Why does the country feel so poor?

Crony capitalism and bad policies

Mr Micawber’s advice to David Copperfield is as true today as ever; Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

British politicians and journalists have a game in which the former have questions sprung on them about the cost of common household items like, particularly, milk and bread. Of course the journalist has to look up the answer too, but a correct response is supposed to demonstrate how the politician in question understands the pressures ordinary people are facing.

In practice, nobody can retain the price of more than a few things in their head (unfortunately for dairy farmers, this often includes milk, which is why supermarkets drive such ferociously hard bargains with farmers, believing that if they offer a competitive price on one of the few items whose prices people do remember, they can pad out their margins elsewhere).

In fact, the vast majority of politicians and journalists have lives far divorced from most of the population – both in terms of the income and the fact they are overwhelmingly London based. Politicians and, particularly, commentators are constantly surprised by how concerned the rest of the country are with fuel prices – only in London is it possible to make do without a car. The affluent double income/London perspective is also reflected in the attention paid to the price of things like childcare, on which spending in the wider country is actually very low while the cost of mortgages and rents loom in the consciousness particularly of younger commentators.

Theresa May tried for a while to shift attention to the people she described as ‘Just About Managing’. I was working as a civil servant at the time, and we soon got irritable diktats from number 10 telling us to curb the usual civil service fondness for acronyms, and not to call these people JAMs.

The aim was a good one. The median British household has been hit hard on both sides of the ledger – stagnant wages and a nasty recent shock of inflation. This has been a huge driver of recent voter volatility all over the world. Kamala Harris even ended up suggesting price controls for groceries in an unsuccessful attempt to win back ground lost with people who felt the Democrats had been in denial about the impact of inflation.

The situation is arguably even worse in the UK, given the many years of stagnant per capita GDP. Looking at the excellent Office for National Statistics tool helps remind us what the median UK household actually spends their money on. Average weekly household expenditure was £567.70 in the financial year ending (FYE) 2023, a nominal increase of £38.90 from the previous year (7%); however, after accounting for inflation this was a real-terms decrease of £21.10 (4%). This is a truly dreadful outcome in a society which has been used to decades of rising prosperity.

Ministers wanting to make a populist appeal should have these numbers constantly before them – what policies could make a difference to these sort of people?

What does the median household spend tell us?

According to the ONS, the median UK household spends just over £550 a week, with Housing, Fuel and Power, Transport and Food the biggest single items alongside ‘other expenditure items’. It is striking what a high proportion of the items here are not really discretionary. You could make a case for saying that half to two thirds of the items here are pretty much essential. Obviously housing and energy, communications, food, most of transport and a range of the other household spend too. Higher inflation on these items than the rate of wage increases will mean brutal cutbacks in the smaller discretionary items.

This also helps explain why the less wealthy are so exercised by issues like crime, which they are both more likely to experience and which hits them much harder through eg insurance premiums, over which they have minimal control.

It is generally striking how much pressure current government policies have put on median household finances. Prolonged ultra-low interest rates fuelled a housing bubble, which was worsened by minimal building rates and very high rates of net migration, the latter also impacting significantly on rents and the availability of social housing to UK nationals. By London standards, however the median spend on housing is remarkably low – a reminder of just how many people own their houses outright or with very small mortgages, or live in social housing.

For all the claims about the falling price of renewables, the period during which effort has been ramped up on Net Zero has seen energy bills increase. While gas remained stable in real terms until the Ukraine war, electricity bills since 2010 have doubled in real terms.

Current Net Zero policies are likely to drive up further the cost of electricity and gas, and force households to buy more expensive EVs and heat pumps. Fuel duties may need to increase to offset lower tax revenues as people move to EVs charged at home and thus liable to only 5% VAT (or the 5% rate will need to increase). Enormous investment is required in the grid, which may end up on household and business’ bills. Putting the cost of Net Zero on household bills is highly regressive – but the fiscal situation is going to mean taking additional cost into general taxation will be very difficult too.

The second table divides household median spend identifying categories likely to be adversely impacted by Net Zero now and in the future (orange). Net Zero impacts household energy use, petrol and the purchase or hire of cars as well as plane tickets.

The table also looks at areas which could adversely be affected by recent high levels of immigration (basically housing, mortgage interest payments or rentals).

The light blue and green segments, conversely, cover items where the median household might see some benefit from lower wage migrant labour. Even taking a generous approach and including all spend on pubs and restaurants, taxis, car and other repair and building work, childcare etc, the total amount of spend impacted is lower than those adversely affected. This brings home how different the experience of the median UK household is to the wealthier London based households of the commentariat, who have benefited much more from cheap cleaning, Ube drivers, child care etc.

Lower immigration is bound to be a key objective of a populist administration for all sorts of reasons, but this suggests the financial impact on the median household could well be positive, even before considering the impact on wages and public services.

On energy, populist Ministers would be likely to review whether the current ambitious plans for the UK to lead the world in emission reduction are affordable and, if so, whether the costs are in the right place. It is hard to imagine them accepting further real terms increase in bills. If the priority is to reduce the burden on ordinary households, slowing down the migration process while driving up domestic production in the hope of reducing the cost of energy imports would be a logical strategy; this would mean a shift back to encouraging North Sea production and revisiting the scope for large scale fracking.

Populists tend to believe the UK is afflicted by ‘crony capitalism’, keeping prices higher than they need. While there are areas of fierce competition in the UK economy, for example supermarkets, there is plenty of evidence of problems in recent work by the Competition and Markets Authority

The CMA found that the UK economy was increasingly concentrated, with poorer households particularly exposed as concentration is higher for essential goods. Average markups have increased since 2008 from just over 20% to about 35%. The increase in markup has been higher for the 10% most profitable firms. Over the last 20 years, the likelihood of the largest firms in an industry remaining the largest firms has increased.

CMA noted the particular problem in the tech area. Google, Meta and Apple are highly profitable and have a very high market share in the markets in which they operate. There is weak competition leading to reduced innovation, higher advertising costs (likely to feed through to wider prices). The Google/Apple duopoly is likely to mean consumers are paying more for app purchases and subscriptions than in a more competitive market.

It is a long time since competition authorities in the UK launched an aggressive campaign to break up dominant markets. And Ministers from successive administrations have been hugely deferential to the large US tech platforms, where we have also seen a revolving door of former senior Ministers and officials. Populist Ministers are likely to demand significant enhanced powers for CMA, encouraging them to take an aggressive approach to breaking up areas of market dominance. Most of all this might involve allowing them to retain fines, creating a ‘war chest’ to fight bigger players later. The UK’s position outside the EU gives some flexibility to ally both with EU and with Federal or State US anti trust initiatives in the tech sector. Controlled access for Chinese firms would be very unpopular with the US but is also a possibility in order to drive up competition, as these are increasingly being forced to build rival platforms to get round sanctions.

This is far from being just a tech problem, however. Many voters have the perhaps justified suspicion that what we have been seeing for the past 30 years has been less capitalism red in tooth and claw than crony capitalism. Now the UK has exited the EU, there ought to be plenty of opportunities to push consumer interests instead of those of businesses on issues like intellectual property. This in turn could give both more innovation and reduce prices while reducing ‘rents’ to right holders. It is extraordinary, for example, that we still have not introduced a right to ‘parallel imports’ – blocking the ability of companies to prevent imports of genuine products from markets where they are available at lower prices, which is justified by an abuse of the trademark regulations. These were originally intended to protect consumers from unsafe or fraudulent products, but are being abused to protect companies’ ability to manipulate prices across different markets.

The sort of measures described here are the last thing that Ministers who have grown up in the economic consensus of the last 30 years want to be doing – with the added piquancy of policies likely to be bitterly resisted by the US just as Trump is due to be inaugurated. But the political prize could be considerable for a government that genuinely seems to be fighting for the average household.