Politicians have fundamentally failed to grasp the causes behind the cost of living crisis
In a major new report from the Institute of Economic Affairs, authors Ryan Bourne and Kristian Niemietz demolish a number of red herrings which dominate the debate, and show how politicians of all parties push for policies that lead to higher prices for everyday essentials like housing, food, energy and childcare.
As this crucial party conference season gets underway, the study exposes the major flaws in calls for:
- The re-nationalisation of industries such as rail and energy
- Increases in so-called sin taxes
- Price caps and price freezes
- Higher taxpayer-funded subsidies
- More red tape
This powerful new analysis shows that government intervention has made life much more expensive for families up and down the country. To reduce the cost of living we must treat the causes of high prices, not the symptoms.
Ten Myths in the cost of living debate:
Myth 1: ‘We do not need more homes’
Reality: For more than three decades the UK has been building fewer new homes than any major country in Europe. Residential floorspace per household is now the lowest in Western Europe. Planning liberalisation is the closest thing there is to an economic silver bullet.
Myth 2: ‘Brownfield development can solve our housing crisis’
Reality: There is a significant amount of brownfield space deemed suitable for development, but much of it is unsuitable for housing. Clean-up costs for many sites are prohibitively high, too. We must relax inflexible planning restrictions on green belt sites.
Myth 3: ‘The market has failed to build, so we need a public house building programme’
Reality: The UK’s archaic planning laws date back to 1947, and planning restrictions have only become more stringent over time. Green belt status has been continually expanded, especially in high-demand areas. Housebuilding rates in the UK did not fall because the public sector stopped building. They fell because existing constraints became much more stringent. Building has been in an almost continuous state of decline since the 1960s.
Myth 4: ‘Greedy landlords are to blame for high rents, so we need rent controls’
Reality: There is no evidence landlords are ‘greedy’ – rent levels have risen by less than inflation, whilst rents on new tenancies reflect housing market dynamics. The cause of high rent levels is restricted housing supply caused by planning laws. Tenancy rent controls cannot improve the affordability of renting, only an increased supply of housing can.
Myth 5: ‘Privatisation of the energy markets is to blame for high energy bills’
Reality: The nationalised energy sector was incredibly dysfunctional, serving the interests of producers, not consumers. Bills fell significantly after energy was privatised, and the price increases of recent years have been associated with rising wholesale costs and government-induced environmental and regulatory policies. Average bills for a typical UK consumer for gas and electricity have increased by 170% and 67% respectively since 2004 in real terms, partly as a result of government policies. Re-nationalisation will do nothing to help this. Instead, the government should abandon significant parts of its green industrial policy, which could reduce electricity and gas bills by 22% and 4% respectively.
Myth 6: ‘Privatisation of the railways is to blame for high fares’
Reality: Part-renationalisation and price freezes will make an already inefficient sector still more dysfunctional, eventually pushing fares higher. Greater intervention in the railways would be a bad way to help the least well off, as almost 60% of spending on rail fares is undertaken by the richest 20% of households.
Myth 7: ‘Subsidies are good for the economy because they get women back to work’
Reality: There is no economic rationale for increasing childcare subsidies. They can increase maternal employment, but this in measurement terms is no different to subsidising longer working weeks or people working until they are much older. It would be far better to deregulate childcare so that it is more affordable.
Myth 8: ‘Sin taxes are justified because there are social costs of smoking, driving and drinking’
Reality: Sin tax levels are extraordinarily high – the poorest fifth of households spend on average almost £1,500 per year on them. Alcohol, tobacco and fuel duty rates cannot be justified by the cost of drinking, smoking or driving on the broader community. Fuel duty rates raise more revenue than spending on roads and far exceed the environmental cost of burning carbon. Alcohol duty rates are higher than the costs of drinking to health and policing. Tobacco duty rates are four times higher than needed to account for the health costs of smoking.
Myth 9: ‘Most people in poverty are in work’
Reality: Work is still a good route out of poverty. Saying ‘most people in poverty are in work’ is like saying ‘most people in poverty are white’ – meaningless. Figures show the more work which occurs in a household, the less likely that family will suffer material deprivation. The chance of a household being in poverty is 10% or less if at least one adult is in full-time work; the chance of household poverty if no adult works is 39% or more.
Myth 10: ‘The taxpayer subsidises employers through tax credits, so we need a higher minimum wage’
Reality: Tax credits are likely to subsidise wages for some workers. But many people who receive them do not work at all or work less than a full working week. Whilst tax credits are targeted at poor households, raising the minimum wage as a substitute would benefit very different groups – often second earners or young people in affluent households. Higher minimum wages could also erode job opportunities for young, unskilled workers.
Mark Littlewood, Director General of the Institute of Economic Affairs, said:
“Times are tough for millions of families up and down the country. But this will not be fixed by introducing new laws, taxes and regulations. To really reduce the cost of living politicians must urgently tackle the root causes, rather than impose populist quick fixes.”
Notes to Editors:
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Red Herrings in the Cost of Living Debate, by Ryan Bourne and Kristian Niemietz can be downloaded here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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