Under increasing pressure from Chancellor Rishi Sunak, the Bank of England (BoE) raised interest rates for the fifth time last Thursday in an effort to put a lid on the highest inflation the UK has experienced for 40 years. Ahead of the rate hike, the BoE said it believed nominal wage growth was running at an ‘unsustainable pace’, and that unemployment would need to rise if inflation was to return to its 2% target in the medium term.
But wages aren’t driving inflation. They’re barely keeping up. Despite record job vacancies and low unemployment, wage growth fell by 4.5% in April, the fastest decline since records began in 2001. Workers have, in reality, experienced the biggest cut in real wages in 20 years. Despite this, there are early signs that the BoE rate hikes are starting to have their desired effect, with unemployment reaching 3.8% in April, up from 3.7% in March.
This assault on jobs and pay comes as the poverty rate in the UK for working households reaches 17.4%, the highest level ever—with nearly 1 in 3 children living in poverty. In autumn, the price cap on energy is set to increase by a further £800, meaning many households will be plunged even deeper. The government has responded to this rising poverty with paltry cuts in fuel duty and a miserly £150 council tax rebate that do little to help the poorest households: the New Economics Foundation, for one, estimated that only 7% of the fuel duty cut would go to the poorest fifth of households owing to the fact that many in the bracket don’t own cars.
Meanwhile, corporations have been generously subsidised with a 130% super deduction for capital allowances in a misguided attempt to stimulate investment and productive growth. Despite handing billions of pounds of tax relief over to some of the UK’s largest companies, business investment actually fell by over 0.5% in the first quarter of 2022, and remains 9% below pre-pandemic levels.
This obvious injustice—subsidies for businesses, cost hikes for workers—is only one example of the reality spread across our economic system: that being in poverty is much more expensive than being rich.
Vimes’ ‘Boots Theory of Socio-Economic Unfairness’
To understand why poverty is so expensive, we can look to Samuel Vimes, Captain of the City Watch and protagonist of Terry Pratchett’s Discworld novel Men at Arms. Vimes uses his ‘Boots theory of socio-economic unfairness’ to outline how the nobility of his city, Ankh-Morpork, could live twice as comfortably as him while spending half the money.
Vimes earned 38 dollars per month as captain of the watch. A really good pair of boots, the kind that would last for around 10 years, would cost around 50 dollars—far more than his monthly salary. As a result, he would have to buy the cheaper, lower-quality boots for 10 dollars, which would last for one year at most. Over a 10-year period, Vimes would spend 100 dollars on 10 pairs of boots (and would still have wet feet), whereas the noble would have only spent 50 dollars on one pair of boots during the same period.
Of course, it isn’t just boots that cost poor people more. Housing costs for private tenants have jumped by nearly 50% above the general rate of inflation in the last 25 years. House prices have also soared, but home ownership remains, often, the cheaper option. Because they don’t have high enough salaries or savings (usually eaten into by rent), tenants can’t qualify for a mortgage. Instead, the tenant must pay the landlord’s mortgage for them, and give them some profit on top. Until very recently, the landlord was also able to claim all or a portion of the interest on that buy-to-let mortgage as an allowance on their income tax liability, as well as other expenses.
Borrowing costs are also much higher for poor people because they are seen by lenders as higher risk, meaning they pay more interest on debt like overdrafts and credit cards. When prices rise but wages stagnate, though, households are forced to borrow to make ends meet. According to a survey conducted by Debt Justice, 1.3 million people where pushed heavily into debt during 2021 due to the rising cost of living; over the past 12 months, credit card borrowing alone has increased by over 11%. Higher interest on debt makes it harder pay down, and as a result, 2.8 million people in the UK are paying more on interest, fees, and charges than on paying down the principle.
By contrast, rich people or rich companies are seen as low-risk by lenders, and so can borrow very cheaply—i.e., banks will lend money to the wealthy and large corporations at low rates of interest. Those corporations and wealthy people can then lend their borrowed money to poorer people at higher rates, or invest in an assets like stock, bonds, or property that will give them a higher rate of return. The returns from those investments, and the subsequent gain in income for the investor, comes at the expense of the loss of income for the borrower in the long run—in the form of interest on debt, rent to landlords, or squeezed wages to generate higher profits for corporations, so they can pay out higher dividends to shareholders.
The Cost of Poverty to Society
Given all that, it is unsurprising that Tory minister George Eustice was considered ‘out of touch’ earlier this year when he urged struggling households to switch to value products in supermarkets instead of buying brand-name foodstuffs. Poorer households are already the ones buying ‘value’ products, and the price of those products has been creeping up for years. Campaigner and author Jack Monroe, advocate for the creation of a ‘Vimes’ Boots Index’, tweeted back in January 2019 how prices at her local supermarket had gone up far above the 5% CPI reported by the ONS: the cheapest pasta had jumped 141%, the cheapest rice 344%, baked beans 45%. This year similar items have risen by around 50%.
As the price of even the most basic staples continue to rise, families living in poverty will struggle find the budget in their already stretched incomes to maintain a healthy diet. In 2021, a study by the Food Foundation found that the poorest fifth of British society would need to spend 40% of their income to reach the government’s healthy eating guidelines. The chronic malnutrition caused by poverty has long-term costs, both to individuals and to society as a whole.
A 2016 study by the Joseph Rowntree Foundation found that healthcare spending accounted for the largest portion of additional spending associated with poverty, at £29 billion. After over a decade of cuts and chronic staff shortages due to real-terms cut to pay and rising stress levels, the NHS now faces a record-high waiting list. The British Medical Journal has warned that unless the government acts to address the Cost of Living crisis, poverty, and therefore health inequalities and the costs associated with treating and managing them, will increase.
Food poverty also impacts educational outcomes for children. A study by the Centre for Educational Neuroscience found that that when a child misses breakfast, performance is most clearly affected when tasks are more mentally demanding. For all the government’s rhetoric of levelling up and boosting the economy with a ‘lifetime skills guarantee’, if they are unable to address the endemic malnutrition facing children in poverty, academic achievement will suffer—hindering life prospects for an entire generation.
Who Pays the Price?
Despite over a decade of rising poverty and poorly funded, over-stretched public services, the UK tax burden is at the highest level in over 70 years. This burden is falling disproportionately on the poor and working households. The top 10% of households own 43% of the country’s total wealth, but pay just 33.5% of their income in direct and indirect taxes; the bottom 10%, who own virtually no wealth, pay nearly 50% of their income in taxes. And while the headline rate of corporation tax is increasing to 25% from 19% (still one of the lowest in the OECD and below 2008 levels), corporations are able to offset this increase by utilising generous capital allowances reliefs and tax credits.
A report recently released by Unite the Union’s Profiteering Commission revealed that the average profit margin of a FTSE 350 company (the largest 350 companies in the UK) grew by over 70% in 2021 compared to 2019. The report also found that while real wages have fallen adjusted for inflation, profits adjusted for inflation have risen by 8%. It is estimated that the surge in corporate profiteering is accountable for as much as 50% of the current levels of inflation.
Trade unions are starting respond to this corporate profiteering by demanding pay reform and taking strike action. Their demands lay the building blocks of redressing this rigged economy: a £15 minimum wage, for a start, would bring wage growth back in line with its trajectory before the 2008 financial crash, and would result in the poorest 70% of households seeing a 7% increase in their earnings.
Simply put, it is a crime that in the fifth richest country in the world, nearly 33% of children live in poverty, and that rising numbers of households are dependent on food banks. It is time for the wealthy to pay their share in taxes and for corporations to pay their workers what they deserve for the wealth that they create. This would be a step toward halting the spiralling inequality that sees the cost of poverty land so squarely on the shoulders of those suffering it. But the goal is not just shifting that burden—it’s doing away with poverty altogether.