As the UK is facing a massive cost-of-living crisis, high inflation and falling real wages, the Intergenerational Foundation is supporting the Stop the Squeeze campaign. Alec Haglund, IF Researcher, sets out the argument for why the government ought to implement the policies advocated by the Stop the Squeeze campaign in order to avoid the largest collapse in living standards for over half a century.
We are all being squeezed
With inflation currently above 10%, and the Bank of England predicting that the target rate of 2% will not be reached for a couple of years, working households are facing a squeeze on their real wages and living standards not witnessed in the UK for over six decades. Those with mortgages are seeing their monthly payments skyrocket while renters must cough up ever more of their falling real wages to their landlords, as rents are increasing over 10% year-on-year.
Although the squeeze on living standards is affecting people across generations all over the country, young people were in a particularly difficult economic situation already before the worse of the crisis began. Many people have seen their real wages stagnate for over a decade now, but young people have also seen the amount of total spending that goes towards essentials increase from 53% in 2002 to 62% in 2018. Recent research by IF shows how the precarious financial situation young people find themselves in has led to them having very little in terms of savings to soften the blow of rising prices and falling real wages.
Poverty and inequality on the rise
Before the pandemic, 4.3 million children in the UK were already living in poverty, which was an increase of half a million children in poverty in comparison to five years prior. Without immediate action from the government, this unacceptable situation is unlikely to improve in the near future. Even if inflation will drop to around 3% by next summer, that will not mean that prices will fall but merely that they will rise at a slower pace. The high cost-of-living will not go away by itself.
The inflationary crisis is not created due to rising wages but rather by external factors, but the Bank of England appears determined to crush the spending power of UK households further by raising rates. This can only lead to UK households feeling even more pressure than they already do to cover their monthly expenses, as pay rises have not kept pace with rising prices.
The Intergenerational Foundation exists to ensure that policy is fair to all – the young, the old and those to come – and is of the strong belief that the policies advocated for by the Stop the Squeeze campaign would be a massive step in the right direction towards intergenerational fairness. To avoid the cost-of-living crisis increasing intergenerational injustices, daring and transformative policies are now required.
What can the government do?
It must be understood that the dreadful economic situation we find ourselves in is not one that cannot be solved. With enough political will, we can both overcome the worse of the crisis in the immediate term and create a policy framework to reduce the likelihood of having to face such a situation again in the future. The Stop the Squeeze campaign shows that there are three areas where the government should take immediate action.
#1 Guarantee affordable, clean energy for everyone
Among the primary reasons why the cost-of-living crisis has hit the UK particularly hard is our inefficient and failing energy system. The UK is overly reliant on imported gas and fossil fuels, has a poorly insulated housing stock, and rampant profiteering throughout the energy industry with fossil fuel extraction companies seeing record profits at the same time as households cannot afford to pay their energy bills.
Due to the impending climate crisis, the only way to ensure energy security and affordability for future generations is for the government to take a bigger role and massively boost investment into domestically produced renewable energy, while also improving the energy grid, storage facilities and insulating homes.
To help those most in need and to guarantee affordable energy for everyone, the government should consider charging for energy in a progressive manner, not unlike how the tax system works. Households could receive a certain amount of energy for free, with every unit beyond that limit being charged at higher rates.
#2 Ensure everyone has access to a Living Income
The fact that 75% of children growing up in poverty live in a household with at least one working adult shows the impossibility of being a parent on the minimum wage, and how children suffer as a result.
The best way to overcome a recession is to ensure that spending power is increased for those who struggle the most to make ends meet. This means that we must immediately raise the minimum wage and ensure that the social security system prevents people from falling into poverty by linking benefits to the cost of living.
#3 Reform the tax system with higher taxes on wealth
The current system of taxation is highly unfair, as the tax burden falls disproportionally on those receiving income from work, rather than those wealthier individuals who receive income from wealth, profit, rent, dividends and so forth. This is intra-generationally unfair as it places a higher tax burden on those who can least afford it. It is also intergenerationally unfair as most young people receive all their income from work and must pay very high marginal taxes on that income, while older and wealthier generations with higher total incomes pay far less in tax as much of that is unearned income which is taxed at lower rates.
Greater taxation of wealth will not only provide funds to support those in need but will also help to reduce the increasingly high, and quickly growing, levels of inequality in the UK. Without a robust framework for wealth taxation, the UK risks creating a future where children grow up in a world where the vast majority of all assets, such as housing, lie in the hands of very few wealthy individuals. In the name of intergenerational fairness, we must ensure that wealth inequality does not become entrenched in our economy, and instead build an economy where both present and future generations can thrive.
Therefore, we should implement policies which equalise the rate of taxation for earned income and income from asset-appreciation (which would raise approximately £16 billion per year), apply National Insurance contributions to all forms of income (raising around £30 billion per year), and consider long-term wealth inequality reduction measures such as small wealth taxes on total wealth.
We need action now
The policies campaigned for by Stop the Squeeze have widespread support across society and would provide both immediate help in the cost-of-living crisis and simultaneously be a vital step in putting the economy on a more sustainable and fair footing for future generations. If you wish to support the Stop the Squeeze campaign, you can find all the relevant information here.
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Image via the Stop the Squeeze website.