The United Kingdom's Cost of Living Crisis: A Looming

Challenge
The Big Issue newspaper defines a cost-of-living crisis as "a scenario in which the cost of
everyday essentials such as energy and food is rising much faster than average incomes".

The United Kingdom is currently facing a profound and pervasive cost of living crisis that
has deeply affected the lives of its citizens. This crisis has cast a shadow over the nation,
touching people from all walks of life, and has emerged as a central concern in the realms of
economics, politics, and society as a whole.

At the heart of the issue lies a relentless and steep increase in the cost of essential goods and
services, far outpacing the growth of household income. Although this issue has been
brewing for some time, the COVID-19 pandemic has exacerbated the situation. As the
pandemic unfolded, businesses shuttered and economic uncertainty grew, pushing many
households to the brink of financial instability.

The cumulative effect of the rising expenses has left a growing number of citizens with
limited disposable income, eroding their financial stability and overall quality of life.
Families are forced to make sacrifices, cut back on essentials, and make difficult decisions
regarding their future.

The cost of living crisis is not a new challenge, but it has been exacerbated by the economic
fallout of the pandemic. This has become a central issue in political discourse, with calls for
government intervention and policy changes to mitigate its impact. Addressing this crisis is
essential to ensure that the UK remains a place where people can thrive and enjoy a decent
standard of living.

Various proposals and strategies have been put forth to tackle this pressing issue. These
include measures to increase the supply of affordable housing; policies aimed at regulating
the rental market; and initiatives to promote energy efficiency and reduce energy bills.

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Additionally, there have been discussions about raising the minimum wage and enhancing
social safety nets to help vulnerable populations weather the storm of rising living costs.

Ultimately, the cost of living crisis has far-reaching implications. It impacts not only
individual households but also the broader economy. Consumer spending, a significant driver
of economic growth, can be hampered as people redirect their limited funds toward essential
expenses. This, in turn, can have a ripple effect on businesses and employment.

Furthermore, the crisis has social implications as it exacerbates inequality and can lead to a
sense of disillusionment among those who feel left behind by economic progress. It
challenges the notion of a fair and just society where opportunity and prosperity are
accessible to all.

Let us delve deep into the UK Cost of Living Crisis- It's Antecedents, Precedents,
Subsequents and Consequents.

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 Antecedents to the UK Cost of Living Crisis
The government argues that problems with living standards are the result of rising prices,
which have been driven up by the war in Ukraine and the legacy of Covid.
But the roots of the cost-of-living crisis go deeper.

1. Stagnant Growth of Wages since the Economic Crisis of 2008

The UK's historically low real wage growth is one of the most visible indications of the
country's dismal economic performance.
TUC general secretary Paul Nowak said: “Since the financial crash, in most parts of the
world workers have seen their real wages go up. However, the UK has been an international
outlier in terms of salary, with family budgets being slashed."
The poor wage growth over the last 15 years has exposed UK households to the current cost
of living problem. UK workers are facing a double whammy of exceptionally high inflation
and extremely low wage growth.

After the Covid epidemic, nominal wages returned substantially in 2021, resulting in real
wage increase. It is questionable whether real wage growth can be restored. Real salaries
have fallen more in recent months.

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 This demonstrates how the United Kingdom has lagged behind other countries in wage
growth. The only major country with lower wage growth is Japan, which experienced 1.4%
median salary increase throughout this period.

2. UK’s low productivity and poor performance

So, what's causing this halt in wage growth? According to economists, the key to raising
wages is productivity, which is a measure of workers' output.
Since the Great Recession of 2009, the United Kingdom has witnessed poor productivity
growth and sluggish economic growth.
The UK's post-war productivity growth rate was roughly 2.5%. Between Q1 2007 and Q2
2022, productivity increased by only 6.4%, an average growth rate of 0.4% compared to
0.9% in OECD countries.

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Some of the reasons for the slowdown in productivity are shared on a global scale:
i. Demographic changes – an ageing population (though UK is less affected by
declining birth rate than many OECD countries.)
ii. Slowing technological innovation. No major breakthroughs and diminishing returns in
scientific development.
Some issues specific to the UK include
i. Low adoption of new technologies, such as robot automation. UK is only in 24th
position in the global league of robot densities, behind countries including Slovenia,
Slovakia and the Czech Republic. (All countries with strong growth in media wages.)

It is extremely difficult to achieve significant rise in real salaries and real earnings in this
context of low productivity. Poor productivity has also strained the government's financial
position, necessitating an increase in the tax burden to provide public services.

3. UK’s Low Investment Rate

Historically, the UK has not invested as much as it could. In the years following 1997, capital
investment has averaged only 16% of the overall value of the economy.

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That is the lowest share of any G7 country and the lowest in the Organization for Economic
Cooperation and Development during that time period. According to Prof Diane Coyle of
Cambridge University, "a lack of investment over decades has held back the economy, and
made the UK less resilient than comparable countries to shocks like Brexit, Covid, and the
invasion of Ukraine."
4. Effects of Brexit Referendum
Since 2020, the government's spending has increased, while business investment has not kept
pace. What has happened since the Brexit referendum is a huge part of that story. According
to the government's independent watchdog, the Office for Budget Responsibility, business
investment in the UK has "stalled" since the UK voted to leave the European Union in 2016.

Given the significance of commerce and the fact that 50% of trade is with the European
Union, the choice to exit the single market and customs unions created additional frictions,
causing the UK to lose exports.

5. Years of Austerity
Between 2010 and 2021, it is anticipated that consecutive Conservative administrations
slashed £37 billion from welfare expenditure. Welfare limitations, benefit freezes, flat lining
earnings, cutbacks to disability payments, and the implementation of the bedroom tax have
been combined with insecure work during the last decade or so, putting homes on the verge
of financial ruin.
The 2010s' austerity inhibited growth and investment during a period of sluggish economic
development. Creating a vicious circle of fiscal constraints and poor investment.

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 Precedents to the UK Cost of Living Crisis
What are the direct factors that exacerbated and immediately triggered the cost of living
crisis?
No single factor has led to a crisis of this magnitude. This is a combination of the pandemic's
impact, the energy price cap lift, debt, rising taxes, inflation, the rising cost of goods and
services.
1. Covid 19 Pandemic
Many people lost their employment and earnings as a result of the Covid-19 outbreak. And
the pandemic's issues disproportionately affect low-income households.
According to research conducted by Child Poverty Action Group and the Church of England,
eight out of ten low-income families experienced a considerable worsening in living
conditions during the health crisis as a result of dropping income and growing expenditure.
The spike in food and energy prices is forcing many poor people to choose between heating
their homes and putting food on the table, exacerbating the pandemic's disproportionate
impact on the poor and vulnerable.

2. Rising Inflation
Inflation declined during the Covid epidemic because families cut back on spending. Two
things happened when the limits were relaxed in 2021.
i. Households were free to spend their epidemic savings, resulting in a huge increase in
aggregate demand.
ii. However, enterprises were unprepared to deal with the spike in demand. Firms had laid off
workers and reduced investment. There were also worldwide supply chain concerns as a
result of ongoing lockdowns in China (e.g., a significant scarcity of containers).
As a result, as demand increased in 2021/22, there were also supply constraints, resulting in
higher costs. In late 2021, inflation was caused by a mix of excess demand (demand-pull
inflation) and cost-push (increasing costs).

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And it's affecting every aspect of daily life!
According to official data, prices are growing at the same rate for richer and poorer
households. However, human perceptions of inflation are influenced by household income
levels, as emphasized by food and poverty advocate Jack Monroe.
Poorer households find it more difficult to cope with similar rates of inflation as wealthy
families since necessities, such as electricity and food, account for a bigger part of their
shopping basket than discretionary products. According to the Resolution Foundation, low-
income households spend twice as much as wealthy families on food and housing costs.
"If you're already spending primarily on necessities, where are you going to cut?" asked Dave
Innes, head of economics at the Joseph Rowntree Foundation poverty charity.

3. Ukraine-Russia War
Just as post-Covid supply chain issues were beginning to be rectified, Russia invaded
Ukraine, triggering a second supply shock and a jump in oil, gas, energy, and food prices. It
exacerbated the initial issues.

According to the Centre for Economics and Business Research (CEBR), the typical UK
family would lose £2,553 this year, half of which will be due to the invasion of Ukraine.

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Notwithstanding little overall commerce, several sectors of the UK economy rely heavily on
Russia. According to UN Comtrade figures, it accounts for over 20% of the UK's vegetable
product imports.
The conflict has hampered supply to the United Kingdom and other regions of Europe.
Because of the sanctions, Russia has reduced its supply to Europe by over 90%. Because of
this pressure, wholesale gas prices have risen 210% since the conflict began. If supplies are
not replaced, the likelihood of blackouts will grow, as conservation programs must be
implemented to get through the harsh winter months. On the other hand, the customary
electrical supply from the Netherlands, Belgium, and France cannot be counted on since
those countries must react to the new situation.
4. Impact of Brexit
According to the Resolution Foundation and LSE analysis, Brexit will have a significant
impact on productivity increases in the years leading up to 2030, with increased import costs
compounding the pain for household budgets.
According to the study, labour productivity - a fundamental measure of economic output per
hour of work - would be lowered by 1.3% by 2030 due to a reduction in the openness of the
British economy following Brexit, which is comparable to losing a fifth of the efficiency
improvements made over the previous decade.
Brexit, according to former environment secretary Hillary Benn, is "making businesses and
consumers poorer at a time when people across the country are struggling to make ends
meet."

5. National Insurance Rise

The United Kingdom's government stated in September 2021 that National Insurance (NI)
contributions will increase by 10% to fund England's social care system. Despite numerous
demands to repeal the manifesto-breaking NI hike, which knocks more than £200 off the
typical worker, the increase took effect on April 6.

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The opposition and labour groups slammed the measure for aggravating the cost-of-living
issue. UNISON general secretary Christina McAnea is among many who have criticized the
program, claiming that the disaster is the result of "political choices."
"The government steadfastly refuses to raise capital gains tax, instead raising national
insurance, a tax on working people." "Those who earn their money from stocks and shares or
buy-to-let properties, on the other hand, pay nothing more," she explained.

6. £20 cut to Universal Credit

The administration decided in October 2021 to discontinue the £20 increase in social
payments that had been implemented at the start of the epidemic. The Joseph Rowntree
Foundation (JRF) issued an estimate on the impact of the UC decrease in July 2021.
According to the charity, the decision to repeal the benefit boost meant that the UK was "on
the verge of the largest overnight cut to the basic rate of social security since WWII."
Rather of cutting benefits, economists and charities have urged the government to boost
benefits twice as much as planned this year in order to help the poorest households cope with
the cost of living problem. According to the Institute for Fiscal Studies (IFS), in reaction to
rising energy costs and rising inflationary pressures, an additional £3bn needed pumping into
the welfare system.

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 Subsequents to the UK Cost of Living Crisis
With inflation at its highest level in 30 years and a record hike in family energy bills
predicted in April, the government is under increasing pressure to address Britain's rising cost
of living issue.
1. All time high Inflation
Inflation is now at its highest level in three decades

Motorists have had it far from easy recently. Despite a 5p cut in fuel duty, prices continue to
reach extremely high levels, impacting the general public and businesses alike. Extinction

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Rebellion protests and blockades at refineries in April have also contributed to fuel supply
problems.
The Automobile Association's (AA) latest report (April 2022) on average fuel prices is
below:
i. Petrol
 Highest: The South East has recorded the highest price for unleaded at 163.4 p/litre.
 Lowest: Northern Ireland has recorded the lowest price for unleaded at 160.0 p/litr.
ii. Diesel
 Highest: The South East has recorded the highest diesel price at 177.4 p/litre.
 Lowest: Northern Ireland has the cheapest diesel at 171.8 p/litre.
In comparison, the AA's April 2021 report recorded highs of 126.3 p/litre (petrol) and 129.1
p/litre (diesel).

In addition, petrol costs have skyrocketed in recent months:

Gas prices on the wholesale market have risen to all-time highs in recent months, driven by
surging demand following the shutdown, cold weather depleting stockpiles, and reduced
wind levels throughout the summer impacting renewable energy generation.

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Households are expecting to see their gas and electricity rates rise by over 50% starting in
April, an increase of roughly £600 for an average yearly utility bill, bringing the total cost to
about £2,000 a year before any government initiatives to mitigate the impact. It follows a
previous record surge when the limit was last changed in October, when rates on default
plans increased by approximately £139.

Food costs are soaring: According to the think tank, "more than 1.5 million households will
see the rise in food and energy bills outstrip their disposable income, forcing them to rely on
savings or extra borrowing to make up the shortfall."
Andrew Bailey, the governor of the Bank of England, warned Sky News that "apocalyptic"
food prices are on the horizon, with culinary materials such as sunflower oil and wheat – of
which Ukraine and Russia are big producers – in high demand and short supply,
compounding the situation.
"This time last year, the cheapest pasta in my local supermarket (one of the Big Four) was
29p for 500g," poverty campaigner Jack Monroe observed. That's a 141% rise in prices for
the poorest and most vulnerable households."
"I've noticed that a small food shop now appears to be at least £20 or £30 more expensive
than before, and no doubt, others have encountered the same thing."

2. Impact on Mental Health

According to an Office for National Statistics (ONS) study conducted between April 27 and
May 22, 2022, 77% of UK people are concerned about growing living costs, with 50%
concerned "nearly every day." A second ONS poll conducted from May 25 to June 5
indicated that 52% of respondents had reduced their energy use. Rising costs have touched all
socioeconomic strata, but the impoverished have been hit the worst. According to a Food
Foundation think tank report published in February 2022, one million UK citizens spend an
entire day without eating in the previous month.

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In June, NGOs stated that the crisis is damaging people's mental health, with one releasing a
poll in which 9% of responding parents indicated their children had started self-harming.

3. Unprecedented Strikes
Nurses are on strike to demand a 5% salary raise above inflation, which is now at 13.4%, but
the government claims it cannot afford it. They are also striking to draw attention to the long-
term degradation of the service, which is exacerbated by a chronic scarcity of health-care
workers and rising living costs.
Nurses told NBC News that the health service, which is funded by taxpayers and offers free
care at the point of use, is failing to recruit enough personnel, straining to meet demand, and
having to cancel major procedures or transfer patients to facilities up to 150 miles away.

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 4. Fall in GDP and Business Investments
On 11 November, the Office for National Statistics (ONS) reported that company investment
decreased in the three months to September, falling below pre-pandemic levels. According to
the ONS, manufacturing declined "across most industries" for the three months to September.

5. Increase in Crimes
The ONS recorded a 22% rise in shoplifting in the year to September 2022. As a result of the
issue, several supermarkets began to implement new retail loss prevention systems, requiring
customers to scan their printed receipt on an optical scanner as evidence of purchase before
leaving the store. The systems have elicited some unfavourable public response.

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 Consequents to the UK Cost of Living Crisis
The long-term implications of a cost of living crisis in the UK can be far-reaching and have a
significant impact on individuals, families, communities, and the overall economy.

1. Impact on Public Health

The severe medical consequences of the cost of living crises include inadequate diet,
deteriorating mental health, and worsening of pre-existing health issues.
As a result, the crisis is anticipated to boost demand for healthcare services. However, if
operational expenses exceed expectations, healthcare providers will be forced to deliver
fewer treatments unless efficiency reductions can be found. Furthermore, low GDP growth
limits the state's ability to raise taxes to fund those services.
According to one study, the cost of living problem would likely cause thousands of early
deaths in the UK and considerably expand the wealth and health divide between the wealthy
and poorest.
According to a recent modelling research, premature fatalities (those dying before the age of
75) would jump 6.5% this year as a result of the cost of living problem, with 30 more deaths
per 100,000 people. The findings were reported in the BMJ Public Health journal.
The expected rise in premature deaths, from 463 per 100,000 people to 493 per 100,000,
corresponds to thousands of more fatalities in the UK each year.

2. Increased Inequality
Disadvantaged people with high food and fuel prices experience increased vulnerability and
decreased wellbeing.
The crisis exacerbated racial disparities. According to a recent analysis, black and minority
ethnic individuals are slipping deeper and quicker below the poverty line as the cost of living
rises.
It reveals that Black and minority ethnic individuals are 2.5 times more likely than white
people to live in relative poverty, with racial disparities most evident in Yorkshire and the
Humber, Wales, Scotland, and Northern Ireland.

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 3. Increased Poverty
The cost of living problem is having a significant influence on poverty rates in the United
Kingdom, with hundreds of thousands of people falling into poverty.
Hundreds of thousands of people are falling into poverty as a result of it.
Between April 2022 and March 2023, the Trussell Trust received a record number of requests
for assistance, with more than 760,000 individuals having to use the charity's food banks for
the first time. That is greater than Sheffield's population.
These data hardly scratch the surface of the problem. Many more individuals are unable to
buy food and are foregoing meals or going hungry rather than using a food bank.
According to Resolution Foundation research, 800,000 additional individuals will be forced
into absolute poverty by 2023/24. Child poverty is expected to reach its peak in 2027-28,
with 170,000 more children living in poverty than in 2021/22.

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