With or without a cost of living emergency the UK government looked vulnerable. A chancellor losing his once golden touch, a prime minister questioned by police about partying in lockdown. Boris Johnson’s party veers from scandal to scandal.
That households are experiencing the biggest squeeze on living standards since modern records began in the 1950s adds insult to injury, ahead of a local election campaign that will test the Conservative vote-winning machine. For those out canvassing for the party before next month’s polls, what positive news is there to talk about?
This time last year the political landscape was very different. Furlough had kept the worst economic ravages of Covid at bay, while a hoped-for end to the pandemic was hoving into view thanks to rapid progress with the vaccine programme. Johnson was on a high, promising “jabs, jabs, jabs and jobs, jobs, jobs” as his party crushed Labour in the polls.
When voters head to the ballot box on 5 May they’ll have less to feel good about. Growth may have returned, but it won’t feel like it for many. Whereas the average household budget was barely hit by the Covid recession, with many saving record sums during lockdown thanks to government support, this year will be marked by the lack of help as incomes plummet. Despite economic growth in aggregate, the typical family will face the worst financial damage since records began around the time postwar rationing came to an end.
Over the past four decades, real household disposable incomes have fallen on just four previous occasions: three times after the 2008 financial crisis, and again after Brexit crashed the pound, knocking Britain’s spending power.
On an official basis the UK economy recovered its pre-Covid level around the turn of the year, after a sharp but thankfully short recession. However, the downturn is still going for most people, with average real incomes now expected to take until 2024 to bounce back – a full two years later.
Given these factors it’s surprising Rishi Sunak chose not to do more in his spring statement mini-budget. The chancellor had been fond of talking about “building a bridge” over the economic ravine opened up by Covid. While he was broadly successful, the task is clearly not complete.
According to the New Economics Foundation, more than 34% of the population – as many as 23.5 million people – will be unable to afford the cost of living this year. Using a metric known as the minimum income standard – based on public polling of what people think is needed to meet socially accepted basic expenses – it estimates almost half of all children will fall below the line.
The hit will be more significantly felt outside London and the south-east, with 44% of all families in the north-east falling below the minimum income standard. Given the squeeze will have a disproportionate impact on poorer regions, it’s all the more remarkable that Sunak omitted any new funding for levelling up at his spring statement.
After the refusal to increase benefits in line with soaring inflation, the Joseph Rowntree Foundation says Britain will see the biggest fall in the value of the basic rate of out-of-work benefit in 50 years. After a decade of cuts and freezes made under the Conservatives’ austerity drive, this benefit has lost value in eight of the last 10 years. Not only have the Tories failed to soften the current cost of living crisis, they dismantled vital support systems in the years preceding it.
The big danger now is that such intransigence could set the conditions for a worse recession ahead. Most forecasters expect the squeeze on households could ease next year, yet risks are growing that what started as a temporary pinch might be locked in for much longer.
Talk of recession is rising on both sides of the Atlantic. With household finances suffering a heavy blow, consumer spending is expected to slow sharply, while the prospect of a sustained rise in business investment could be put on ice thanks to the mounting uncertainty. In the US, economists have started to warn that a recession shock is coming.
Official figures this week are expected to reveal a slowdown in the UK economy during February and yet another rise in inflation. Last month the Office for Budget Responsibility said there was a one in five chance that GDP would fall this year or next, amid uncertainty over Russia’s war in Ukraine, inflation, global commodity prices and Covid.
There is growing agreement that Sunak will need to do more. Steffan Ball, the chief UK economist at Goldman Sachs and a former chair of the one-time Tory chancellor Phillip Hammond’s council of economic advisers, expects Sunak will be called on to act.
First and foremost, a rise in benefits is required to soften the blow from soaring living costs. Beyond doing so for basic reasons of fairness and to support wider activity in a faltering economy, Ball highlights a technical inconsistency that could be addressed.
Since the 1980s governments have typically raised the value of benefits each April by the rate of inflation in the previous September, aiming to keep them in line with living costs. For this year, however, last autumn’s inflation rate of 3.1% now looks badly out of step as the measure for the rising cost of living surges towards 8%.
Looking ahead to this autumn, inflation is forecast by the OBR to be 7.5% come September, meaning a big rise in welfare is pencilled in for spring 2023. Yet when households are in most need now, and with inflation forecast to fall back sharply next year, a case could be made for pulling the increase forward.
The government must, at a minimum, increase the value of benefits to show it is serious about helping those most at need. Failure to do so would only ensure that conditions for rising poverty become entrenched, while political parties with a record for making poorer do not tend to do well in the polls.