The papers by Chris Pissarides, Colin Crouch and Jill Rubery explain that inflation in the UK is driven by endogenous price rises in energy and fuel exacerbated by the decline in value of the pound which in turn has been accelerated by Brexit. The price rises have been addressed by interest rate rises, attempts to contain pressures for wage increases matching inflation and limited policies to address the impact of energy price rises on households.
The policy of seeking to persuade workers in the private sector to accept real wage cuts as incomes fail to keep pace with rising prices has been unsuccessful but demands for wage increases across most of the public sector have been kept to low levels. The outcome is the current wave of strikes affecting the NHS, railways, buses, postal workers, Border Force staff and other areas.
The link between inflation and public sector unrest must be seen in the context of the longer-term trend of a decline in the labour share of productivity increases, evident since the 1970s and particularly marked in the UK, rising poverty and inequality, again marked in the UK, government policies since 2010 to impose a substantial fall in public sector wages and cuts in the welfare state that reduce the benefits that help support bottom-end wages. Other trends such as the real-terms increase in housing costs have also borne heavily on the low-paid. Population ageing has contributed to growing pressure on social care and the NHS.
There is some evidence of a shift in public opinion against the trend to inequality and of concern about the growth in poverty and the damage to welfare state service that austerity policies have produced. In the context of broader developments, the public sector response to further cuts in living standards is not surprising.
Government policies have led to increases in debt from 42% of GDP in 2007 to 85% by 2019. Debt then rose sharply in response to the wage support “furlough” scheme and a programme of ill-regulated loans and payments to business during the Covid-19 crisis so that debt now stands at 102 per cent of GDP (October 2022; ONS 2022a). Options for government to manage the situation are explored at the end of this article.
Decline in the labour share of productivity
The share of increases in GDP that went to the labour force remained roughly constant at about two-thirds or slightly less in developed countries for the century up to the 1990s. It then fell to the mid-fifties in percentage terms (Oberfield and Grossman 2022). The chief factors in this appear to be greater use of technology, the outsourcing of labour from developed to undeveloped countries and the weakening of the bargaining power of labour (Guschanski and Onaran 2022). The impact of the decline in trade union influence has been particularly marked in the UK These trends set the context for increasing inequality.
Rising poverty and inequality
Income and wealth inequality is greater in the UK than in most other advanced countries (HoC 2021). Poverty rates are also higher.
The IFS’s Deaton Review shows that inequality in the UK fell during the early post-war period, plateaued in the 1960s and then rose sharply in the 1980s to plateau again. Incomes at the 90th percentile, previously three times those at the 10th percentile, are now four times – relatively a third larger. However, the incomes of the smaller minority of super-rich have moved rapidly upwards. The top percentile, which received 4% of all incomes, now receives more than 8%, a doubling of their relative share (Deaton Review 2022). The review also shows that, while poverty among pensioners fell, poverty among working-age families and children increased rapidly during the 1980s and early 1990s, fell slightly in the early 2000s and rose sharply since 2010, so that about a third of UK children now live in poverty.
The picture in relation to wealth is even more striking. Inequality in wealth holdings fell between 1900 and 1985, then plateaued and is now rising. The top 10% of wealth-holders own about half of all wealth and the top 1% cent about one-tenth. The effect of greater inequality is exacerbated by the fact that total wealth has expanded rapidly since the mid-1980s from about a third to more than 80% of GDP. This increase has been fuelled by a property boom, rapid growth in the value of stocks and shares and laxer taxation of wealth. The result of the wealth boom is massive wealth inequality privileging the rich (Resolution Foundation, 2022).
Public sector wages
The public sector accounts for about 5.9 million workers, a fifth of the total labour force. While overall wages have remained roughly constant in recent years as the extra value of productivity has risen to counteract the declining wage share discussed earlier and inflation has whittled away cash increases, the gap between private and public sector wages has growth, particularly since 2010 (ONS 2022b). Government policies of a 2010-2012 public sector pay freeze followed by a pay cap of 1% and then 2% annually, and pressure on review bodies to follow government inflation and austerity targets have resulted in a 4.2% overall decline in public sector wages, taking inflation into account, since 2009. Cuts have been particularly sharp for nurses and other health sector workers, social workers and education sector workers. This contributes to the present unrest.
Welfare state and benefit cuts
Numbers on Universal Credit, the main mean-tested benefit for working-age people on the poverty line rose from about two million to about 5.7 million during the Covid-19 pandemic and has not fallen since. About half of claimers are in paid work (a little under one in ten of all workers) and use the benefit to top up wages below poverty levels.
Those over pension age on low pensions (about 9% of the 12.3 million pensioners in the UK) receive means-tested pension credit, paid at more than twice the rate of the working age benefit.
Pension credit has been increased at a rate slightly higher than inflation since 2010, while universal credit has fallen in real terms, particularly since 2015 (ONS 2022c). The result is that the benefit has fallen from about 14% to 12% of the value of median wages for a single worker. In addition, something like a third of all those on benefits do not actually receive the headline rate of benefit due to caps for large benefits, children above two in the family and rent above 30% of the average for a local authority area, and also to delays in claiming, repayment of debt up to 10% of benefit (typically incurred through payments to survive while waiting for benefit or for energy bills or council tax payments) or sanctions for errors or overclaiming. Benefit uprating is implemented some six months in arrears leading to further poverty for claimants.
Minimum wage rates rose between 2001 and 2010, taking inflation into account, then fell to 2015 but have since recovered and risen by about 4% since 2016 (HoC 2022). The government price cap scheme for household energy bills contains energy price rises to just under doubling on average for most in 2022 and increasing by a further fifth in 2023, with a weaker benefit for those on pre-payment meters. There is no corresponding policy to manage food price increases which are the second most rapidly rising area contributing to very high inflation rates.
These policies impose severe cuts in the living standards of the poor who were already suffering a decade of austerity. The poor pay more. They are more likely to purchase energy through prepayment meters and tend to spend a higher proportion of their income on food. Food prices at the bottom end have increased much faster than overall inflation. One illustration is that the cost of the food parcel provided by one local food bank rose by over 20% in the period in which ONS measures of inflation rose by 11.7% (CFB 2022). The number of impoverished people coming to food banks has roughly doubled since the beginning of the Covid-19 pandemic, and an increasing proportion are in low-waged employment rather than on benefits (Trussell Trust 2022)
The government policies and price rises that cut living standards even further for those at the bottom contribute to poverty and inequality and further exacerbate the pressures for pay increases in line with inflation on the part of the lowest paid workers.
What can be done?
The problems of inequality and poverty and of industrial unrest resulting from inflation rates that outstrip wage increases, especially in the public sector, are due to specific policies that are set in the context of long-run factors outside the control of government. The high level of public debt resulting from tax reductions in the context of austerity since 2010, and from Covid-19 spending, in a context where the emergency budget of the previous government leadership has undermined confidence in UK economic management limits the freedom of action of the current government. It will not be possible to make progress in managing poverty and inequality without taking action to address the long-run issues. This must include measures to improve productivity (targeted investment, training, labour force management) and trade with the EU and to reduce wealth and income inequalities. Such policies would confront the interests of powerful groups and would take vigorous and determined action over the course of several parliaments to achieve.
In the more immediate term, a number of issues could be addressed. Measures to tackle inequality could increase tax revenue and enable the government to tackle poverty.
In relation to inequality:
- initial moves might include a move to raise the taxation of the 300,000 residents with non-domiciliary status who do not contribute to UK taxation. This would raise about £3.2 billion and would remove the incentive for non-domiciled residents to invest outside the UK, since their income from investments abroad is UK tax-exempt LSE
- Closing loopholes such as entrepreneur’s relief which allows very rich people to pay 10% rather than 40% tax on income taken as capital gains. This applied to 9,000 individuals in 2021 and accounted for about £11.5 billion of tax foregone.
- Further measures could include addressing the loopholes in the taxation of inheritance and reforming local taxation to make it more progressive.
In practice, it is unlikely that measures to address these issues would raise the sums currently foregone, since further loopholes would be discovered, but it is likely that the tax take could be substantially improved to enable the immediate measures to address poverty to be implemented. Universal Credit and related benefits currently cost some £76 billion (OBR 2022):
- The policies in relation to capping benefits, sanctions, delays, debt recovery and that reduce the benefits actually received could be removed at a cost estimated at between £2 and £3 billion.
- In addition benefit rates could be increased. Real increases would be expensive and take time but the £20 per claimant cut in October 2021 when the pandemic was officially at an end could be restored at a cost of a little over £5 billion.
None of this would be easy to accomplish but the alternative appears to be further industrial unrest that is driven by inequality, and in the UK is currently exacerbated by high inflation. This will take place in a context of continuing unsatisfactory productivity and even greater wealth and income inequality.