THE Conservative party leadership candidates agree that the British economy is in dire straits. Inflation is biting incomes, growth is stagnant while public services are faltering. In response, Liz Truss backs a bold new approach encompassing supply-side reforms, while Rishi Sunak promises a “radical set of Thatcherite reforms that will unleash growth and strengthen our society and culture”.
Reform is desperately needed to unleash the UK economy and improve cost of living. But we shouldn’t be entirely negative about the last few decades. There has been immense improvements in our lives, along with lower prices and higher quality, in at least some sectors. We can learn a lot from this experience.
Between 2000 and 2021, the average rise in prices amounted to 39 per cent, according to the Office for National Statistics. Over that period, however, the price of some goods skyrocketed while others declined. The likes of televisions (-306 per cent) and computers (-1,118 per cent) are the most notable examples. The capacity of a computer, in terms of their necessary components – processors, storage, RAM, for example – has gone up rapidly while the cost has gone down. It’s a similar story for TVs, that not only are far higher quality and cheaper but also contain smart features like in-built Netflix and Disney+.
Similarly, furniture, clothing, toys, appliances, vehicles and communications have gone down in price. These sectors are notable for their competitive markets, with relatively limited state intervention. The state does not operate a National Television Service or dictate furniture design.
The same cannot be said in the sectors that have experienced the largest increase in prices — such as housing, childcare, or electricity. In these sectors, red tape, that is, regulation beyond what is necessary to ensure minimum standards are met, has pushed up the structural cost of living.
Over regulation has been most damaging to the housing market. The planning system has prevented enough homes being built in places where people want to live, significantly increasing prices. The average (median) house now costs over nine times more than the median salary. This has not just pushed up the cost of living but meant people cannot live nearby to better paying jobs, thus lowering productivity, while increasing commute times and environmental degradation.
But planning reform is only the tip of the iceberg. The UK’s childcare regulation, which includes some of the most stringent staff-to-children ratios in Europe and an extraordinary set of other educational requirements, has increased costs while pushing childminders and family carers out of the market. Regulatory reform, that would put UK regulations closer to the rest of Europe, could cut costs by around 40 per cent, reducing full time monthly childcare costs for one child by £360.
Then there is growing employment regulation that has made it more expensive to hire people, continuing tariff and non-tariff barriers to trade, nanny state interventions that disproportionately impact poorer households as well as a dire approach to energy that has pushed up costs and sacrificed security and reliability of supply.
Families could save as much as £9,000 a year by cutting red tape in the likes of housing, childcare, and energy, according to a new report for the Institute of Economic Affairs, released today. That is not small change.
The discourse about cost of living has largely focused on costly handouts, but it’s regulatory reform that enables open and competitive markets and will reinvigorate the British economy while lowering costs for households.