Smoking out red herrings: The cost of living debate

Source: IEA

Summary

• The approaches of the political parties to aspects of the ‘cost of living crisis’ seek to treat the symptoms of problems, rather than addressing the underlying causes. In particular, parties have advocated or implemented policies which completely ignore how existing government policies lead to structurally higher prices in essentials such as housing, food, childcare and energy.

• There is likely a political gain from being seen to be doing something which is populist, irrespective of what the long-term consequences might be. It is often difficult for voters to make the link between a negative outcome and a particular government policy, whilst policies often create some clear ‘winners’.

• The cost of living debate is distorted by a host of myths, straw men, red herrings and outright fallacies about housing, energy, food, childcare, taxes and welfare which are repeated ad nauseam in the media and in parliament.

• Arguments suggesting that the current housing supply is large enough for our needs and wants are misguided. Realistically measured, the UK housing supply is the lowest in Western Europe. Redistributing this meagre supply is not the answer to our housing crisis.

• Brownfield development is over-emphasised by campaigners as the solution to the housing shortage. There is little that is suitable for housing development, particularly where demand is high and once competing potential uses are considered. There are also prohibitively high clean-up costs for many sites.

• A decline in public sector house building is not the cause of our current housing shortage. Adjusting for population size, UK house building has been in decline since the 1960s. The real reason is the existence of planning constraints, which have become binding.

• Greedy landlords’ have not been responsible for high rents. Overall, rents have recently risen by less than inflation whilst rents on new tenancies have risen at a similar rate to house prices.

• There is no evidence that privatisation is associated with higher energy bills. Bills fell significantly after energy was privatised, and the price increases of recent years have been associated with rising wholesale costs and government-induced environmental and regulatory policies.

• Privatisation per se is not responsible for high rail fares. Operators make fairly modest profit margins. Importantly, the potential productivity gains associated with private enterprise in rail have been suffocated by heavy-handed regulation, a complex and fragmented industry structure imposed by politicians, and huge sums being wasted on uneconomic projects.

• There is a variety of factors other than rising food prices that may explain the trend for the increased use of food banks. To the extent that food price rises have contributed to increased living costs, these have been caused by global factors.

• There is no general economic rationale for childcare subsidies. They can increase maternal employment and hence measured GDP, but this is no different from advocating subsidies to encourage longer working weeks or for people working until they are older. A policy for improving maternal employment rates should focus on making childcare cheaper overall.

• Childcare subsidies do not reduce the cost of childcare. Whilst the families receiving the subsidies may benefit, other families face higher tax burdens. In the UK we have high public and high family childcare costs. This suggests that childcare is expensive for supply-side reasons

• It is very difficult to justify current levels of fuel, alcohol and tobacco duties using ‘social cost’ arguments. Fuel duty far exceeds the cost of roads and maintenance as well as the social cost of carbon emissions. Tobacco and alcohol duties, meanwhile, are way above the level which would account for the genuine financial costs borne by others associated with the activities.

• High levels of sin taxes are not legitimised because they are ‘voluntary’. Fuel duty on petrol in rural areas can be considered to some degree essential. Furthermore, the government imposes some significant sin taxes with regressive effects despite knowing that demand is likely to be unresponsive.

• Historically and internationally, government welfare spending in the UK is very high. The living standards of the poorest could be improved, and poverty tackled, via a supply-side agenda in product markets to lower the cost of living. More government spending is therefore neither necessary nor sufficient to reduce poverty.

• The commonly used ‘most poor people are in work’ argument is, at face value, true. But this statistic is driven by the fact that there are more people in work than people not in work. There is strong evidence that the degree of labour market attachment matters in terms of lessening the probability of a household being in poverty.

• The extent to which tax credits subsidise employers is exaggerated – many households in receipt of them do not work or do not work a full working week. Furthermore, instituting a higher minimum wage as a policy response to this tax credit subsidy is ill-targeted to those really in need and could have negative consequences for young and unskilled workers.