The cost-of-living crisis was years in the making

The cost-of-living crisis and the inflationary surge which has accompanied it came as a surprise only to professional economists who – almost universally – failed to predict it. Having been unable to anticipate the Global Financial Crisis in 2008, we shouldn’t be surprised that most economists repeated their performance this year.

Yet basic economics can tell us much about why people are facing rising prices and crushing costs, and what can be done about it. The origins of the ‘heat or eat’ dilemma now facing some British households lie in how sectors such as energy and housing are structured. In particular, the root of the problem can be traced to an aversion by successive governments to long-term planning.

The crisis in Britain’s energy sector emerged a few months ago when price spikes in the wholesale gas market caused some supply companies to go bust. This event revealed a fundamental weakness in how our energy market is organised. In the UK countless energy firms operate as intermediaries between producers and consumers and compete for customers on price.

We’re encouraged to think of this as competition but, as recent events make clear, energy suppliers who don’t themselves produce energy are simply acting as middlemen. Effectively, they make a bet between energy costs and anticipated revenue and hope to make a margin. It’s unclear what is added by this process, but it has certainly added to the complexity of households obtaining gas and electricity.

Our establishment parties have designed a structure aimed at fabricating opportunities to make profits instead of concentrating on planning, developing, and producing power to serve the public. As a strategy to make national energy supply less resilient it could hardly be improved upon.

To understand how we got here we need to look at causes. Hostility to planning in the utilities sector has been a feature of both Labour and Conservative governments. Much of this is rooted in the free-market ideology which took hold during the Thatcher era and which is based on the naive belief that national strategic planning is unnecessary. Global markets, it is thought, will provide in all circumstances.

Little was done to strengthen UK energy resilience in the New Labour years, despite having a unique opportunity afforded by large parliamentary majorities. Blair preferred to squander millions on foolish military intervention in the Middle East rather than to invest to secure Britain’s energy supply.

Indeed, the ultimate cause of the present surge in energy prices was Labour’s failure to invest in a new generation of nuclear power stations two decades ago. Domestic nuclear power is not subject to wild market fluctuations, nor complex global supply chains. By contrast, France, which depends on nuclear to provide 70% of its electricity, has been able to limit bill hikes to only 4% this year.

Governmental failure in the energy market has been equalled – if not surpassed – in the housing sector and, again, some basic economics can help explain the problem.

Put simply, demand is increasing – partly because immigration is too high, and partly because of natural population growth – and supply is inadequate because we don’t build enough houses. The result is spiralling housing costs. As the SDP’s recent Green Paper ‘The End of Indifference’ explained, average UK house prices have risen by 160% in real terms since 1996.

This is anti-social because a perpetual rise in house prices damages the ability of first-time buyers to own property and prevents young people from starting families. Rental prices have also risen sharply particularly in our largest cities. resulting in reduced living standards and even more delays to family formation.

Liberal thinkers are inclined to ignore the link between public sector house building capacity and the housing crisis, yet it is plain to see. Since 1979 large-scale state housebuilding has all but collapsed. While the austerity-afflicted post-war governments of Attlee and Macmillan regularly built between 200,000 and 300,000 homes per year, we now build less than 20,000. The role Council housing had in providing affordable homes with stable tenancies seems now to go unrecognised by our political class.

In truth, the present cost-of-living crisis has been 25 years in the making. Instead of reversing Thatcherism, Tony Blair embedded it and instilled a complete hostility to long-term planning among the main parties. No amount of tinkering with VAT rates, loan schemes, or price rebates will undo 40 years of hostility to national planning. The short-term, anti-planning bias within our system will only be cured when the establishment parties are removed from power.