A supply-side agenda to solve the cost-of-living crisis
Prices of […] essentials […], from food and child care to energy and transport, have gone through the roof. And the dream of home ownership seems more distant than at any time since the war […]
The current cost-of-living crisis is not just about people on tax credits, zero-hours contracts and the minimum wage. It is about millions of middle-class families who never dreamt that life would be such a struggle.”
This passage could be from any of today’s newspapers. It was, in fact, written by Ed Miliband nearly a decade ago – and it feels a lot older still, given how much has happened in the meantime.
The world of the early 2010s was, in a lot of ways, a different world from ours. When Miliband wrote that article, the word “Brexit” did not exist yet (although the Economist had recently warned that “A Brixit looms”). Labour’s last leadership election, from which Miliband had emerged as party leader, was mostly remembered as the “battle of the Milibands”. The fact that two members of the Socialist Campaign Group (SCG), John McDonnell and Diane Abbott, had also thrown their hats in the ring, received a lot less attention, because the idea that someone from their wing of the party could ever become the official leader of the opposition seemed comically remote. Donald Trump was still primarily a reality TV personality and real estate investor (although he had dabbled in politics a little). Smartphones were becoming quite common, but they were not yet ubiquitous. And, of course, the vast majority of the world’s population had never heard the word “Coronavirus”.
If you had fallen into a coma then, and woke up today, you’d have a lot of catching up to do. But you would instantly recognise the arguments around the cost-of-living crisis.
Back then, almost all the policy responses to the cost-of-living crisis that were being discussed – Miliband’s article being a case in point – involved higher degrees of state involvement in the economy. The IEA was a minor, but persistent player in this debate, and IEA authors and media spokespeople tended to take a very different view. We pointed out that, to a very large extent, it was misguided government interventionism which had originally caused or exacerbated the problem in the first place. So before we think about new policy measures to address the cost-of-living crisis, why not roll back some of the already existing policy measures that systematically inflated the cost of living?
In my 2012 book Redefining the Poverty Debate, I argued:
“[T]he UK’s exceptionally high cost of living, as far as some of the basic essentials are concerned, is […] one of the main reasons why redistributive spending has […] never [been] cost-effective. As long as the cost of some basic necessities is as exorbitant as it is currently, no amount of redistributive spending is ever going to deliver. […]
The best insurance against poverty is a product market structure in which the basic necessities of life are easily affordable right across the income distribution. […]
While some price developments are driven by factors outside the control of policymakers, many others are policy-induced. The UK has every potential to become a country where even those on tight budgets can afford the basics, generously defined. […]
[O]ne of the main pillars of a future anti-poverty strategy should be the removal of product market distortions with an anti-poor bias”.
Since the cost-of-living issue is now back with a vengeance, our new IEA report Cutting Through: How to address the cost of living crisis picks up where we last left off, and spells out a supply-side reform agenda for the 2020s. The policy context has changed in the meantime, but the basic economic logic still applies. The British economy is still plagued by numerous supply-side distortions which systematically inflate the cost of living. The effect of this is highly regressive, because it is most pronounced in sectors on which low-income earners spend a disproportionate share of their household budgets.
The policy agenda developed in Cutting Through would drastically improve living standards for those on below-average incomes. It would do so in a way that is fiscally neutral at worst, and which could even lead to substantial fiscal savings. If the cost of, for example, housing and childcare falls, the housing cost of childcare cost elements of Universal Credit also falls, leading to lower public spending without penalising Universal Credit recipients.
This would also improve work incentives. If we slashed the cost of living, fewer people would need Universal Credit in the first place. This means that fewer people would be exposed to the Universal Credit taper, which acts as a major disincentive to taking up work and to in-work progression.
Suppose you are a part-time employee who earns a little bit above the personal allowance, and who also receives Universal Credit. Now you get an offer to take on additional working hours, thereby increasing your gross earnings by £100 per week.
You would, first of all, have to pay another £33 in additional income tax and national insurance contributions per week, reducing your additional net earnings from £100 to £67. The taper rate would then reduce your entitlement to Universal Credit by another £36, leaving you just £31 a week better off – an effective marginal tax rate of 69%. The best way to ameliorate this problem is to create a situation in which fewer people need Universal Credit to begin with.
In summary, our supply-side agenda would simultaneously improve living standards, public finances, and work incentives. This may sound like “Cake-ism” – but we can have our cake and eat it. What we need to do is liberalise the supply side of the cake market, and get baking.
- “Cutting Through: How to address the cost of living crisis” (2022) by Matthew Lesh, Kristian Niemietz, Christopher Snowdon, J.R. Shackleton, Victoria Hewson and Andy Mayer
- “Smoking out red herrings: The cost of living debate” (2014) by Ryan Bourne and Kristian Niemietz
- “Redefining the Poverty Debate – Why a War on Markets is No Substitute for a War on Poverty” (2012) by Kristian Niemietz