IEA - Cutting taxes and regulation could cut living costs
25 Sep 2014 12:33 PM
Politicians of all stripes have tackled the symptoms of high living costs rather than addressing the underlying causes.
Both campaigners and policymakers have seen the solution to the rising cost of living as more intervention through price controls and regulation, failing to realise that it is government intervention itself which has pushed up prices, making life much more expensive for families up and down the country.
During this vital party conference season a new report from the IEA shows that by eliminating government interventions in areas such as housing, energy and childcare, the cost of living could be dramatically reduced.
The research in Low Pay and the Cost of Living: A Supply-Side Approach estimates that these reforms could make some families up to £7,800 better off each year.
Helping the UK’s poorest
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The poor spend a much larger proportion of their overall spending on ‘essentials’ such as food, housing and energy than the rich, the prices of which have risen significantly more than average inflation, even prior to 2008. For too long campaigners and politicians have focused on the role of benefits and wage campaigns to alleviate poverty. Interventions such as the Coalition’s ‘Help to Buy’ policy and Labour’s energy freeze address demand rather than supply. Cutting taxes and regulation, on the other hand, would dramatically reduce household bills.
Housing
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The UK’s planning laws and development restrictions have been a key driver of exorbitant house prices. House prices relative to median incomes are lower in Washington DC than Swansea, whilst residential space per household in the UK is the lowest in Western Europe. Not only is our housing more expensive than in most other countries, we get much less of it.
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Relaxing green belt restrictions, giving more freedom to local authorities to experiment with development compensation schemes, and decentralising the UK’s tax system to encourage development could see prices fall by as much as 40%. With a more sensible planning system, rent levels for a typical family could fall by over £250 per month, equivalent to a pay increase for someone in the 20% tax band of over £4,500 per year.
Energy
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Abolishing renewables subsidies and the UK’s unilateral carbon price floor would reduce gas prices by 4% and electricity prices by over 20%, saving households nearly £150 per year. That is without even allowing innovation in tariff formation for energy companies, which could also dramatically reduce gas and electricity prices.
Childcare
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The government spends around £7 billion per year on childcare subsidies, but the UK is still an outlier in that both the public and private cost of childcare is exceptionally high. Government policy itself has driven up costs by increasing regulation relating to staff qualifications, staff-to-children ratios and safety measures, resulting in the number of registered childminders nearly halving.
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Fundamental deregulation of the childcare sector and a shift away from equating childcare with pre-primary education would significantly reduce costs. Alongside a simplification of existing childcare subsidies, costs of childcare for families could fall by £280 per month, equivalent to a pay rise of nearly £5,000 per year in earnings before tax.
Food
Abolition of biofuels mandates at EU level, the abolition of the Common Agricultural Policy, and relaxation of planning restrictions to allow more developments of large supermarkets would reduce UK food bills by 10%, saving families at least £550 each year.
Sin taxes
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The poorest fifth of households spend an average of over 30% of their disposable income on indirect taxes. The same group spends nearly £1,500 a year on ‘sin taxes’ alone, by way of betting taxes, air passenger duty, tobacco and alcohol taxes etc. These levels far exceed the “social cost” of the activities, and disproportionately hit the poor.
Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“For too long, the political debate has obsessed over tweaks to certain benefits or increases in minimum wage rates, at the expense of a host of policy areas where supply-side reform could have a much larger impact on living standards, especially for the poorest. “
“The startling figures in this report reveal just how hard life is for many families. If the government wants to tackle poverty it must address living costs. It is ludicrous that high levels of regulation and taxes are pushing up the price of basic goods.”
To arrange an interview (live or pre-recorded) with an IEA spokesperson, please contact Stephanie Lis, Head of Communications at slis@iea.org.uk or call on 0207 799 8909/ 07766 221 268.
Notes to Editors:
1. Methodology: The findings are based on a 4 person household (2 adults, 2 children) renting a two-bedroom flat in a medium-sized English city like Bristol or Milton Keynes. One of the children is aged 3, the other is aged 8. The estimated cost of childcare, food and energy for this family is based upon the JRF (2014) Minimum Income Standard estimate of what is necessary for a household of this composition where both parents work full time. On sin taxes, we assume that the parents in the family drink ten pints of beer per week, the parents consume one bottle of wine per week, there is one parent who smokes an average amount for a smoker in a low income household, and we assume that the family uses 18 litres of petrol per week (in line with estimates of fuel use for households in low-income groups which have a car).
2. Policy measures: Liberalisation of planning laws, with estimated reduction based upon returning to historic norm for median house price to income multiple of 2.9 from 4.9.
Deregulation of childcare with significant planning reform and de-formalisation of the sector. Estimated reduction based upon reducing cost of childcare in line with other EU countries with similar enrolment rates.
Abolition of the Common Agricultural Policy and domestic measures such as planning reform and abolition of Town Centre First policies. Estimated reduction based on direct impact on abolishing CAP and modest reductions in food prices to the level seen in The Netherlands (according to the EU).
Reductions in alcohol, tobacco and fuel duty by 20 per cent.
Whilst benefit withdrawal on housing and childcare may mean welfare recipients may benefit in different ways, it is important to remember that reductions in government spending would allow much wider tax cuts.
3. The full report, Low Pay and the Cost of Living: A Supply-Side Approach, by Ryan Bourne can be downloaded here.
4. The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
5. The IEA is a registered educational charity and independent of all political parties.