writer, broadcaster, portfolio woman

It’s not just the middle being squeezed

The Independent, January 31st 2011

Unemployment affects one in ten workers, but rising prices hit all of us

The anger on the streets of Egyptian cities is palpable. And it’s not just a yearning for democracy that’s sending people out to risk their lives. They are just as much concerned about the rising price of a loaf of bread.

Egyptians aren’t alone. There have been riots about food prices in Haiti, Tunisia and Algeria too. What particularly enrages the protesters is the sense that their leaders are insulated from all the suffering they are having to endure.

Britain isn’t Egypt, and London isn’t Cairo. The Army won’t be firing water cannons on protesters demonstrating about the price of bread in Parliament Square. But we’ve already had riots about the rising price of tuition fees and there is growing fury about the cost of petrol at the pumps. Add to that people’s annoyance that those in charge of the economy are millionaires who don’t even notice the price of a loaf of bread and you have the makings of a powerful political grievance.

Inflation is back, but few of today’s political leaders have experience of its political consequences. Throughout the Nineties and Noughties, it barely registered as a blip when pollsters asked which were the most important issues facing Britain. The last time it was raised by more than 20 per cent of people was 1991. I’m willing to bet that – 20 years later – we’ll see that level of anxiety again this year.

What particularly annoys people is that prices are going up for goods that they can’t avoid buying: food, petrol, train fares, parking permits. You can opt to take a cheaper holiday when times are tight, but you can’t find a way to commute to work more cheaply or to fill your tank for less. So consumers feel held hostage by rising prices.

And this should particularly worry the Government because here we are genuinely all in it together. Unemployment, though life-crushing for those who go through it, is likely to affect only one in ten of the working population. Most of us will avoid it, and pensioners don’t have to worry about it at all. Inflation, though, squeezes the standard of living of absolutely everyone; and it particularly hurts the poor, who already find it difficult to stretch their income to cover the necessities.

Our wallets are being assailed from all sides. We are being taxed more heavily – the rise in VAT will increase the typical annual shopping bill by more than £200. Food prices have soared – wheat, for instance, jumped by 47 per cent last year – while the price of cotton has doubled, which is feeding through to higher clothes prices. Then, of course, there is petrol, gas and heating oil. If we get out of our cars, we find that train fares have risen faster than inflation too.

Meanwhile, many of the Coalition cuts are being translated into higher prices. When we first heard about lower public spending, we expected longer waits for operations and shorter opening hours for libraries. But what we are also facing are higher charges for users, whether it is the cost of parking or – soon to come – tuition fees.

At the same time, we are earning less. Real wages have fallen, and show no prospect of rising again soon. Benefits have been cut, particularly for the “squeezed middle”. For instance, half a million working mothers will now lose more than £400 a year in childcare support, some of them as much as £1,300. Childcare is unavoidable spending if you want to carry on working. True, there has been a £1,000 increase in the amount these basic-rate taxpayers can earn before paying tax, but that saves them only £170 a year, not even enough to cover the VAT rise. The only consolation, for homeowners on floating-rate mortgages, is that interest rates are now so low.

Last week Mervyn King, the Governor of the Bank of England, warned that real wages this year will be no higher than they were in 2005, the first time since the 1920s that they have fallen over six years. The squeeze in living standards, he said, was “the inevitable price to pay for the financial crisis”.

Well, that’s going to go down well with voters, isn’t it? The bankers balls it up and the citizen has to pay. We’ve already seen how much people mind about a squeeze on their living standards. Look at the fuel protests in 2001, a time when incomes and the economy were growing, or the fuss over the withdrawal of the 10p tax band. Neither was even nearly as painful as what we’re going through now.

The trouble is, there is little to be done about inflation. As the Governor argued in his speech, apart from the one-off rise in VAT, it’s all coming from abroad. If he were to raise interest rates, it wouldn’t affect demand for wheat in India or oil in China. It would strengthen the pound, though, which is the last thing we need when exports are virtually our only engine of growth.

The main worry is that these price rises feed through to higher wages. That inflationary wage-price spiral was what wrecked the British economy in the 1970s and eventually led to the IMF bail-out. Trade unionists have short memories too, and they are going to feel pressurised by their members’ complaints about falling living standards.

Meanwhile, the existence of inflation makes it harder for the Bank to stimulate the economy through more quantitative easing. This has always been the Government’s secret Plan B, to be used if and when the spending cuts led to an economic slowdown. Its view was that looser monetary policy could be used to offset tighter fiscal policy. Not, though, if prices are rising too fast already, as QE can exacerbate the problem.

So is there a Plan C? Ministers are loath to admit it. After all, as George Osborne said on The Politics Show yesterday, “If, on Monday morning I went to Parliament and got up at the dispatch box in the House of Commons and said, ‘I am abandoning the deficit reduction plan that Britain set out last year’, what do you think the reaction would be? Within minutes Britain would be in financial turmoil.”

With the eurozone still vulnerable, Japan under threat of a credit downgrade and even the US looking a bit shaky, ministers know that Britain can’t afford to start going soft on the deficit. But as one admitted to me yesterday, “There might be room to re-arrange it between years” – in other words, to cut back less now and postpone more of the pain to the back half of the Parliament.

The other thing the Chancellor can do – and we may well see it in the Budget – is to use more time-limited incentives to bring forward private-sector spending and investment. The “cash for clunkers” deal was a good way to boost car sales. Expect similar schemes in March if consumer confidence doesn’t pick up.

Whatever happens, though, we are all going to feel quite a bit poorer. And some will be struggling to feed and clothe their families. Whether that will lead to riots in the streets, who knows? But unlike the Egyptians, we do at least have the power to throw our leaders out through the ballot box. If living standards haven’t risen by the time of the next election, David Cameron and Nick Clegg will be feeling as vulnerable as Hosni Mubarak.

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