Free market, tax-cutting economics will not ease the UK’s cost of living squeeze

Britain’s unfolding cost of living crisis is dominating the headlines. The soaring cost of a weekly shop, a record increase looming for utility bills, and the price of petrol through the roof. Households have never had it so tough.

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Photograph: Andy Rain/EPA

Yet the squeeze has been in place for longer than the current crisis might suggest. Far from the year of the squeeze, the opening months of 2022 reflect the problems of the past decade, compounded by Covid-19.

Even before the pandemic struck British workers had suffered the worst decade for real wage growth since the Napoleonic wars. While 2022 will stand out for a particularly sharp hit to living standards, the Institute for Fiscal Studies reckons incomes will barely budge up until 2026. This means an unprecedented hit to earnings spanning two decades, and will leave household incomes 42% lower than would have been the case if wages had risen at pre-2008 financial crisis rates.

Related: Cost of living squeeze: how much worse off will you be in 2022?

In the 10 years leading up to the pandemic, median income for the poorest fifth of households in Britain collapsed by 4.8% thanks to a mix of weak pay growth and benefit cuts while living costs marched higher. In contrast, the incomes of the richest steadily rose.

In the opening months of this year, the squeeze from soaring inflation and rising energy bills will add to these strains for the millions who were already in poverty before the pandemic.

Ofgem, the energy regulator, will soon decide how much its consumer energy price cap will rise from April. With record gas prices on the wholesale market, an increase of 50% or more is expected, pushing up household bills by £700 a year, worth a combined £18bn to families.

Ministers have so far shown little appetite for tackling the cost of living crisis head on. Rishi Sunak argues mitigations have already been put in place to help with higher bills, including through changes to the universal credit taper and a £500m household support fund. The chancellor also believes removing 5% of VAT on energy bills – a plan called for by Labour – is unappealing as it would permanently deprive the exchequer of revenue.

However, there are hopes the government will make an announcement soon, with the smart money on ministers announcing a time-limited and targeted intervention to deal with the sharp rise. The warm homes discount (WHD) is mooted for an overhaul. However, as the Resolution Foundation has suggested, it will need to be taxpayer funded – a point that might pain the Treasury. At present, the WHD scheme works by increasing everyone’s bills to fund discounts for the neediest. Yet further pushing up gas and electricity costs is clearly an undesirable solution given the expected dramatic increase.

All of this concern over cost highlights a pattern with Boris Johnson’s government: shirking big problems until they become unavoidable.

With the prime minister’s authority tarnished by scandal and the Tories dipping in the polls, this tendency has the added consequence of opening up space for debate among his rivals over the best way forward. Questions are now openly raised through via newspaper leaks over a plethora of policy areas. Calls to scrap the planned 1.25 percentage point increase in national insurance are debated by cabinet members as an option to ease the cost of living squeeze, less than six months after they signed off on the plan.

But as ministers jostle for contention as potential future Tory party leaders, there is a worryingly nostalgic feel to the Conservative debate; harking back to legacy ideas tried and tested over four decades.

The invocation of tax cuts, deregulation, “private-good public-bad” comes as rote. The phantom of a bloated public sector squeezing the life out of the British economy is raised, while ignoring the fact that state intervention prevented a far worse reckoning during the pandemic and has grown popular after a decade of austerity.

Public sector employment has risen by more than 200,000 since the start of the Covid-19 pandemic, a fact leapt upon by the right wing as inherently negative. Yet the health emergency requires a small army in response, while years of cuts mean thousands more teachers, nurses, police, and civil servants are demanded.

Rather than ramping up taxation to the highest levels in 70 years, backbenchers want to push for growth as an alternative, with the mood summed up by Brexit true believer Marcus Fysh urging “radical supply-side reform” – a phrase empty of substance but popular on the free market right for its invocation of the 1980s.

But the shape of the state is very different to four decades ago when Margaret Thatcher came to power. Despite recent growth, the public sector remains smaller as a percentage of total employment than even two decades ago, at 17.5% compared with a peak of 22.2% in 2009 and 20% at the turn of the millennium. The main rate of corporation tax has been slashed from 52% upon Thatcher’s election in 1979 to just 19% today. The old playbook has been next to exhausted.

There are clear reasons why it would do the Tories more good than harm to move on from these old debates. The party that emerged from the 2019 election is markedly different from the one before, spanning true blue shires and post-industrial towns. As Will Tanner, the former deputy head of Theresa May’s policy unit, has warned: those wanting a rerun of the 1980s forget this at their peril.

Faced with the fallout from Covid-19 and a deep-rooted cost of living crisis, the solutions require a more robust state response bringing the public and private sectors together. For the model to reboot Britain from Covid-19, the Confederation of British Industry invokes not Thatcher but the 1945 Labour government.

In the midst of the current pandemic turbulence and unsustainable pressure on living costs, reaching for the comfort blanket of a tried, tested, and failed rolling back of the state is the wrong response. It is time the government grasped that.