The real reasons why living costs are still going up

 
Ryan Bourne
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ED MILIBAND is said to want to fight the next election on the issue of living standards. This week a report by the Resolution Foundation gave him the intellectual ammunition he needed. It highlighted how income growth for middle and low income households will be constrained by technological and global pressures and the continued structural adaptation of our economy. Without fast growth, living standards for this group will decline.

Some of the proposed solutions were sensible. A “winner-takes-all” global economy requires our young to be appropriately skilled, and adaptable to the fast moving pace of technological changes. And our tax and benefits system certainly has perverse effects on work incentives that need to be addressed.

Other recommendations are misguided – a beefed up Low Pay Commission and pressure for a “living wage” sound appealing, but will add to business costs and continue to exclude many from the jobs market altogether.

But the most frustrating part of the report was that it focused heavily on income and employment, but didn’t emphasise the other determinant of living standards: the cost of living. As such, it gave a rather one-sided view of how affordability could be dealt with, usually involving taxpayer support.

Take childcare. The report notes that childcare is unaffordable for many. Its solution: more public subsidy for childcare paid for by cutting other spending elsewhere. But this ignores the supply-side factors that have driven increased costs.

Since the mid-1990s, the number of child minders has fallen by nearly 50 per cent, after the last Labour government ramped up red tape, the costs of training, and the bureaucracy associated with being registered. Countless good child minders gave up and many potential new entrants were deterred by the hurdles. Now the £7bn in government subsidies for child care restrict consumer choice by distorting the market towards day care centres.

Childcare is an obvious example of how state control begets state control, with the unintended consequence of driving up cost. Numerous state policies affect our everyday lives and living costs: housing (where restrictive planning laws and housing benefit increase prices), energy (where green policies drive up energy bills), and fuel (where governments have escalated duties).

Globalisation and innovation are unforgiving, and will lead to large structural changes in economies around the world. Policymakers have to address symptoms of the wealth generation process by enabling the conditions for fast adaptation. But it’s vital we understand wages alone don’t represent our living standards – they are also determined by what we can afford.

The fact that a large proportion of our wages go to industries heavily- regulated or controlled by government should tell us something. Free-market, pro-competition policies will do more for living standards than self-defeating tinkering.

Ryan Bourne is head of economic research at the Centre for Policy Studies.