War and disease can uncover issues in society that otherwise lurk beneath the surface. The 1918 Spanish Flu, for example, exposed the need for socialised healthcare. The invasion of Ukraine may be no different. Soaring costs are exposing vulnerabilities in the UK’s economy, energy system and household finances. Failing to look beneath the surface will leave us exposed to future crises.
Supply chains, dormant during the pandemic, have struggled to meet new demand, increasing the costs of products like cars. This has put pressure on global energy supplies, exacerbated by a cold winter—and in the UK, broken electricity cables and unseasonal low wind have made it worse. And things have continued to deteriorate: inflation has spread from goods to services as business costs have risen. Russia’s invasion is now spiking food and fossil fuel prices, too. Gas prices that pushed the energy bill price cap to nearly £2,000 in spring could hit £3,000 in October.
The cost of living has put energy policy front and centre of politics, pushing the government to release an underwhelming energy security strategy. This tried to pull the Conservative Party together in favour of clean energy, like offshore wind, while reserving warm words for oil and gas. But it has been widely—and rightly—criticised for lacking action to make homes warmer and reduce people’s bills. Even if it had covered energy efficiency and demand, it would still only be looking at one side of the equation—costs—while ignoring another way to pull the Tories together: economic growth.
Households are squeezed, not just by rising prices but by the failure to address our underlying economic insecurities. The UK’s median real wage was lower in 2021 than 2008, a slowdown unprecedented since the 1920s. The Office for Budget Responsibility forecast in March that real wages are expected to fall even further over the next few years. Stagnant productivity and wage growth has left households with no buffer for rising costs.
Recent government policy has prioritised making things cheaper whilst failing to address a society that has become poorer. Cheaper imports or cuts to fuel duty might make wages go further, but only if you spend your money on those products. If prices are beyond our control, the solution to rising costs is to make people better off.
The number one priority must be to boost productivity and, ultimately, wages. Fundamental to that is having a clear sense of direction for the UK economy post-Brexit. What industries can the UK lead on globally?
The government has shown it understands that building on UK strengths and future-proofing them for a net-zero world might be the way forward. The City has taken early leadership on green finance, and there are hints of excellence in battery technologies in the West Midlands and Teesside. This is also one of the reasons why the energy security strategy leans so strongly in favour of offshore wind. What the strategy lacks is a sense of the new industries the UK should be getting ahead in. We may have already missed the boat on carbon capture and storage—without concerted action, we run the risk of falling behind on clean steel too.
Green investment can deliver better productivity returns than high-carbon investments. Higher productivity—greater output per worker—should increase wages, if unions and active policy provide the security and skills for a more productive labour market.
Second, a green economy must work for everyone. Without careful design, the transition could exacerbate economic insecurity for some and create pockets of pushback.
However, the government’s net-zero strategy, published last year, has so far failed to look at how households can take advantage of green technology and at how to establish new industries and markets that can drive economic growth.
Take car ownership. Although the upfront purchase cost is higher, electric vehicles are cheaper to own over the course of their lifetime, compared to petrol and diesel models. Over the course of their ownership, people can save up to £2,300 with a second-hand electric vehicle and as much as £5,600 third-hand, compared to equivalent petrol or diesel models. But currently only those who are better off can afford an electric car. This holds back market growth and excludes poorer people from savings: a classic Vimes Boots challenge. A small firsthand market limits the subsequent availability of cheaper used vehicles for lower income drivers to buy. Targeted support, for example by widening access to electric vehicle car clubs, would increase the size of the market.
More broadly, while climate policy will benefit everyone, it should do most for those in society who need it most. Sixty-seven per cent of the private rented sector has poor energy efficiency ratings of D or below, compared to 44 per cent of social housing. Raising minimum energy standards for the private rented accommodation will mean better living conditions and lower bills for the young people and poorer families excluded from the housing market by high costs.
Improving local public transport, walking and cycling routes benefits the single parent who tends to make more regular but shorter journeys. New public transport routes can be targeted first at rural communities, who are disproportionately forced to rely on cars or risk isolation.
Acting in a crisis isn’t easy, especially when the government is worried about its own political vulnerabilities. While finding ways to reduce costs now is vital, without action that also addresses longer-run economic vulnerabilities we’ll remain exposed to the next crisis. Bringing clear purpose to the economy, to make the whole country better off, will be central to creating a more secure foundation for the future.
