Conservative Cost of Living Inertia

ConservativeCost of Living Inertia

The absence of credible solutions to the economic crisis is one of the most galling features of the Tory leadership contest, says James Meadway

On 5 September, the Conservative Party expects to announce its new leader and the new UK Prime Minister. Weeks later, Ofgem, the regulator of the privatised domestic energy market, is expected to impose a 64% increase on the price of gas and electricity bills, taking the average household bill to £3,200. This extraordinary increase, arriving just as summer fades and the days become colder, comes on top of successive hikes in the prices of essential foods and the motor-fuel millions rely on for their transport.

The squeeze on living standards this year has been merciless – sharper than anything in living memory. Even the high-inflation 1970s actually delivered increasing real incomes, as stronger trade unions and collective bargaining consistently secured inflation-beating pay-rises.

The closest parallel for a squeeze on households’ purchasing power of this kind is the early years of the Industrial Revolution – in the so-called Engels’ Pause. And while the price squeeze is apparent across the world, sparking riots and even the overthrow of the Sri Lankan Government, among major developed economies Britain is one of the hardest hit, as the historically low wages and Brexit chaos add to the misery.

Consistently – and understandably – voters think this cost of living crisis as the most important single issue they face. The “terror/fury” of participants in a Rother Valley focus group when asked about their immediate economic future, reported on by BBC Newsnight’s Lewis Goodall, is mirrored up and down the country.

The closest parallel for a squeeze on households’ purchasing power of this kind is the early years of the Industrial Revolution

None of this is set to improve: the Bank of England cautiously estimates 11% or perhaps higher inflation before the end of the year. Further rounds of sanctions against Russian oil, scheduled to kick in by January, could provoke further price spikes. Extreme weather across the world is damaging harvests and threatening supply chains.

It is possible that inflation starts to subside somewhat as we enter the new year. Yet it is unlikely to return rapidly to the (currently rather laughable) 2% target the Bank of England claims to aim for. And the Bank’s solitary weapon to fight this surge in prices – jacking up UK interest rates – is, as even Governor Andrew Bailey admits, at best useless against price rises arriving from the rest of the world. At worst, it is simply another turn of the screw on households, threatening an economic downturn.

A recession was narrowly avoided this month, thanks to a 15% rise in GP visits making a positive contribution to what the Office for National Statistics records as national output.

Whoever emerges from the knife-fight of the Conservative leadership election campaign will find their triumph incredibly short-lived. Before they have even had chance to choose the wallpaper, the new occupant of Number 10 will be faced with a series of hard economic decisions: over funding for the NHS’ winter crisis, over the shortages of teachers and, above all, in the dramatic loss of purchasing power that is already provoking strikes and protests.

Yet the scale of the crisis barely registers with the Tory contenders. From outside Westminster, the unreality of the contest is like peering at the world through a fish-eye lens. Distant concerns, issues that scarcely register with most voters like the alleged problem of ‘trans orthodoxy’ are brought leeringly close. Immediate, dramatic problems like the cost of living crisis and climate change are meanwhile pushed off the radar.

The only candidates to directly address the energy price hike have been eliminated. Sajid Javid, who was removed even before voting began, offered £5 billion for “cutting energy bills”. This is a long way short of the £28 billion the forecasted price hike will cost households, but it is, at least, more than nothing at all. Suella Braverman, meanwhile, hinted at a “VAT cut” for “energy costs”, presumably photocopying Labour’s policy, although untroubled by detail or costings. She, too, has now exited the contest.

Otherwise, the problem of high and rising prices for essentials has been transformed by all the candidates into a problem of taxes on motor fuel. This is at least a genuine problem, with petrol prices having risen 70% since last summer. Penny Mordaunt has the biggest single pledge, arguing for a 50% cut to VAT on petrol and diesel, amounting to around 12p off a litre of petrol. It has won her the support of Howard Cox, of the FairFuelUK tax protestors. But because oil prices have risen so much, it is equivalent to only three weeks’ worth of price increases this year. And with global prices forecast to rise still further, it’s likely to be wiped out by the year’s end.

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The Elephant in the Room

But the real culprit behind fuel price increases are the profits of the oil giants, with BP and Shell between them having made £40 billion in profits over the last year. As a result, cuts to the taxes due on petrol and diesel act as little more than a subsidy from government for those profits. Of course, none of these duty changes has any impact on the (generally poorer) one in five people who live in a household without a car.

Those excess profits have, of course, never been mentioned by the leadership candidates. Far more common have been pledges to shovel more cash back into the hands of corporate shareholders and senior managers, with various also-ran candidates attempting to outbid each other on the biggest pledged cut – a contest won by Jeremy Hunt, who promised to slash the headline rate of corporation tax from a planned 25% down to 15%, at a likely cost of around £26 billion.

Notably, however, the candidates with the biggest explicit pledges on corporation tax cuts – Hunt, Braverman, Javid, Nadhim Zahawi, and Grant Shapps – are no longer in the contest. Those left have been far quieter, while pledging, as all senior Tories must, to cut taxes in the future – just perhaps not yet. The shadow of Boris Johnson’s bigger state, higher taxes ethos still hangs over the party, and will do for some time. 

Intriguingly, although out of all of the remaining candidates she has been perhaps the least associated with Johnson, it is Penny Mordaunt who comes closest to maintaining his economic legacy. Her launch article in The Telegraph was careful to distance herself from the competition currently howling at the moon about tax cuts, stressing that “economic reform” is more important. Mordaunt (like all the other remaining candidates, bar Kemi Badenoch) has pledged to maintain the commitment to Net Zero, highlighting the potential for three million green jobs by the end of the decade. She promises more investment in infrastructure and science – key Johnson pledges, somewhat delivered.

There’s a hard political calculation behind this, and it’s one persistently underestimated in accounts of Johnson’s Government, which tend to fixate on the personality of its head, his personal foibles, and his many and varied inadequacies. But the coalition Johnson glommed together in 2019, centred (of course) on delivering Brexit but – crucially – noisily promising both an end to austerity and what he came to call ‘Levelling Up’ investment – centred on the big opportunities created by falling renewables costs and a global push for decarbonisation.

In the northeast of England especially, where the Conservatives have spent significant political and actual capital, this strategy is paying dividends, returning a thumping majority in the Darlington by-election, and an astonishing 85% vote for Teesside Mayor Ben Houchen.

A Conservative leader who managed to hold together this fragile 2019 coalition, offering just enough culture war to keep GB News happy, just enough higher rate tax cuts for the Tory heartlands, and just enough in the way of jobs and devolution for the ‘Red Wall’, may well get to the next general election in reasonable shape.

But the election is likely now to be two years away. We have a miserable winter to get through, and the likelihood of only limited respite from inflation next year. Johnson’s grand plans have amounted to very little in reality. It is not obvious that his replacement, thrown into a deep and worsening economic crisis, lacking the will or the inclination to challenge the super-profits and vested interests driving higher prices, quite likely facing actual social unrest, will do any better.

James Meadway is a former advisor to the former Shadow Chancellor John McDonnell MP and former chief economist at the New Economics Foundation