Let the living costs debate be radical

With the election phoney war now under way, it appears that the main issue dividing the parties will be the cost of living.

Unfortunately, politicians seem to have no real ambition to resolve the problems faced by so many families in Britain today. The importance of the cost of living debate in contemporary politics cannot be under-estimated. At heart, much of the discussion about the welfare state, triggered by various churches two weeks ago, is a debate about how the poorest struggle to get by. When we worry about productivity we are concerned that prices will rise faster than wages. And the debate about the living wage is – by definition – a debate about whether the incomes of the less-well-off are sufficient to provide for a family.

Discussion around these issues has long been sterile. Lobby groups argue that income transfers to the poor should be increased and opponents then suggest reasons why that should not happen. Similarly, campaigners propose that employers increase the amount they pay employees, regardless of whether pay increases can be justified by productivity.

Politicians do nothing to improve the quality of these debates. Both the Labour and Conservative parties suggest that living standards can be increased through a series of price caps and controls and by raising the statutory floor underneath wages. Energy prices, rail fares, pensions, rents and consumer credit have all been subject to proposals and it was suggested in the Guardian over the weekend that the Conservative Party might now propose capping water bills for large families. Not only would such proposals reduce investment and competition and distort markets still further, in the long run they would exacerbate the problem they are designed to solve by reducing productivity and wage growth.

Politicians and campaigners are arguing over minutiae and over policies that are doomed to failure when radical and clear thinking is needed.

There are four reasons why the cost of living is so high in the UK, especially for the poor.

The first is our planning system. House prices have risen over and above inflation by about 3 per cent per annum in the last 40 years and housing now takes up around one third of the budget of the country’s poorest people. There is simply nowhere else in the Western world that compares with the UK in this respect.

The knock-on effects of restrictive planning policies are huge: high business rents lead to higher childcare and food costs; the increased housing benefit bill leads to higher taxes for all of us; restrictions on business development lead to lower productivity and hence lower wage growth – economists at the LSE calculate that planning policies since 1980 have reduced retail productivity by about 20 per cent. Furthermore, high house prices in the south-east prevent people from moving to more productive employment opportunities.

Perhaps those in churches concerned about poverty should see the inability to build houses because of restrictive planning policies as a matter of justice – after all, they are quick to throw that word around in debates about much less important causes.

We also have an energy policy that is designed to cut carbon emissions at the maximum possible cost, as a result of policy being captured by vested interests. Some of the renewable sources of energy that have to be exploited as a result of government policy cost over three times as much as conventional energy sources.

Food costs are raised not just because planning policy increases retail costs, but also by the Common Agricultural Policy. Abolition of this should be top of the UK’s European Union renegotiation list. Agriculture is 50 per cent more productive in New Zealand where farm support programmes have been eliminated.

Finally, the level of taxes paid by those at the bottom of the scale is higher than most people would expect. The reason for this is the regressive nature of so-called ‘sin taxes’. As revealed by Chris Snowdon, the poorest fifth of the population pay over 11 per cent of their income in taxes on betting, motoring, air travel, tobacco and alcohol. This should be a cause close to the heart of Catholics, even if not Methodists.

In their recent intervention, church leaders argued that food markets are ‘failing’. They are not; there is no evidence for that assertion whatsoever: markets are not allowed to operate. There are also questions that the churches need to ask themselves about the way they have surrendered their belief in charity to a belief in the all-providing state. However, when it comes to the working poor, we should not have an economy where people who are working also need welfare. The only reason they do is because, in the last thirty years, we have taken actions that constrain the economy and load burdens on those least able to afford them. Changing this should be the battleground on which the next election is fought.

This article was originally published by the Daily Telegraph.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

5 thoughts on “Let the living costs debate be radical”

  1. Posted 01/03/2014 at 13:38 | Permalink

    Philip Booth: “The importance of the cost of living debate in contemporary politics cannot be under-estimated”. Philip, if it can’t be under-estimated then you are suggesting that it isn’t important at all. Presumably you meant to either say it ‘shouldn’t be underestimated’ or that it ‘can’t be over-estimated’.

    I would also question your comments on restrictive housing policies causing an inability to build houses. Building houses is a large part of the problem. Planning controls in this country favour low density house building which leads to inefficient use of land and thus exacerbates the housing shortage (many of our towns and cities have population densities barely half that of their European equivalents) . What we need is more housing, but not necessarily more houses (at least not in the way planning laws allow them to be built), i.e. we need more flats and more high density houses as in the terraced housing in (say) Westminster and Chelsea. How much worse would Hong Kong’s housing shortage be, and how much higher would their housing costs be, if they built low density housing?

  2. Posted 01/03/2014 at 17:29 | Permalink

    The value of money is rising against stuff.

    Now, that is far easier to understand as the great British worker has failed to have his wages increased at the same rate as inflation.

    So, as the price of stuff remans constant (against gold, for example) the capacity for the poor to buy stuff with fiat money, which is depreciating against gold, is progressively reduced.

    Note how all commodity prices have risen against fiat money so, gold does not need to be the measure: almost any commodity will do, even a Big Mac or a can of Coke will illustrate the problem.

    Since the Central Bank are responsible for the expansion of the money supply and the government are happy to conspire then it is clear that the government policies are making the poor poorer.

    The sting is in the tail however and wage price inflation will eventually pretty well sink the current calm

  3. Posted 01/03/2014 at 22:00 | Permalink

    @HJ – thank you for the correction. I don’t really agree about densities though. We have rather small houses in this country and if people would like more space I don’t think it should be artificially constrained. I do think there should be some principle of compensation in the planning system though

  4. Posted 02/03/2014 at 06:25 | Permalink

    Philip – there is no contradiction between higher housing densities and larger housing (i.e. greater floor space in housing). We have low densities combined with small houses, which is encouraged by planning controls. In most of Europe they combine higher density with more space in their housing. They do this by building up – i.e. taller houses and flats. This is how they achieve higher population densities combined with more living space.

  5. Posted 05/03/2014 at 13:04 | Permalink

    The LSE’s figure of a 20% drop in retail productivity is total tripe(like all their wonky analysis of planning).

    There has been a huge increase in metro super markets. These charge higher prices, people don’t appear to mind paying the extra for the convenience.

    The 2011 census showed every part of the UK has more dwellings per capita than ever. So the simplistic supply/demand explanation doesn’t wash.

    The confusion surround housing affordability is due to the fact 99% of people think high land values are a bad thing in themselves.

    They are not. Think of places around the World where land values are low/zero. Would you want to live there? No.

    High land values are the measure of high GDP, and demand for excellent amenities. It is the role of government regulation to balance the needs of both. High land values show they have hit the sweet spot on the Laffer curve.

    The problem lies in the fact these land values are capitalised into the exchange value of free hold titles. A massive state subsidy in other words.

    It’s bizarre that free market advocates seem unable to recognise the economic and social damage these implicit subsidies cause.

    It is easy to demonstrate the effect of ending these subsidies would have on housing affordability.

    It was increase four fold for a median UK household in the short term. Better than that in the longer term as the bulk of deadweight losses are eliminated.

    That’s the solution to our “housing crisis” and cost of living crisis right there. And without the need to build a single new home.

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