left public services like transport, care and housing with around a third to two thirds less funding in real terms.
If the chancellor fails to take further action this week then a staggering 23.4 million people – more than a third (34%) of the entire population and almost half (48%) of all children – will be living in families that are forced to make sacrifices on essentials come April. But trying to tackle this problem with tax cuts is like trying to help a thirsty person by pouring a bucket of water over their head – most will be wasted where it’s actively unhelpful, and too little will go where it’s actually needed to make a difference.
Against this backdrop, the chancellor must think again, and look to longer lasting repairs rather than more poorly targeted short-termism. NEF is calling for five big changes in direction, not just to address the crises in the year ahead, but to start changing the course of the coming decade:
1. Living Income
First is to put in place the building blocks of a new Living Income, a social security system that guarantees everyone the minimum income they need to meet the challenges and opportunities of our fast-changing economy. As a first step, we propose: increasing the value of all means-tested benefits to meet the latest inflation estimates, effectively reversing the cuts to working-age benefits since 2010 by investing around £16bn a year into universal credit, and ‘auto-enrolling’ everyone onto the universal credit system so that payments become automatic in response to changes in income, much like a reverse tax system.
2. Great Homes Upgrade
Second is an £11.7bn cumulative investment in a Great Homes Upgrade over the remainder of this parliament, retrofitting millions of cold, damp homes to new levels of energy efficiency, significantly improving national energy security and saving millions of pounds a year in energy bills, especially for the lowest income families. The first phase of the programme should be the flagship item within a wider £28bn increase in zero-carbon infrastructure investment over the next 18 months, creating more than 400,000 well-paid jobs a year.
3. Universal social care
Third is to begin the creation of a new universal care service, so everyone can access the care they need while raising standards, pay and job quality in the sector. The government should start by gradually reducing the cap on private contributions to care towards zero, lifting care sector wages to at least the real living wage, widening the range of care activities that can be funded publicly, and giving new financial muscle to local authorities to design the long-term care strategy in their area with the right providers.
4. Fairer taxes
Fourth, rebuilding the UK’s safety net for the long term will require those who can afford it to contribute more in tax. Key to this will be taxing income from wealth at the same effective rates as earnings from employment. Closing this tax gap for dividends and capital gains could eventually raise more than £20bn a year, even after accounting for behavioural effects and allowances for inflation.
But even if the government remains solely committed to changing national insurance contributions (NICs), we could do much better than their current proposals. Removing the exemption in NICs for pension-age individuals and investment income, and equalising the rate of tax on earnings above £50,000 with those below, would raise more than £15bn a year while enabling government to avoid the 1.25% hike in everyone’s headline rate.
5. A new framework for public borrowing
Fifth, public debt is one of the best tools for distributing the cost of long-term policies through time. But the current targets for debt and borrowing (‘fiscal rules’) place arbitrary and irresponsible limits on the ability of the government to tackle the most serious crises for both ourselves and future generations. The government should replace the fiscal rules with a new framework. This would include new powers to parliament, and new analytic capabilities at the Office for Budget Responsibility, to hold the Treasury to account for either increasing, or decreasing, public borrowing too fast.
The cost of living only becomes a crisis when people are not given the resources to meet it. At the spring statement this week the chancellor must put in place the income support, higher wages, stronger public services and energy-efficiency savings to both rebuild lives today and reinforce economic resilience for tomorrow. He must not miss this opportunity.
Image: Number 10 (CC BY-NC-ND 2.0)
