Low pay and the cost of living: A supply-side approach



A paper about the misguided policies put forward to address the high cost of living

Economic Theory

The latest edition of this annual report, published in association with the Institute of Economic Affairs

A book on how eliminating government intervention can reduce the cost of living pay and the cost of living_web_0.pdf

  • The ‘cost of living crisis’ is now a substantial part of the UK’s political discourse. The prices of essential goods in some product markets have become politicised in a way not seen for a generation, and there is widespread concern about low pay levels.

  • Most of the new policies offered up in response to these concerns entail more government intervention through price controls, regulation, higher minimum wages and higher transfer payments. This amounts to treating the symptoms of high prices rather than addressing the underlying causes and could be very economically damaging.

  • The prices of many essentials such as housing, energy, childcare and food were rising substantially even prior to the financial crisis. Price rises in these markets have a disproportionate impact on those with low incomes. Policies which drive up costs in these product markets might have been tolerable in an age of abundance, but are much more difficult to justify given the recent living standards squeeze.

  • The UK’s planning laws and development restrictions have been a key structural cause of high and rising house prices. Relaxing them and decentralising the UK’s tax system to encourage development, seeking to return to historic house price to income ratios, could see prices fall by as much as 40 per cent.

  • An extensively regulated and formalised childcare sector, coupled with our restrictive planning laws, makes childcare very expensive in the UK. In international terms we have some of the highest out-of-pocket childcare costs as well as a very high taxpayer subsidy. Deregulation of the sector could bring significant savings to households with children.

  • EU policies such as biofuels mandates and the Common Agricultural Policy drive up food prices. In addition, restrictions on building reduce the productivity of the retail sector and raise prices for UK consumers. A very conservative estimate suggests food costs could be reduced by around 10 per cent if these policies were abandoned.

  • UK energy prices are raised by incoherent environmental policies. Rather than adopting simple, efficient means of pursuing carbon reduction, the EU and UK are encouraging green industrial policies, subsidies and price fixing, which increase energy bills unnecessarily. Abolishing the worst of these measures could reduce gas prices by 4 per cent and electricity prices by 22 per cent within the current carbon mitigation framework.

  • Sin taxes on fuel, alcohol and tobacco are a significant burden on many of the poorest households. Current duty levels are considerably higher than those justified by estimates of the ‘social cost’ of the activities. Reducing all three duty levels by 20 per cent could offer substantial relief to low-income households.

  • A market-oriented supply-side agenda in all of these areas could lower the cost of living for an illustrative working family with moderate needs by as much as £650 per month or £7,800 per year. Some of this would lead directly to higher disposable incomes, whilst savings on benefit payments could be used to reduce the tax burden.

  • Lowering the cost of essentials, rather than seeking to artificially raise wage rates for those on low incomes, could help achieve the same aim as the ‘living wage’ campaign – an aspiration for working households to have the means of being able to live comfortably without significant state assistance.

The publication featured in The FT Adviser and CityAM. 

To view the press release, click here. 

2014, Briefing 14:05

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Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.