Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.
The Conservative Party Conference seems like an age away. Boris Johnson was riding high and Keir Starmer was the leader who looked vulnerable. Many Tory MPs and activists thought the next general election was in the bag. And shortages of long-distance lorry drivers meant that the Prime Minister could weave a narrative about higher wages boosting living standards.
Now it all looks different. It is not all to do with parties at Number Ten. Many Conservative MPs are just as worried about the looming cost of living crisis driven by real wages stagnating whilst energy bills and taxes are rising.
Wages enjoyed a brief surge during the summer, so there was a moment when we could hope we were at last becoming a high skill, high pay economy. But now pay growth is falling whilst prices are rising fast. Real wages were flat over 2021, and will probably remain so in 2022, with the gap between high inflation and low wage growth at its worst during the spring.
Energy prices are expected to rise by an average of at least £600 in April, with little respite on the horizon for at least a year or two. Less affluent households will be particularly hard hit, as they spend three times more of their budget on energy than affluent households.
Households face another bill for £600 in April because of tax increases – the start of the four year freeze in tax thresholds and the new 1.25 per cent National Insurance Levy for health and social care.
This adds up to a £1,200 hit for households with no increase in their real wages to help pay for it: even the minimum wage increasing by 6.6 per cent may be no more than the rate of inflation.
This is what we at Resolution Foundation have identified as a looming crisis for the living standards of millions of families. They might be willing to shrug off stories about parties in Downing Street if they feel that at least the Government is delivering for them. But if they are already struggling to make ends meet, then they will be even more cross if it looks as if there is one rule for people at the top and a different one for everyone else.
What can be done to help? Although the energy price increases and the tax rises appear to be pretty much equal, if you look behind the averages there is a crucial difference. The tax rises will fall most heavily on affluent families, whereas the energy price increases hit low-income families the worst. So easing the burden of energy costs should be the priority.
There is some help already. The Coalition introduced the Warm Homes Discount of £140 on energy bills for some pensioners and other low-income families. That cost is borne by wider energy bills, not public spending, so it might be the kind of benefit increase which the Treasury likes.
Cutting the five per cent VAT on energy bills would save about £60 a year from the average bill, but would help richer households most: they have bigger bills even though energy is a much lower proportion of their total spending.
The burden of energy bills on low-income families is so heavy because we have made a mess of helping them use energy more efficiently. Better insulation of walls and lofts could each on their own save £250 a year from energy bills, and is key to both ending fuel poverty and hitting our net zero targets.
When there were public programmes to help fund such initiatives, poor people came to live in more energy-efficient homes than more affluent families. But now they live in less energy-efficient homes, which cost more to heat. We once insulated a million lofts in one year – that is now down to 25,000. It is a similar story with wall insulation.
More low income families live in the private rented sector, where incentives are all wrong since the costs accrue to the landlord and the savings to the tenant. It is one reason why low income families have the most inefficient boilers which push up their energy bills.
So an urgent programme to improve the energy performance of the homes poor people actually live in would make sense. It would get us back on track for lowering carbon, help poor people most and create good jobs in tough areas. Combined with a boost to the Warm Homes Discount, it would add up to a useful and attractive package.
We already have the backbone to achieve this, with a new phase of the Energy Company Obligation set to start in April. Now is the time to turbocharge it.
There are many Tories who would also like to see the national insurance increase abandoned. But it raises about £14 billion a year, and not many are saying we should cut that off the NHS. So it would mean instead we borrowed the money. Simply borrowing the money to finance current spending is what Tories used to denounce Labour for.
Moreover, the underlying problem remains. Over the16 years from 2008 to 2024, the Treasury forecasts real wages to rise by 2.4 per cent – not per year but over the entire period. By contrast during the previous 16 years from 1992, real wages increased by 36 per cent.
That appalling deterioration is driven by a serious decline in underlying economic performance. From the start of the Thatcher revolution in 1979 through to the financial crash in 2008, we had a 30 year run when we were if anything catching up with our main competitors. Our productivity was gaining on theirs, and our so was our GDP per head. We were attracting business investment from around the world as a flexible modern economy.
Since then, we have performed worse than our main competitors. Our concentration on financial services left us particularly exposed to the financial crash. Our Thatcherite strategy of attracting business investment from around the world to Britain as the base for selling into the European Single Market no longer functions, and business investment is low. Our labour market no longer looks so flexible with job mobility falling. Those are the real drivers of living standards. To get them rising again we are going to need a hard-headed economic strategy as effective as the one we developed post-1979.