Social Justice

What are the real reasons for the cost-of-living crisis? (It's not Ukraine)

As Boris Johnson pins the cost of living calamity on Russia, we look at the real reasons for the fall in ‘real’ disposable income that is pushing households to the brink as living costs soar.

Prime Minister Boris Johnson holds talks in Ukraine with the Ukraine President Volodymyr Zelenskyy

Prime Minister Boris Johnson visits Ukraine. Picture by Ukraine Government

Facing the highest rates of inflation since the early 1980s, UK households are enduring the biggest hit to incomes since modern records began.

As millions struggle to afford the basics, the government has come under heavy criticism over its handling of the crisis. Labour, business leaders and even some Tory MPs have called on the government to bring in additional measures to help households feeling the squeeze.

But Boris Johnson continues to blame the Ukraine war for problems as he tries to convince voters the brutal drop in living standards has nothing to do with the government.

When pressed this week about the cost of helping to defend Ukraine and whether there was any limit in UK funding, Johnson said the “price of freedom is worth paying.” He added: “I think that the economic impacts on the UK will start to abate, we’ll find ways around things and some of the cost pressures will start to come down.”

The comments come as the Ukrainian president, Volodymyr Zelensky, calls for more military support. The UK government has said it is spending £1.3bn on support for Ukraine. But the real reasons for the cost of living crisis have been months or, in some cases, years in the making.

And it’s not just Boris Johnson – Liz Truss, Rishi Sunak, Michael Gove and Kwasi Kwarteng, have all been hollering the same message that the war is responsible for the economic hardship engulfing families in Britain.

What are the real reasons for the cost of living crisis?

National Insurance rise

In September 2021, the government announced National Insurance (NI) contributions would rise by 10 per cent to pay for the social care system in England. Despite widespread calls to axe the manifesto-breaking NI increase that takes over £200 from the average worker, the rise went ahead on April 6.

The move was condemned by the opposition and unions for exacerbating the cost of living crisis. Among the policy’s critics is UNISON general secretary Christina McAnea, who said the calamity is “down to political choices”.

“The government stubbornly refuses to increase capital gains tax, choosing instead to hike national insurance, a tax on working people. But those who get their income from stocks and shares or buy-to-let properties pay nothing more,” she said.

Energy crisis predating Ukraine war

Warnings about an impending cost of living crisis were made well before Russia’s invasion of Ukraine. In September 2021, amid surging wholesale costs for fuel and demand that outstripped supply, smaller fuel suppliers began to fold. At the time, almost four million people were already living in fuel poverty, struggling to pay their bills.

The same month, as the gas price crisis worsened, Citizens Advice warned that millions faced a ‘double whammy’ of soaring fuel bills and a cut to Universal Credit.

In December, warnings were made that already eye-watering energy bills were set to double, and that families could be spending an additional £550 on bills in 2022. 

Brexit

The financial crisis has also been implicated to Brexit. A study by the Resolution Foundation and the London School of Economics finds that in damaging Britain’s productivity and competitiveness, departing from the EU will leave the average worker poorer.

Criticising Boris Johnson’s post-Brexit trade deal, former environment secretary Hillary Benn said Brexit was “making businesses and consumers poorer at a time when people up and down the country are struggling to make ends meet”.

Covid-19 pandemic

The Covid-19 pandemic turned lives upside down, with many people losing jobs and incomes. And the challenges of the pandemic hit low-income families the hardest.

Research by Child Poverty Action Group and the Church of England shows around eight in 10 low-income families reported a significant deterioration to living standards during the health crisis due to falling income and rising expenditure. Analysis by the Resolution Foundation predicts that 1.3 million people will be plunged into absolute poverty by 2023, including the 700,000 who fell into poverty during the Covid health crisis.

The rise in food and energy bills is forcing many living in poverty to make impossible choices between heating their homes and putting food on the table, thereby worsening the disproportionate impact the pandemic had on the poor and vulnerable.

£20 cut to Universal Credit

In October 2021, the government decided to remove the £20 uplift to welfare benefits that had been introduced at the start of the pandemic. In July 2021, the Joseph Rowntree Foundation (JRF) published analysis of the impact of the cut to UC. The charity said the decision to abolish the benefits hike meant the UK was “heading for the biggest overnight cut to the basic rate of social security since WWII.”

Rather than taking the axe to benefits, economists and charities have called on the government to increase benefits twice as much as planned this year to support the poorest household through the cost of living crisis. The Institute for Fiscal Studies (IFS) said that in response to soaring energy bills and mounting inflationary pressure, an additional £3bn needed pumping into the welfare system.

Years of austerity  

Assaults on the UK’s welfare system are not confined to the ending of the £20-a-week uplift to UC. It is estimated that between 2010 and 2021, under successive Conservative governments, £37bn has been cut from benefits spending. Welfare caps, benefits freezes, flatlined wages, cuts to disability payments, and the introduction of the bedroom tax, have been coupled with precarious work during the last decade or so, leaving households on the brink amid the cost of living crisis.

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