The Cost of Living Crisis

Energy prices are now rising 14 times faster than wages, and with Ofgem doubling the price cap, households need to find an extra £38 billion keep the lights on while energy companies rake in record profits. On top of this, food prices are expected to rise by 15%, with one in ten households already experiencing food insecurity. This trend will only get worse with global wheat prices soaring in the aftermath of Russia’s invasion of Ukraine (which together account for 25% of global wheat production), combined with a bad winter harvest in China leading to a 20% drop in yield. This will disproportionately hit poorer households, who spend a higher portion of their incomes on essentials like food and energy.

Wages are not keeping up with higher cost of living. Despite pay increases above inflation in sectors like logistics, public sector workers are facing an average pay cut of around £1,750 adjusted for inflation. And it isn’t just workers being hit by higher prices. The government’s broken promise of the pension triple lock will hit the 2.1 million retirees already living in poverty, with 25,000 retirees dying a year from cold as they choose between heating and eating. The government has been quick to blame the higher living costs on Russia’s invasion of Ukraine, but founder of Money Saving Expert Martin Lewis stressed that the war has only exacerbated what was already desperate situation for many.

Even the Confederation for British Industry (CBI) recognises that increasing taxes for lower earners at this time is counter-productive, saying that the proposed measure would ‘risk curtailing growth at a critical moment in the recovery from coronavirus restrictions’. Manufacturing trade body Make UK echoed the CBI’s concerns, warning that 60% of firms said the proposed NIC hike would have a moderate or significant impact on their hiring intentions. In other words, the measures will lower demand for workers. This will weaken the nascent resurgence in wage bargaining power brought on from tighter labour markets post-pandemic, which has seen a 1.4% fall in unemployment—facilitated in part by an increase in early retirement by the over-55s.

Squeezing Workers to Save Investments

Asset owners have seen their wealth increase throughout the pandemic. The top 1% own nearly a quarter of the UK’s wealth while the top 10% have gained an average of £50,000, according to the Resolution Foundation. Despite that, it seems unlikely that the Chancellor will opt to increase the rate of capital gains to fund increases in spending.

Taxing capital gains at the same rate as earned income, and charging national insurance on it, would raise around £25 billion a year. Similarly, while the basic rate of NIC is going up, the higher rate on earnings over £50,270 is staying at just 2%—meaning a significantly lower burden on higher earners.

Rather than taxing unearned income, the Chancellor is trying to protect it. Raising taxes on earned income, which impacts those who derive income from work over asset ownership, puts downward pressure on demand in an attempt to prevent a ‘wage-price spiral’. Persistently high inflation, with wages rising in tandem, would diminish the interest earned on investments in real terms. Inflation redistributes income and wealth from asset owners to wage earners—but it is not without collateral damage.

People on fixed incomes, such as pensioners, would be hit hard by higher inflation—particularly with the pension ‘triple-lock’ promise broken. However, it also erodes the real value of outstanding government debt, increasing the government’s capacity for borrowing. In an attempt to discourage government borrowing and squeeze workers, the Bank of England is set to raise interest rates back to pre-pandemic levels of 0.75%, which will increase the cost of mortgages and borrowing. This comes just weeks after BoE Governor Andrew Bailey came under fire after calling for workers to stop asking for pay rises in response to higher costs.

A Political Choice

The decision to raise NIC taxes isn’t the result of a budgetary necessity: there are many other ways the government could raise revenue to fund increased spending that won’t hurt ordinary people, such as a higher capital gains rate, financial transactions taxes, and land taxes, to name a few. It is a political choice to squeeze the incomes of workers in order to protect the investments of the rich: the government can do little to address the Covid-induced supply chain disruptions that continue to wreak havoc across the global economy, but it can try to stop inflation getting too hot by putting downward pressure on wages and spending in the form of higher interest rates and higher taxes on income, whilst simultaneously providing asset owners with preferential tax legislation.

It should come as no surprise that the billionaire and former investment banker Chancellor should choose to protect the interests of the rich and the financial sector over all else, awarding banks with a 60% cut in their corporation tax surcharge from April 2023. According to a House of Commons Library report the financial services sector ‘contributed’ £164.8 billion, which was 8.6% of total economic ‘output’ in the UK in 2020, with net exports amounting to £42bn. What isn’t clear is how ordinary people have benefited from the growth in the UK’s financial sector over the past few decades—which has coincided persistently stagnant wages.