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Joe Storey

Joe Storey is an A-Level student who is researching Margaret Thatcher’s influence on the current Conservative party’s economic policies.

The false narrative emerging from the crash is astounding – namely, that reedy bankers and free markets caused a systematic international economic collapse, with the actions of government-sponsored Fannie Mae and Freddie Mac who saturated the mortgage market with sub-prime loans broadly deemed irrelevant.

Regardless of the loose monetary policy pursued by Western economies, or the UK government operating a deficit from 2002 onwards after abandoning Conservative spending plans (between 2000 and 2008, Germany’s debts grew by seven per cent, whilst the UK’s spiraled by 157 per cent), blame continues to be pinned on private companies and, most notably, the banks.

Yet the pain caused by government extends beyond the crisis to the so-called ‘cost of living’ crisis. While originally pushed by Ed Miliband and co, the opposition benches have been quiet on the matter recently, given that there is now a degree of real wage growth. However, Labour’s calls for more government action overlook the role it has in artificially inflating prices. In notable areas such as energy, food and housing prices, government actions have a demonstrably detrimental effect on consumers and the economy as a whole.

Politicians have long lauded the progressive nature of Britain’s tax system, but it has become increasingly pernicious for those on either end of the income spectrum through the introduction of ‘sin taxes’ and VAT increases. An extension of the nanny state with increasingly burdensome duties on alcohol and tobacco, combined with VAT and council tax, means our progressive tax system now accounts for a monstrous 47 per cent of the bottom ten per cent’s income, the highest of any income group.

Cutting duties on alcohol, tobacco and fuel by a mere 20 per cent would return over £600 to the average family. With our lowest earners having close to half their income consumed by the Treasury, it is clear our tax system is perverse, and that the burden of government is increasingly unsustainable for many people. For those at the other end of the spectrum, it is clear that they do pay their fair share and bear the cost of their success. The top ten per cent of earners in the UK contribute, on average, £30,023 more in tax than they receive in benefits (including education and the NHS), a figure which is more than the average salary in Britain.

Whilst government manages to consume increasing amounts of peoples’ incomes, it also artificially inflates the cost of living. If left to market forces, food prices would be 17 per cent lower in the UK using the Consumer Nominal Protection Coefficient for the EU between 2000-2010, due to the producer subsidies agreed under CAP. This policy is estimated to cost Britain an estimated £10 billion per year through increased food prices and regulations, a cost of over £330 for each taxpayer.

Unfortunately for consumers, the cost of government is also increasingly noticeable in the energy market. Despite their frequent vilification, energy supply companies operate a modest profit margin of less than five pe rcent. As they operate in the futures market, the companies are unable to transfer any falls in the wholesale price immediately onto consumers.

Government, on the other hand, possesses the ability to reduce bills overnight. With VAT accounting for five percent of an energy bill and environmental levies of 17 per cent on electricity (over double the profit margins of these companies), governments are capable of a significant reduction immediately.

Admittedly, policies such as the Boiler Regulations and Products Policy have stemmed price rises to an extent through efficiency gains, but this is more than outweighed by the cost of the EU European Trading Scheme (ETS) and Carbon Price Floor (CPF). In the electricity market, it is estimated green levies could result in bills being 41 per cent higher than the market rate by 2030. It seems somewhat bizarre regressively to inflate energy prices in the name of climate change when the UK emits less than two per cent of global carbon emissions and whilst supposedly environmentally friendly countries such as Germany are opening more coal power stations.

Perhaps government regulation is felt most painfully in the housing market, where extensive planning regulations (combined with low interest rates and a sharp influx of foreign capital) have led to house prices increasing faster in the UK than anywhere in mainland Europe. Housebuilding in the UK is at its lowest level since the 1920s with our population expected to surpass 70 million by 2028.

A flabbergasting figure from the Economist indicates the broken nature of the UK housing market: if groceries increased at the same rate as housing since 1971, a chicken would cost £51.[2] In terms of monetary costs for individuals, the Institute of Economic Affairs estimates that liberalisation of planning regulations and a decentralisation of the tax system could save the typical family £250 per month.

Not only are prices rising to extortionate levels, but Brits are now getting less bang for their buck: we have the smallest homes in Western Europe, with houses in Holland on average 53 per cent bigger and a colossal 80 per cent bigger in Denmark. It is simply wrong to suggst planning liberalisation would result in our great countryside becoming a concrete jungle; just seven per cent of the UK is classified as urban, allowing ample space for further house building to satisfy increasing demand. No one is calling for a grey countryside – just selective building in the areas of the greenbelt with no amenities or natural beauty (of which there are surprisingly many).

Somewhat paradoxically, the general consensus appears to be to call for more government action in an attempt to tame the cost of living crisis, despite the bloated state’s regulation and taxation being the root of the problem through artificially inflating prices.  If the state is to be serious about further easing the burden on individuals, it should start with a significant redefinition of its roles and allow the market to flourish – after all, acts of government, not private sector efficiency, are causing the cost of living crisis.

102 comments for: Joe Storey: The root cause of the cost of living crisis is government

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