ourEconomy: Opinion

To tackle the cost of living crisis, we must end the Great British Rip Off

A major culprit of the ‘cost of living’ crisis is hiding in plain sight: an extractive economy that redistributes wealth upwards

Laurie Macfarlane
9 February 2022, 10.45am
The UK’s cost of living crisis is not simply the result of rising gas prices
Vuk Valcic / Alamy Stock Photo

According to the Bank of England, UK households are facing the “biggest fall in living standards since comparable records began”. If you’re thinking ‘haven’t we heard this before?’, that’s because the UK has just experienced the worst decade for living standards since records began. To live through two ‘lost decades’ in a row is unprecedented in modern history. For young adults across Britain, rising living standards are now something they have encountered only in history books.

Although the ‘cost of living’ crisis has started to appear in the headlines only recently, it is anything but new. Struggling to make ends meet has been a reality for millions of households for many decades. With around a fifth of UK adults having less than £100 of savings in the bank, any sharp increases in the price of goods and services can mean having to choose between heating and eating.

To successfully tackle the cost of living crisis, we must first understand its root cause. The first culprit is a persistent problem of low pay. Real average weekly earnings – earnings after inflation is taken into account – are no higher today than they were in 2008. Following the global financial crisis, real wages suffered their longest sustained decline on record, and have begun to slowly regain ground only in recent years.

This stagnant wage growth has been compounded by the erosion of the welfare state. Today, the UK has one of the least generous systems of unemployment support and statutory sick pay among advanced economies. Before the COVID-19 pandemic hit, real incomes for the lowest-income households were no higher than in 2001-02, thanks to years of sustained welfare cuts.

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But what matters for living standards is not simply how much money people earn, but how much they have left over after their essential expenses have been paid. And it is this side of the equation that has been quietly eroding living standards for years.

Last week the UK energy regulator, Ofgem, announced that the energy price cap will rise by 54% in April, pushing up bills for millions of households by £693 per year. On the same day, fossil fuel company Shell reported that its annual profits had quadrupled, largely due to the very same soaring gas prices that are responsible for fuelling recent spikes in inflation.

In other words: not everyone is feeling the pinch of the ‘cost of living’ crisis. As household budgets are squeezed even further, fossil fuel company shareholders are laughing all the way to the bank.

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Energy is far from the only sector where one person’s pain is another’s gain. In recent decades, many of our most essential services have become engines of extractive redistribution – taking wealth away from workers and funnelling it upwards to asset owners.

There is perhaps no more basic need than water. Since the sector was privatised in England in 1989, bills have increased by 40% above inflation. At the same time, more than £50bn has been paid out to shareholders in dividends while companies have been loaded up with debt. According to research by the University of Greenwich, households in England are paying £2.3bn more a year for their water and sewerage bills under the current privatised system than if the water companies had remained in public ownership.

Anyone who regularly travels by train in the UK will know that rail fares are often mind-bogglingly expensive. Since rail services were privatised in 1994, rail fares have increased by a fifth in real terms. Speaking in the House of Commons on the eve of privatisation, John MacGregor, the Conservative transport secretary, promised that privatisation would harness “the management skills, the financial disciplines, the entrepreneurial spirit” – bringing lower rail fares, increased consumer choice and soaring investment.

But the reality for many customers has been rather different: late services, spiralling ticket costs and overcrowding. Meanwhile, private train operators have paid out more than £8.3bn in dividends to shareholders – returns that have been funded almost entirely by a complex web of public subsidies.

Perhaps the largest expense for many households is housing costs. For much of the past half-century, housing has served two conflicting functions in the economy. On the one hand, housing is a basic need – providing shelter, security and warmth. From this perspective, it is desirable for house prices and rents to stay low to ensure that housing is affordable. On the other hand, housing has become one of the primary vehicles for accumulating wealth. From this perspective, it is desirable for house prices and rents to increase, enabling those who own property to grow their wealth over time. These two roles are in direct conflict with each other: housing can not simultaneously be affordable and lucrative as an investment at the same time, as much as politicians like to pretend otherwise. In recent decades, government policy has sought to promote the latter role at the direct expense of the former – with dire consequences for the millions of households that are locked out of homeownership.

While economists and politicians hail a booming housing market as a sign of wealth creation, in reality it’s one of the most powerful forms of wealth redistribution. When the price of a house goes up, the total productive capacity of the economy is unchanged, because nothing new has been produced: it merely constitutes an increase in the value of an existing asset. While this increases the net wealth of individual homeowners and landlords, for everyone else it often means facing higher rents in the rental market, and having to save for a deposit and pay more interest on larger mortgages. The reality is that the housing ladder is rather like a zero-sum game: the wealth enjoyed by some is mirrored by the deprivation and exclusion of others.

On one hand, housing is a basic need. On the other, it has become one of the primary vehicles for accumulating wealth

Similarly extractive dynamics can be found in Britain’s social care sector, which represents a growing expense for millions of households. The sector is now largely owned by private equity firms, which were lured by the prospect of steady income streams and large property portfolios. In recent years, a number of private equity-owned care home companies have been condemned for operating extractive business models characterised by excessive cash extraction, unsustainable debt and opaque corporate structures. A 2019 report by the Centre for Health and Public Interest, an independent think tank, found that of a total annual income of £15bn, an estimated £1.5bn per year leaks out of the care home industry in the form of rent, dividend payments, interest payments, management fees and profits – money that could otherwise be spent on front-line care. These dynamics have contributed to the cost of care in residential homes soaring by almost 30% since 2012, rising from £27,000 to £35,000 a year.

There can be no doubt that the ‘cost of living crisis’ is a real concern. But it is not new, and it is not simply the result of rising gas prices. For decades, British households have been squeezed by a pincer movement of persistently low incomes on the one hand, and extractive business models on the other. Unless urgent action is taken on both fronts, another ‘lost decade’ looks all but inevitable.

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