Stagflation Nation

Malcolm Christie and Mike Davies warn the UK’s ‘price-wage spiral’ is now spiralling out of control and creating a severe cost-of-living crisis

IN the UK the cost of living is now increasing much faster than the net incomes of all the population except the super-rich. How has this has come about and what are the prospects for the foreseeable future?

Cost inflation generally has been accelerating for some time. Those on pensions and other benefits lose out in these circumstances because their annual increase in gross income in April is driven by the significantly lower cost inflation rate from the previous autumn. The same goes for workers in the public sector whose pay ‘rises’ fall well short of inflation: they are pay cuts in real terms. Indeed nearly all workers suffer from rises significantly lower than the rate of inflation. They do and will struggle to protect the real value of their incomes. 

It is noteworthy that the media almost invariably refer to this as the problem of the ‘wage-price spiral’ even though all the evidence is that what we are seeing is a ‘price-wage spiral’. The factors driving inflation are clearly not wage demands but increases in prices.

The present government is also hitting the working population with an increase in national insurance contributions in April. Income tax allowances are also frozen which means that any rise in income leads to a larger proportion being taxed.

The effect of all this is that nearly everyone is finding that their net income after tax buys less than before. In short, their standard of living is being cut.

Costs of energy

Even before the Russian invasion of Ukraine, we saw large increases in energy prices with more in the pipeline. Gas prices in the UK were already set at least to double, and likely treble, because of a changing balance between supply and demand in the global market.

After Japan’s Fukushima nuclear disaster in 2011, Germany had decided to move away from nuclear power generation. This led to that country relying on gas for 60% of its power generation. Much of the gas used in Germany came from Russia and a new pipeline, Nord Stream 2, was to be built to further increase this supply. Since the Russian invasion of Ukraine, this has been suspended. Nonetheless Europe is heavily dependent on Russian energy. If western Europe goes further in reducing its imports of Russian gas and oil, this will further drive energy costs upwards.

Rising energy costs drive inflation directly and indirectly. Households are hit with huge rises in the cost of heating, lighting and cooking – regardless of their exact mix of fuels. People’s transport costs are similarly rocketing. Nearly all goods are made more expensive by increases in the cost of fuel for manufacturing and/or transport.

UK energy ‘policy’

As recently as five years ago, it was possible to believe that the UK had a vaguely coherent set of policies, at least for power generation. These included moving away from coal and increasing the use of gas in the short term, relying on a substantial nuclear sector to cover a proportion of year-round base load, and slowly growing the generation of power from renewable sources.

Whether or not one agreed, it did make some sort of limited sense. What the government has and hasn’t done since, however, suggests that rather than an energy policy with which we may disagree, the government has for years now had no energy policy at all. Decisions are now being made without any policy framework as a guide. We are at the mercy of global markets.

For example, the current nuclear power stations are all coming out of service in the next three years. There were supposed to be large new ones being built at Hinkley Point, Sizewell and Wylfa. But of these only that at Hinkley Point is currently being built. The capitalists who were supposed to be funding the other two have pulled out, despite the government having promised them outrageously large, guaranteed subsidies once the plants were up and running.

Shale gas from fracking was supposed to take the place of some of the reducing output from the North Sea. Fracking exploration has been stopped.

In terms of renewable power generation, the government cancelled the tidal barrage in the Severn estuary, failed to increase subsidies and feed-in tariffs to encourage small scale installations. They have effectively blocked any significant expansion of onshore wind turbines. There also appears to be chaos regarding investment in inter-connectors to neighbouring countries and to windy islands in the north. Our natural generation opportunities are being disregarded.

The government has also cancelled almost all support for home insulation – a key factor in reducing our demand for energy.

As things stand, the government’s non-policy means we shall suffer a grave lack of energy security despite sharply increasing energy prices for the foreseeable future. We will pay through the nose but, even so, not necessarily get what we need.

Monetary & tax policy

For the last twelve years the Bank of England has been engaging in ‘quantitative easing, i.e. printing money and giving it to the banks. The banks then used it to support the rich. What the Bank of England should have been doing is giving this money to the poor, or to everyone. This would have led to the poorer members of society spending more and stimulating the whole economy.

However, the government has chosen to follow regressive monetary and tax policies. The rich pay less than their share even if they don’t avoid or evade taxes altogether (which of course they do). What we need are progressive taxes on income, taxes on very large personal wealth and more stringent taxes on corporations. In terms of energy, there is an urgent need for a windfall tax on the excessive profits made by the big energy companies. These profits arise not from any actions of the energy companies but are simply a by-product of changing conditions – profits from the misery inflicted on millions of people.

Rishi Sunak, the chancellor of the exchequer, has been presented with an unparalleled opportunity to shift Britain’s energy sector away from fossil fuel dependence in favour of renewables and towards reducing energy use. Instead he has chosen to do nothing for renewables, nothing for insulation, but piss away money on a futile and counter-productive 5p cut in petrol prices (which will be swept away in a week).

While a tiny minority grow ever richer and richer, everyone else is becoming poorer. The effects of this are harmful to everyone (even including the wealthiest).

The cost of living squeeze is bad now. It will get worse. Costs, especially for energy will rise and rise. Incomes will fail to keep pace. The government will continue to raise taxes, except for the super-rich.

Malcolm Christie and Mike Davies are the AGS’s Treasurer and Chair respectively

%d bloggers like this: