Rishi Sunak has claimed there’s nothing he can do about the external global circumstances driving the cost of living crisis, but he’s dodged the real question: how can he best respond, and avoid an escalating crisis and a costly recession? In fact, there are fair, green solutions to this crisis staring us right in the face.
And they’re solutions that should get support from business. Over the past few days, the trickle of increasingly panicked messages from businesses on the cost of living crisis has become a flood. Already alarmed by the Bank of England’s warning of a looming recession and “apocalyptic” price rises, business leaders were spooked when Sunak’s speech at the CBI last week left many people wondering if he understood the scale of the challenge. At the weekend, the chief executive of E.On – a company not known for its economic radicalism – declared that “the most important thing is that the government intervenes” and the chancellor must “tax those with the broadest shoulders”.
Consumer spending drives the economy. If people are struggling to pay their gas bills, they have less money in their pockets to spend on the high street or a restaurant meal. Which is why, as the CBI’s director general, Tony Danker, has said, Sunak’s first step should be investing in social security via increases in universal credit and legacy benefits to prevent families falling into destitution. This would also help to stabilise the economy, not fuel inflation. Income tax cuts wouldn’t help here. They’d give a big bonus to the rich, but the poorest, already facing the choice between heating and eating, wouldn’t benefit at all.
Second, we need a serious industrial strategy to boost confidence, give long-term business certainty and restore investment in the UK’s productive capacity. Sunak promised to increase private investment with a “super-deduction” incentive, but in fact it fell in the last quarter. To make this long-term vision work, Sunak should break up the Treasury and form a new Ministry for Economic Strategy with the target to drive investment-led, green growth.
Third, rather than continuing to slip on our green ambitions, we must double down. Every home newly insulated and each wind turbine erected across the UK will reduce household fuel bills. We need to make this investment before 2050 anyway – so let’s do it now, to support the economy and bring down electricity bills sooner. As Danker said, non-inflationary, green investment opportunities are there for the taking, but government must “confirm them, launch them and fund them”.
To do this we should build on the lessons learned during the pandemic and form a government taskforce to drive public and private sectors to collaborate better, spur business innovation and unblock the supply chain. We need an effective civil service, not one with a recruitment freeze and job cuts hanging over it. That collaboration, after all, not greed or capitalism, is what got us Covid vaccines and could bring lower energy bills too.
Next, the government must make clear to businesses that just as they were supported in the pandemic, now companies must themselves act responsibly. Andrew Bailey, the governor of the Bank of England, misrepresented the problem when he said wage restraint was most important in stopping inflation. In fact, companies can reduce their profits too, to keep prices down – as the Bank has since acknowledged.
Profits have gone up over recent decades, particularly in uncompetitive, concentrated sectors. In a particularly egregious example, petrol stations haven’t passed on the fuel duty cut to customers, benefiting their bottom line at the public’s expense. Evidence from the US suggests that recent rising prices have been disproportionately driven by rising profits, not wages. The real issue is that we’ve been too relaxed about some companies in some sectors building too much market power for too long. Their excessive market power is pushing prices higher still.
At the same time, the risk of a wage-price spiral is low because of a collapse in trade unionism. The last time inflation was at 9%, more than half of workers were in a trade union; today it’s less than a quarter. Consequently, not only are wages failing to keep pace with inflation, but we’re seeing their biggest fall since records began. Instead of forcing workers to take the strain, companies should show profit restraint and cut their dividend payouts.
Finally, as fossil fuel companies pile up huge, unexpected profits from the very crisis that is pushing millions into absolute poverty, it’s fair for the government to redistribute these into welfare and income support. Even the former Treasury minister Jesse Norman and the CEO of E.On seem to agree. Like Italy, we should levy a windfall tax on oil companies whose profits have soared merely because of Vladimir Putin’s invasion of Ukraine. Extraordinary unearned profits call for extraordinary measures.
Sunak needs to realise that intervening now to avert a recession, help the worst-off families and secure a green transition is the best way to support everyone. This is the most responsible thing to do. In fact, as the penny-pinching chancellor should realise, we simply cannot afford not to.
George Dibb is head of the IPPR Centre for Economic Justice
