In the UK, inflation predictions – designed to manage the expectations of consumers and businesses – are being quickly invalidated by events. In November 2021 the Bank of England predicted a brief peak of 5 per cent, but Michael Saunders, a member of the Bank’s Monetary Policy Committee, reassured the Treasury Select Committee that “talk of a return to the Seventies is completely misplaced”. By March 2022 the Bank was forecasting 8 per cent. In August, as the Consumer Price Index hit 10.1 per cent, it estimated that inflation would reach 13 per cent by the end of 2022, while the investment bank Citi projected a rate of 18.6 per cent in early 2023.
As the economist Duncan Weldon writes, the government and the candidates for prime minister refuse to recognise the true nature of the gathering economic storm. Liz Truss, the likely winner of the Conservative leadership contest, maintains that economic growth will be created by a £38.5bn programme of tax cuts. But the largest of these cuts (£17bn in corporation tax) is one to which all but the largest multinationals are indifferent, while the second largest (£13bn in National Insurance) will overwhelmingly benefit the wealthy rather than the lowest earners.
Such measures are economically unsound but politically expedient; they are what a small but influential faction of Tory voters wants to hear. When the “headroom” that Ms Truss claims makes these cuts affordable vanishes because of rising interest rates, she will blame the ensuing recession on the Bank of England. Ms Truss is so committed to political rather than economic gains that she has already declined the forecasts offered to her by the Office for Budget Responsibility to inform an emergency budget.
Ms Truss is by no means unusual in this approach. For more than a decade, the Conservative Party has aggressively deployed fiscal policy in the service of political capital. In 2010 the then chancellor George Osborne announced his austerity programme. Of the 50 councils that would be hardest hit by the cuts, 28 were controlled by Labour; the three that suffered least were all in the constituencies of then Conservative cabinet ministers. Nearly 80 per cent of the constituencies receiving funding from the government’s £3.6bn Towns Fund, unveiled by Boris Johnson in 2019, are represented by Tory MPs. Fourteen local authority areas – all considered wealthier than the national average – that were made top-priority for funding by the government’s £4.8bn Levelling Up Fund had at least one Tory MP.
Through the triple lock on pensions (a safeguard to protect the value of retirement savings from inflation), policies that inflated the housing market (such as Osborne’s Help to Buy scheme, launched in 2013), and the failure to invest in wind and solar farms because some voters find them unattractive, fiscal policy has been employed not for the long-term health of Britain’s economy but as a means to satisfy the Conservative base.
Even as inflation rose in 2021, from 0.7 per cent in January to 5.4 per cent in December, the government persisted in offering aid to the wealthy: the then chancellor Rishi Sunak spent £693m of taxpayers’ money giving double- and triple-strength energy rebates to owners of second and third homes.
Meanwhile, those on the lowest incomes are experiencing the steepest fall in the standard of living for half a century, and face a winter in which many will have to choose between paying for energy and paying for food. In the years to come, this disaster will spread to the wealthier, as they are forced to renegotiate their debts – such as fixed-rate mortgages and car finance deals – in a world that is suddenly more expensive. Spain, France and Germany are spending more than the UK on reducing energy bills; France’s state-owned energy company, EDF, will absorb the losses from a capped rise of no more than 4 per cent.
Energy analysts warn of at least two further years of price rises and economists predict a recession comparable to that of the early 1990s. But despite the external shocks – Covid and the war in Ukraine – that have intensified it, Britain’s cost-of-living crisis is as much a political problem as it is an economic one. Both Ms Truss and Mr Sunak are competing to lead an intellectually exhausted party. Unencumbered by fiscal reality and in thrall to a reheated Thatcherism, the Conservatives have failed to acknowledge the magnitude of the crisis to come.
[See also: The coming economic storm]
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This article appears in the 24 Aug 2022 issue of the New Statesman, The Inflation Wars