Tackling prices will help ignite growth
One of the fastest and most powerful tools for igniting growth doesn’t belong in the Treasury’s toolbox. It’s instead in the remit of the Bank of England: the tool to raise consumer demand and cut costs for businesses by cutting interest rates. While central banks are independent of governments, governments can still play an important role to make the Bank of England’s decisions-making easier by creating a low-inflation environment.
Keeping prices stable is a good aim in itself: the Prime Minister has already named the cost of living as his first priority this year. But it is doubly good from the perspective of macroeconomic growth because of its impact on the Bank’s decisions.
The government has already taken big measures to support price stability, meaning the Bank of England has cut interest rates six times already since the general election. The Bank reckons that measures in the Autumn Budget, for instance on energy bills, will reduce inflation this year by half a percentage point. Before the US-Israeli strikes in Iran and the subsequent on the international economy, financial markets broadly expect ed inflation to be back at its 2 per cent target by the summer.
As a result, households, as well as the Bank of England, are understandably cautious about how long the economic respite will last. In such a climate of economic and international uncertainty, and consumer anxiety emerging from the post-pandemic era, the government could do even more to reassure strapped households that it has their back.
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We in parliament must talk more about daily living costs and how to target them. What cuts through most for individuals are prices rather than the rate of growth, so the government could seek to target prices for the essentials that people notice most. To understand these dynamics, the government could regularly survey the public’s expectations of prices, as Costas Milas of the LSE has recently argued.
Obvious targets include administered prices, such as energy and water bills. The government has capped ground rent for leaseholders, but going further and faster on service charges would also affect the millions of people living in new-builds and managed estates.
While there are few cheap fixes for the cost of living today, there are many structural changes that will yield benefits in years to come. Our energy system remains unduly dependent on imported gas, which sets the marginal price of our electricity; we need a rethink of the standing charge and a move towards a more progressive pricing system. Planning reforms can help ensure there is always a low-cost supermarket within reach.
We need to build more houses in the regions where jobs concentrate, at the same time as investing in growing the opportunities in other regions. And of course, further trade alignment with the European Union is essential to cutting the costs of the weekly grocery shop.
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