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The cost of living crisis in the UK is about to get much worse. Last week, the Bank of England raised interest rates by 0.5 percentage point to 1.75% and forecast inflation would rise to 13% by the end of the year. It also said Britain was in a prolonged recession and living standards would fall by 5% over the next year or so, the biggest fall on record.
This comes after 15 years of stagnant living standards: the poorest fifth of households experienced zero growth in median household income between 2005 and the start of the pandemic. The energy price cap, which was just over £1,200 in 2019, is now expected to reach £3,600 in the autumn; Rising energy costs account for about half of the inflation rate. As a result, low-income families will be unable to cover basic housing, heating and food costs, and many parents face existential decisions about how to house and feed their children. Russian President Vladimir Putin is responsible for the global energy price shock that is driving up inflation everywhere. As a result of the war in Ukraine, global gas prices have skyrocketed as Russia halted supplies to Europe via the Nord Stream 1 pipeline. Putin has threatened further consequences if the West imposes further sanctions.
But the UK, which the IMF and OECD are forecasting to have the lowest growth of any wealthy nation for next year, has remained particularly exposed. We have little gas storage capacity due to government decisions and the economy is suffering from a long-standing productivity crisis. Productivity growth fell sharply after the 2008 financial crisis and has never recovered. Sluggish growth over the next decade was instead fueled by consumer spending, fueled by rebounding real estate prices. A decade of public spending cuts has left low-income people further exposed as tax credits and benefits have been eroded, public services have failed to meet demand and regional inequalities have widened.
Brexit has exacerbated these structural economic problems. What Britain needed after the financial crisis was a plan to rebalance the economy away from its dependence on the housing bubble and towards investment- and export-led growth. Those countries that have been hesitant to recover post-Covid have done so because of exports. Great Britain, on the other hand, sees corporate investment and export declines as a result of Boris Johnson’s hard Brexit. According to one estimate, the economy is already 5% smaller than it would have been if the UK had remained part of the single market and customs union. This amounts to billions of pounds lost through household income and public budgets every year. It’s an indulgence Britain can hardly afford, a decision that will be viewed as a ridiculous act of economic self-harm at a time of global economic crisis.
By the fall, many people will find themselves in a financial crisis, unable to pay their mortgage, or unable to pay their rent. But the prime minister and the chancellor are now abroad on vacation. Meanwhile, the contest between Rishi Sunak and Liz Truss for the next leader of the Conservative Party continues. One will be chosen by Conservative Party members on September 5 and will be responsible for guiding the country through this economic emergency. However, their proposed solutions are more geared towards gaining the support of fewer than 200,000 members than addressing the country’s urgent needs.
Sunak remains a deficit hawk who would horribly expose the NHS, schools and other public services to the real spending cuts that would result from double-digit inflation, and who, as it emerged last week, has boasted about taking money from the poorest areas of the country . Truss has pledged to increase fiscal policy by 30 billion. She has expressly spoken out against the urgently needed targeted measures to relieve low-income families. The Bank of England’s rate hike, which aims to lower inflation by raising unemployment and further dampening growth, risks making an already painful recession worse.
The Conservative Party is failing the country. It doesn’t matter that Boris Johnson is an acting prime minister or that MPs are locked in a bitter leadership contest. The government urgently needs to introduce a new support package before the fall that will increase Universal Credit and provide more one-off support for low-income households. With inflationary cost pressures set to result in significant real cuts, it must also increase spending on public services, with huge implications for the NHS, social care, schools and the police. It was intended to increase revenue from the windfall tax that Sunak had imposed on North Sea oil production during his time as chancellor, by abolishing the generous tax breaks he had planned.
The UK is facing an economic storm that could be even worse than the economic impact of Covid. But the conservative government is unable to act. If the new prime minister doesn’t act on the first day he takes office, voters won’t be quick to forgive him.
