It’s time to be radical in restructuring our economy
July 8, 2022 7:00 am(Updated 10:18 am)
The playing out of the Boris Johnson psychodrama has been great television but there are more important dramas and, unfortunately, many tragedies being played out in homes across the country.
These are the struggles people are facing in trying to make ends meet, pay their energy bills, feed their children and pay their rents or mortgages. They are having to cope with the dramatic rise in inflation from two per cent to potentially 11 per cent in just over a year.
To fully understand why this is rightfully described as a cost of living crisis we just need to look at the plight of so many of our fellow citizens facing this huge increase in inflation.
Fourteen and a half million of our people are living in poverty, including over four million children. Over two thirds of these children live in a household where at least one person is in work.
Who lives in poverty? Forty-seven per cent of single parents, 2.1 million pensioners and 42 per cent of people who rely on disability benefits.
What is startling today is that we now use a description of poverty that was last used in the depths of the 1930s recession – destitution. There were 2.4 million people classified as destitute in 2019 including 550,000 children.
It’s no wonder that people are struggling, especially after a decade when the Government’s austerity policies resulted in wages being frozen or cut.
Many workers including teachers, nurses, local council workers and many in the private sector have seen their incomes cut and the security of their employment undermined by increasing casualisation whilst even their pensions have been degraded.
The response to this cost of living crisis from the Government, the Bank of England and many economic commentators have failed to demonstrate any appreciation of the scale of the financial insecurity people are experiencing, the daily grinding poverty and hardship so many are facing.
In their talk of a risk of a wage inflation spiral they appear as armchair generals fighting the battles of a past war, unrelated to the plight of so many of our people.
Even though the Bank of England has accepted that 80 per cent of the inflationary pressures stem from external factors such as Covid and the war in Ukraine, the orthodox decision-makers fail to appreciate that the threat is not a wage inflation spiral but a prices and profiteering inflationary spiral.
That’s why the use of the traditional measures of interest rate hikes, imposed wage cuts and more austerity is counterproductive and sucking demand out of the economy. The real risk to the economy is a recession that could cost jobs and deepen poverty and increase the grotesque levels of inequality in our society.
To challenge this dangerous orthodoxy, a group of progressive economists and I have put forward an alternative economic strategy to tackle the cost of living crisis and lay the foundations for an economy that also addresses the overhanging crisis of climate change.
The strategy includes immediately inflation-proofing incomes (wages, pensions and benefits) to provide short-term protection against rising prices – but it also includes controlling prices.
This is vital to reducing inflationary pressures and why we need urgent regulation of and caps on rents, energy prices and fuel, and preparation of price controls on basic food. Cutting VAT, at a historic high of 20 per cent, would also be a sensible policy.
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Profits have been soaring in some sectors of the economy. The windfall tax that has been introduced in the energy sector now needs to be extended, with an excess profits levy across sectors of the economy where profiteering has also been evident.
Far from curbing growth and demand in the economy, a serious programme of investment is needed to stimulate the economy, create higher-skilled jobs, improve productivity and achieve Government policies such as net-zero carbon emissions, and levelling up the country. Building a new generation of affordable zero-carbon council housing would also be a wise investment.
This economic crisis calls for a throwing over of the orthodoxy of the past that has undermined our financial resilience. It’s time to be radical in restructuring our economy so that never again do people endure a decade or more of falling real wages and rising poverty whilst the threat of climate crisis grows ever more pressing.
John McDonnell is the Labour MP for Hayes and Harlington. He served as shadow chancellor from 2015 to 2020