Part two of our seven-part series on the cost of living crisis, running all this week. Find the first part here.
WHEN it comes to the cost of living crisis, UK Chancellor Rishi Sunak likes to paint a picture of himself as helpless in the face of forces beyond his control.
After facing criticism for not reversing the £20 cut to Universal Credit, Sunak said he “can’t do everything”. Asked why his Spring Statement was so light on measures to reduce the cost of living, the Chancellor replied that he “can’t help everyone because it’s too expensive”.
The hundreds of billions spent during the pandemic crisis to once again prop up Britain’s biggest banks and corporations suggests that there is always enough government money for those at the top, just not those at the bottom.
Moreover, Sunak’s supposed impotency looks more like dishonesty when many examples can be found of governments taking action, not just to provide financial support for those in need but also to regulate big business when it comes to the prices they are setting and the profits they are making. What this proves is that the cost of living is as much about politics as economics.
Here are some of the best examples of countries tackling the cost of living crisis.
The ‘price-quality shield’
SIX-HUNDRED kilometres to the east of Madagascar, in the Indian Ocean, is a small island called Reunion. The island was colonised by France in 1642. Slavery wasn’t abolished until 1848, nearly 50 years after the French revolution. For a small period of time in the 19th century, it was the world’s leading producer of vanilla. Today, Reunion Island is an “overseas department” of France, and has a population of 868,000.
Why am I telling you all this about a French island off Africa’s south-east coast? Because Reunion Island has perhaps the most ambitious approach to controlling the cost of living anywhere in the European Union (for which it is officially called an “outermost region”).
This policy is called the “bouclier qualite prix” (BQP). In English, the “price-quality shield”.
What the BQP does is bring together 153 products considered essential for living and sets a maximum collective price. The BQP is renewed every year and is currently set at €348, one euro less than in 2021. That’s despite inflation increasing by over 3% on the island in that time.
Whether the product is local or from one of the biggest brands in the world, they are all subject to the red BQP sticker on supermarket shelves. Items on the BQP list include toothpaste, diapers, rice, sausages and frozen fish. The products are selected to cover the everyday needs of a family with children.
“The idea is that producers, importers and distributors make an effort on their profit margins,” Pascal Gauci, secretary general for regional affairs at the Reunion government, has said of the policy.
The BQP has been in place since 2012, introduced as a measure to combat the higher cost of living in the “overseas departments” compared to mainland France. But it has only now become a major talking point in French politics, in an election year that has been dominated by the inflation crisis.
“Reunion is ahead of the game,” Jean-Luc Melenchon, the left-wing leader of “France Unbowed”, said at an election event on the island in February. “Here, you control 153 prices. We will do that throughout France.”
Melenchon narrowly failed to make it to the last round of the French presidential election, which was won by sitting President Emmanuel Macron, but his radical ideas for tackling the cost of living crisis helped galvanise a surge in support for his candidacy.
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That momentum has spilled over into the parliamentary elections in June, where he has realistic hopes of leading a broad left coalition to a majority, which would make Melenchon the country’s Prime Minister. The BQP could still make its way to mainland France yet.
Macron’s energy cap
WHAT Reunion Island’s price-quality shield illustrates is that it is possible to control prices, if the political will is there to do so. France provides yet another crucial example in the case of energy bills.
The French government’s 4% cap on energy prices for 2022 means the rise in heating costs for French households are a fraction of those in the UK, after the record breaking 54% increase in the UK energy cap in April.
What explains such a stark difference in energy prices?
Around 85% of French homes use state-owned EDF Energy as their supplier. The fact EDF almost has a monopoly and is publicly owned makes it much easier for President Macron to impose such a cap, even though, according to EDF, it has come at the cost of a €7.7-8.4 billion hit to the firm. Ministers have since cushioned that blow by buying €2.1bn of new shares that have been made available in the majority public-owned firm.
A second, less discussed, part of the price cap was that EDF would be forced by the government to sell energy from its 56 atomic nuclear reactors to rival French energy suppliers at a fixed wholesale price, to ensure those firms can also afford to pass on to consumers a price rise of no more than 4%. Macron, a former banker and avid proponent of capitalism, is effectively controlling domestic wholesale and retail energy prices from the Élyse Palace.
There is of course a crucial political context to this. Macron introduced the cap just a few months before the presidential election. Perhaps more importantly, four years ago he faced mass protests and road blockages which lasted the best part of a year after replacing a wealth tax with a tax on fuel, incurring the wrath of the “Yellow Vests” who mainly resided from rural towns and villages across France. The French president had learnt his lesson by 2022. Yet more evidence that prices are political.
Spain’s emergency rent cap
SPAIN has been one of the European countries hardest hit by rising prices, with inflation up 9.8%, the highest rise since 1985. The centre-left coalition government has been under severe pressure to act, and at the end of March it announced an emergency rent cap of 2%, in principle only until June 30, but with the inflation situation not improving it is likely that the cap will be extended.
The rent cap makes sense as even before the cost of living crisis began 3.5 million Spaniards who rent were already spending an average of 40% of their income on housing. Freeing up money from rent will allow more to be spent on the rising price of food and fuel. And unlike in the food and energy sectors, the costs of being a landlord – largely home maintenance – are not surging.
The 2022 Spanish Government budget also included a new “youth housing benefit” whereby anyone between 18 and 35 years old with incomes below €23,725 per annum can receive €250 per month towards housing costs. Critics warned that this may only entice private landlords to raise prices further, although even before the emergency rent cap was introduced, maximum rent increases in Spain were linked to the inflation rate.
Suffice to say, there would be nothing preventing the Scottish Government from also introducing an emergency rent cap.
Italy’s windfall tax
WHILE Boris Johnson was ruling out any windfall tax on the north sea oil & gas giants raking in billions during this crisis, the Italian Prime Minister Mario Draghi announced in early May that he was increasing the one-off levy on energy firms, which was originally announced in March at 10%, to 25%. The “national unity” government’s windfall tax applies to profit margins that rose by more than €5 million between October last year and April this year.
The 25% levy is expected to raise €11bn, which gives some insight into just how big the profits are for oil & gas firms right now, as Italy ranks only 39th in the world for oil production. The money will pay for a one-off cash payment of €200 to pensioners and workers who earn up to €35,000 per annum, tax breaks for energy-intensive businesses, and financial incentives to invest in renewable energy and home insulation.
It’s likely that, with the much greater number of oil & gas firms in the UK, the 25% windfall tax announced in the Chancellor’s major policy U-turn will raise significantly more than €11bn. BP made £5bn in the first quarter of 2022, and that’s despite taking a big loss on the sale of it’s 20% stake in Russian oil company Rosneft. Another UK headquartered company, Shell, made almost £7.5bn in Q1, three times as much as the same period last year.
No-one could plausibly argue that these companies have done anything to deserve such astronomical profits. Indeed, even BP’s chief executive, Bernard Looney, has said the oil trade is “a cash machine at these types of prices”.
Regulating prices and profits
WHILE there have been plenty of household tax cuts and fuel subsidies introduced by governments across Europe, the key measures highlighted here have all been about regulating big business. These examples show it is possible to tax mega- profits and to control prices if governments want to.
The idea has been ingrained into European politics for decades that the economy works best when we let “the market” decide, and that the job of government is to fiddle around the edges, adding a bit of extra welfare spending here and a bit of tax reduction there when necessary, but never intervening in prices or profits. That idea must be placed firmly into the dustbin of history for any government serious about tackling the cost of living crisis.
