The new prime minister and her cabinet face tough challenges ahead, not least a growing cost of living crisis. Rebuilding trust in government policies – and ensuring that the most vulnerable are provided with sufficient support – should be central to the response.
Newsletter from 9 September 2022
On Monday, the Conservative Party leadership contest finally came to an end. Liz Truss emerged victorious, gaining 81,326 votes (57.4%) from party members, with former chancellor, Rishi Sunak, backed by 60,399 (42.6%) voters.
But there is to be no honeymoon period for the new prime minister, not least with the passing of Queen Elizabeth, just two days after inviting Truss to form a government. Soaring energy and food prices, the war in Ukraine and issues around the Northern Ireland protocol make for an in-tray few would envy. Truss’s reaction to these challenges – among many others – will quickly define opinions among her own MPs, international leaders and the public.
She has already announced her new government’s response to the energy crisis. The UK energy price cap will be fixed at £2,500 a year for a typical home for the next two years. According to the prime minister, the policy will save the average household £1,000 a year and comes in addition to the £400 energy bill discount announced earlier this year.
Businesses are also to be offered some government protection. They will see their energy costs capped at the same price per unit as households for six months (from October). This will then be reviewed, with possible additional protection to be offered to businesses in more vulnerable sectors.
Crucially, this intervention will not be funded via a windfall tax on energy companies’ excess profits, despite renewed calls to do so from the Labour Party. Instead, the scheme – which could cost in the region of £150 billion over the two years – will be financed via government borrowing. This will have significant and long-lasting effects on the UK’s public finances and future fiscal strategy.
Trust in me
For the prime minister to gain buy-in for this and other policies from the public, rebuilding trust in government will be essential. The importance of trust for effective policy-making is discussed by Chris Dann (London School of Economics) in a recent Economics Observatory piece.
If the government is perceived to be trustworthy, people will be more likely to comply with public policies via consent, such as paying taxes and following the rule of law. As Chris highlights, if we think of state capacity broadly as ’the government’s ability to accomplish its intended policy goals’, then compliance – and therefore trust – is critical.
But the latest data paint a dire picture. In the UK, only 35% of the people trust the government (according to these data from the Office for National Statistics, ONS). This is well below the OECD average of 41%.
Opinions on Westminster seem to be particularly negative compared with local administrations. Around 42% of people trust their local government; and trust is even higher in the civil service, at 55%. Political parties are the institutions in which the public places the lowest level of trust, at only 20% (see Figure 1).
Figure 1: Trust in political institutions
Clearly, Liz Truss faces a large challenge in rebuilding trust among the public in the UK. This will be vital for the success of her premiership, but also for developing a better long-term relationship between the state and the people. As the country faces significant challenges, such as the current cost of living crisis, it is important for people to believe that those governing have their best interests at heart.
As Chris points out, developing a greater commitment to procedural fairness and amplifying people’s voices in the political process are key. This will help to ensure that policy decisions are seen as being legitimate, strengthening trust.
The announcement of the energy bill plan will have come as a relief to many who face much increased costs. But as highlighted by two new Observatory articles this week, not all households are affected by the cost of living crisis equally. Two groups that are likely to be disproportionately hurt are disabled people and those already living close to or below the poverty line.
As outlined by Jennifer Remnant (University of Strathclyde), people with disabilities are more likely to face higher household bills already – whether because of extra transport costs or the need for specialist equipment or additional heating. What’s more, they are often excluded from full economic participation, particularly employment.
Benefits, designed to offer support, are of limited assistance as they are falling behind the cost of living. This also affects poorer households, as emphasised by Helen Barnard (Joseph Rowntree Foundation). Individuals with fewer resources are more likely to take on debt to cover essential bills and goods, and this extends the effects of the cost of living crisis and increases the likelihood of falling into poverty.
With the prices of essentials such as food and other basic household items going up at an alarming rate, some politicians have suggested that ‘looking for bargains’ is the answer. But is this even possible? In another new article, our director Richard Davies explores whether inflation is avoidable and if, by shopping carefully, savvy customers can keep their food bills down.
Drilling into the micro data, Richard finds that many of the prices of bargain options are going up faster than those of higher-cost equivalents. Those who buy goods in the cheapest three baskets of goods (the 10th, 20th and 30th percentiles) are seeing higher rates of inflation than those at the top (the 70th, 80th and 90th percentiles). In short, prices have gone up more for families who already shop for bargain products (see Figure 2).
Figure 2: Average inflation rates, consumer price baskets
Sources: ONS and Davies, 2022
The key issue is that eventually, there are no cheaper options. At some point, the bargain-hunters will end up with much of their shopping taken from the cheapest possible value ranges. And while historically prices in this range have risen more slowly, with the UK’s latest bout of inflation, this is no longer the case.
Winter is coming
For now, at least, some of the pressure caused by rising energy bills may have been eased. But for families and businesses across the country, the months ahead will still be difficult. Prime minister Truss and her new cabinet will need to find a way to mitigate the worst effects of inflation, which Bank of England forecasts suggest could reach 13% by the end of the year.
There are also concerns that tightening monetary policy could plunge the country into a recession, which is likely to bring with it rising unemployment, lower investment and diminished tax revenue to fund public services.
Finding the balance between managing the cost of living crisis and protecting the economy presents a daunting task for UK policy-makers. Failing to rise to the challenge will have serious implications not only for Truss and the Conservative Party, but the country as a whole.
The Festival of Economics will be returning to Bristol on Monday 14 to Thursday 17 November. We’re delighted to announce a packed programme of talks and events, details of which can be found here.
And finally, as the nation enters a period of mourning, here’s a reminder of what’s changed and what hasn’t in the UK economy during the 70 years of the second Elizabethan age. John Turner (Queen’s University Belfast), one of our lead editors, wrote this piece to mark Queen Elizabeth’s Platinum Jubilee back in the summer.