It is astonishing how many people are willing to claim that the UK would not be facing a cost of living crisis if Brexit had not happened, or if the Tories were not in power, and that the Chancellor has done nothing to help. This is – to use a technical economics term – cobblers.
Let’s start with the facts on consumer prices. The inconvenient truth is that inflation is just as high in the rest of Europe.
Preliminary estimates published by Eurostat on Friday showed that the average inflation rate in the euro area jumped to 7.5 per cent in March, including a particularly sharp rise to 11.9 per cent in the Netherlands.
In Belgium, home of so many EU bureaucrats, inflation was 9.3 per cent. Even in inflation-shy Germany, it was 7.6 per cent.
The latest official figure for the UK was 6.2 per cent in February. Of course, this rate will inevitably rise further, probably to around 7 per cent in March, and more than 8 per cent in April. But the idea that ‘Brexit Britain’ is some sort of outlier is just nonsense.
The usual suspects therefore have to fall back on the accusation that the UK government has done far less than the rest of Europe to shield the most vulnerable from higher prices. This claim doesn’t stack up, either.
Last October the European Commission unveiled a ‘toolbox’ of measures to protect consumers and businesses. This included emergency income support for energy-poor consumers, temporary deferrals of bill payments, and temporary tax cuts. The UK government is deploying all of these tools, in some form.
Of course, different countries have done different things. Unlike some EU members, the UK has not cut VAT on domestic energy bills. But UK VAT here is already relatively low, at just 5 per cent. Eliminating this would save less than £100 from a typical bill, with more of the cash going to higher energy users who are more likely to be better off. Instead, the UK has cut Council Tax by £150 for millions of lower-income households.
And for all its many faults, the Ofgem energy price cap will at least protect most UK households from further increases until October, when the Treasury could do more if necessary.
In the meantime, the UK government has also taken action in other areas (this crisis isn’t just about energy prices). This has included raising the threshold at which people start to pay National Insurance and reducing the taper rate for Universal Credit (both effectively a tax cut for low earners), as well as increasing the national minimum wage by 6.6 per cent.
To be clear, the Chancellor could, and probably should, have gone further in his Spring Statement. The measures announced last month will undo just one-sixth of the tax rises he has previously announced, and still left £30 billion of fiscal headroom that could have been used now.
My own wish list included a more realistic uprating of benefits, which are only being increased by the September 2021 inflation rate of 3.1 per cent, a one-year postponement of the hikes in National Insurance rates, and more to lower the standing charges in energy bills by taking off some of the environmental and social levies.
There are some relatively easy wins on regulation too, from rowing back on plans to restrict the promotion of ‘buy one get one free’ offers, to doing more to lower the costs of housing and childcare by reducing red tape. Energy policy remains a dog’s breakfast.
But these shortfalls do not justify claims that Rishi Sunak has been idle, or that this is a ‘Tory’ cost of living crisis unique to ‘Brexit Britain’.
Indeed, there are many reasons why the UK should weather the coming storm much better than the EU economies. One is that the UK economy had greater positive momentum at the start of the year. For example, the S&P Global PMI business surveys suggest that private sector activity in the UK outpaced the euro zone in every single month between October and March. (Yes, despite the Brexit drag on trade.)
In part this reflects the fact that the UK is one of the first major countries to emerge from lockdown. The pandemic may not be over (worryingly, staff absences are climbing again). But our economy is learning to live with Covid much sooner than most.
The UK economy is also less exposed to the fallout from the Russian invasion of Ukraine. Our trade and financial links with Russia are relatively limited, though no-one can escape the volatility in energy prices.
The UK has two other big advantages over the rest of Europe. First, our labour market is relatively tight and nominal wages are rising more quickly. Private sector pay growth in the euro area is barely 2 per cent, perhaps half the rate in the UK. As a result, while real wages are still likely to fall in the UK, they should at least fall by less than elsewhere.
Greater job security should also give UK households more confidence to dip into savings (where they have them) to maintain spending and living standards, even if incomes fall.
Second, there is far more scope for business investment to rise in the UK. In the fourth quarter of last year, business investment was still 8.6 per cent below its pre-Covid level. This year, though, surveys suggest that investment is finally set to rebound, helped by tax breaks and an easing of some of the Covid and Brexit uncertainties that have held companies back over the last few years.
Compared to their pre-Covid peaks, the UK economy had already caught up with the euro area in the final quarter of last year. This year the UK should pull ahead. The government – and Rishi Sunak – deserve at least some credit for this.
This article was first published in the Sunday Telegraph on 3rd April 2022