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How Neoliberalism Led to the Cost of Living Crisis

Years of austerity and attacks on trade unions have resulted in poverty pay that leaves British workers exposed to soaring prices – to fix the cost of living crisis, we need worker power and higher wages.

A decade of flatlining pay has left British workers exposed. Credit: Getty Images

This month’s inflation figures show another inexorable increase, as the prices of essential goods from gas and electricity to petrol and cooking oil have shot up in price. Prices are now rising at their fastest rate for 30 years. They were rising rapidly even before Russia’s invasion of Ukraine in February, but the disruption of the invasion to two of the world’s largest exporters of agricultural produce and essential raw materials has sent further shockwaves throughout the world.

Here in Britain, it means that despite some significant increase in pay for some workers over the last year, price rises are now running well ahead of pay. The outcome is the worst squeeze on living standards in generations—and all the forecasts are that it will worsen.

A Legacy of Austerity

Yet Britain is entering this having already seen average real incomes (earnings after taking account of inflation) barely move over the last decade. The turning point was the coalition government of Tories and Lib Dems, formed in June 2010. Real wages in general had recovered strongly from the 2008 crash but once austerity was imposed, including real pay cuts for public sector workers, the impact was obvious.

Across the whole OECD group of developed countries, it was a similar story. The TUC’s senior economist, Geoff Tily, has shown how the imposition of major spending cuts across most of the OECD, urged on by the OECD itself and backed up by the IMF and, in the eurozone, the European Central Bank, created a massive drag on economies struggling to recover. 

Countries that imposed harsher spending cuts saw worse falls in their real wages over the 2010s. But those, like Germany, Chile and Japan, that dodged the demands for austerity, maintaining government spending, also saw continued (if low) improvements in their average pay. 

The short-term reasons for this are well-known to economists, and depend on the idea of ‘aggregate demand’. Cuts to government spending suck money out of the economy and, with less money in circulation, fewer goods and services are sold—’aggregate demand’ is reduced by the cuts. That, in turn, means that bosses will have less demand for labour:  with less being bought on one side of their business, there is obviously less need to employ so many people on the other.

The War on Wages

In the UK, this lack of demand for labour did not turn into very substantial unemployment, as has happened in the past. Instead, the lack of demand for labour meant employers could get away with paying the bare minimum to their workers, and expanding the number of very insecure jobs. Zero Hours Contracts grew hugely, rising from 200,000 in 2012 to nearly one million just four years later.

Employers were able to create an army of poorly-paid and insecure workers because of the UK’s ‘flexible’ labour markets. With limited protections for those in work compared to other European countries, and with the numbers of the self-employed growing hugely, to over 5m, rather than forcing people into unemployment—as used to be typical—the UK labour market forces them into insecure, low-paid work instead.

Throw in the weakness of trade unions, after decades of legal restrictions on their activities culminating in the 2016 Trade Union Act, and the picture becomes very clear. Austerity undermined the economy in general, sapping demand when what was needed was more spending. But weak labour market institutions—low trade union membership, and few rights at work—meant that this weak demand translated into poorly-paid, insecure work. 

The result is that many workers in Britain are entering this cost of living crisis in a state of economic insecurity. Household debt has started to grow rapidly, with credit card borrowing, expanding at the fastest rate since current records began. We know this isn’t some consumer spending spree—everyone rushing off to buy new TVs or treat themselves to a holiday—because retail sales have been falling over the same period. Instead, it looks like many people facing rapidly rising prices but earning only the same amount of (typically low) pay are being forced to borrow to make ends meet. 

With an £700 increase in average household energy bills already pushed through by the government, and another, similar hike expected for autumn, and with the price of wheat up 40 percent since February, the situation over the next few months is only going to get worse for most households. 

Immediate Demands

Discussion on what to do about this often focuses on longer-term problems. It is true that British households would have much lower energy bills if our houses were better insulated and more of us could use renewable electricity (in place of gas) for our boilers. But insulating homes and replacing boilers takes time, and people face a crisis today. 

So there are three things that could happen immediately. The first is to address low wages. Whilst wages have been falling behind prices, profits have recovered dramatically from Covid-19—up 181 percent since 2020 on one estimate for major British companies. There is enough money out there to give everyone a decent pay rise. The government could intervene directly, and rapidly increase the minimum wage to £10 or, ideally, above that. It could commit immediately to double-digit increases in public sector pay, beating the expected rate of inflation for the year.

Second, household energy prices in Britain are under a great deal of government control. Ofgem is a government agency which ordered the £700 increase in average bills last month. It is scheduled to order another increase in October. The Office for Budget Responsibility forecasts that this will be £830—taking the total increase for the year to a jaw-dropping £1500. Ofgem says these increases are intended to protect businesses supplying gas. But not freezing pensioners to death in winter or forcing families to choose between heating and eating is more important than keeping gas supplies privatised. The government could halt the next increase, and nationalise any failing gas suppliers—like it did with Bulb Energy in autumn last year.

The same goes for rent. The case for rent controls is strikingly clear, and it’s good that Sadiq Khan has finally come out in favour of them for London. But what applies in London applies across much of the rest of the country—renters who are often in insecure, poorly-paid work are expected to fork out more and more for an essential. There’s no good reason for landlords to expect permanently rising rental incomes when everyone else is suffering.

Third, we need to rebuild trade unions. This may take time—it means reversing forty years of continual decline in membership, especially amongst the young. But a few good victories, like those of lorry drivers winning 10 percent or tube workers winning 8 percent pay rises can help spread the word. Every union in the country should treat the next few months as a critical moment for organising and rebuilding. And where unions are too weak, or can’t stretch far enough into the labour market, we need a mass movement on the streets prepared to make the case for higher pay and lower prices.