The British are facing the test of the "cost of living crisis"

A sharp rise in energy prices will cause some poor British households to spend half of their household income on paying their energy bills. Up to a third of UK households will struggle to afford their energy bills in 2022

Wen | special contributor to Caijing Wei Cheng from London

Editor| Haozhou

My first two op-eds in 2022, the first on the outlook for the UK and continental Europe and the second on youth unemployment in the UK, and this one we look at the cost of living and consumption in the UK.

At the beginning of the new year, both the British print media and the British television and online media are talking about a word: cost-of-living crisis, and some media even published editorials, arguing that what eventually brought down British Prime Minister Johnson may not be the recent "party door" that has been making a lot of noise, but the cost of living crisis.

So what happened in the UK that made the cost of living problem that any country would face worsen to the point of crisis?

Worse

The latest data released by the Office for National Statistics on 18 January 2022 shows that inflation in the UK rose to 5.1% as of November 2021, the highest inflation rate in a decade. By comparison, the three-month salary increase, including bonuses, for the three months to November 2021, fell to 4.2 percent, below inflation.

According to the Resolution Foundation, a British think tank, this is the third time in the past decade that income growth in the UK has failed to keep up with inflation, the first after the 2008 financial crisis and the second after the Brexit referendum.

Economists predict that UK inflation will reach 5.2% in December 2021 and possibly 7% at some point in 2022, which will be the highest inflation rate in more than 30 years, and the Bank of England may be forced to raise interest rates several times.

But the cost-of-living crisis in the UK is not just one factor that is higher than income growth. The largest proportion should be the sharp increase in the UK's household energy bill.

The surge in global energy prices has been going on for a long time, but the UK has a cap on the household user charges of energy companies, which, while protecting ordinary consumers, has led to the bankruptcy of many energy companies.

In April 2022, the UK's energy regulator, Ofgem, will raise the ceiling, with some experts estimating that the increase could be more than 50%, with the average annual energy bill per household rising to £2,000.

A recent survey by pollster YouGov found that up to a third (33%) of UK households will struggle to afford an energy bill after raising the cap in 2022.

The charity Joseph Rowntree Foundation says that after the cap is raised, some poor British households may spend half of their household income on their energy bills.

Before the ceiling was raised, many Britons did not turn on heating this winter in order to save money.

Chris O'Shea, chief executive of Centrica, Britain's largest energy supplier and parent company of British Gas, recently warned that the soaring trend in energy prices could continue for two years.

O'Shea said there was no reason to expect gas prices to fall "very soon," and "the market suggests that gas prices will remain high over the next 18 months to two years." Those who hope that the increase in the price of natural gas is only a short-term phenomenon is wrong. ”

To make matters worse for UK households, the UK's national insurance tax will also be raised by 1.25% in April 2022.

The tax hike is expected to add £12 billion to the UK treasury. The UK government says the money will be used to fund the UK's health care system and social pensions.

But economists have criticized that raising the national insurance tax will only stifle economic recovery at a time when real incomes for ordinary Britons are falling and the British economy is under pressure from the COVID-19 pandemic.

Today, johnson has been asked by johnson to cancel plans to raise the national insurance tax on all sides of britain, including within the ruling Conservative Party, but Downing Street insists they will not cancel the plan.

Tighten your trouser belt

The decline in real income of ordinary Britons will naturally have a negative impact on consumption, and the decline in consumption will drag down the broader economy.

KPMG, one of the Big Four international accounting firms, recently surveyed 3,000 UK consumers and found that nearly a third (32%) of UK consumers intend to cut back on their household spending by 2022, with only 9% of respondents saying they will increase spending.

Of those UK consumers looking to reduce household spending in 2022, 55% said they would eat at restaurants less often; 50% said they would buy less clothes, and a whopping 59% of female respondents who intend to buy less.

26% of respondents said they had not been able to save during the COVID-19 pandemic, while the remaining 74% had saved some savings during the pandemic.

Perhaps, looking at the 74 percent of respondents talking about why they don't spend money or spend less money is more telling.

They cite them as the main factors preventing them from spending money freely, the first is soaring prices (23%), followed by rising taxes and household bills such as water, electricity and gas (17%), and the third is the uncertainty related to the COVID-19 pandemic (13%).

Another updated survey found that three out of five Britons plan to postpone large purchases or spending in 2022. Among them, 60 percent said they would postpone traveling abroad; 16 percent said they would delay buying their next car.

Wealth management firm Quilter commissioned polling firm YouGov to conduct the survey, and the results were announced on January 18, 2022.

Sean Moore, Quilter's tax and finance planning expert, points out that January is often the month people plan and book for a summer vacation to a more sunny country, but January is not a normal month because of the staggeringly spreading Olmikharin variant, soaring energy bills and increased national insurance taxes, which combined to hit consumer confidence and purchasing power, which is why three-fifths of respondents postponed buying bulky goods and traveling abroad.

"When people choose to wait and see, outbound travel is naturally the biggest victim." Moore said.

There are different industries

Of course, different industries, different occupations, the salary increase is also different.

UK wage data from job posting website Indeed shows that only a handful of jobs have seen wage growth above inflation since the COVID-19 outbreak, and the jobs with the biggest salary increases tend to be those in short supply over the past two years.

For example, the position of nurse in home nursing has been in short supply during the pandemic, with real wages increasing by more than 50% between February 2020 and November 2021, the largest wage increase to date.

For example, the United Kingdom is in urgent need of truck drivers and welders, and the salaries of these two positions have also increased by more than 18%.

But very few jobs have such high pay increases. In fact, since the beginning of the COVID-19 pandemic, the real purchasing power of many Britons has been declining, as prices have risen more than their wages have increased.

For example, installers (i.e. those who install and repair industrial machines or work in home repair jobs) experienced the biggest drop in wage declines during the two-year pandemic: since the beginning of 2020, the real income of this occupation has fallen by 14%.

Another example is that construction estimators have also experienced a decline in real purchasing power. For example, assistant positions, including front desk receptionists, are now paid an average of 1.7% less than in February 2020.

Even in industries where salaries are growing strongly, practitioners don't dare to expect this trend of salary growth to continue for a long time.

Moreover, there are special reasons for the salary growth in these industries.

Jack Kennedy, an economist at Indeed's recruitment lab, noted that the COVID-19-related hiring freeze has created the situation in these industries today: "Since the reopening of the UK economy, many industries have been trying to hire certain similar types of employees, and as a result, we are seeing a shortage of such employees, which has driven high salaries growth in these particular industries. But we're not seeing any real signs of increase in average employee salaries, which is really worrying given the spike in energy bills and the increase in the overall cost of living. ”

Historical trends

If we expand our gaze to a much longer period of time, we can dig into some of the more far-reaching historical reasons behind today's "cost of living crisis" in the UK today.

The past decade has actually been a period of relatively poor real wage growth in the UK. The income level of the average UK employee is now lower than it was before the 2008 financial crisis.

Real salaries for ordinary employees in the UK plummeted at the start of the COVID-19 pandemic and have since rebounded to pre-pandemic levels in the second half of 2020, but failed to grow throughout 2021.

If we take a closer look at the salary situation in the UK's two major sectors, public and private, we will find that the real income of ordinary public sector employees has declined compared to 2010, and the real wages of private sector employees have increased by only 5.6% in the past 12 years, compared with more than 20% in the eight years before the financial crisis.

Peter Leville, deputy director of the Institute of Fiscal Studies, a British think tank, said the upcoming changes in tax, welfare and energy price caps in April 2022 would exacerbate the current financial distress of Britain's working class.

"All of the above changes, combined with soaring prices, will depress the standard of living of ordinary British families, so nominal wages for the British working class must rise significantly to ensure that their standard of living is not lower than in the previous year," Level said. ”

And those who do not have wages, such as the elderly and those who are not in the labor market, will undoubtedly be hit harder by inflation.

The latest research from the Institute for Fiscal Research shows that poor households in the UK have been hit the hardest by those changes as they spend a higher proportion of their income on their energy bills.

But while low-income households have been hit the hardest, wealthier households will also be hit hard by the increase in the national insurance tax, as they tend to have higher employment rates.

Therefore, the "cost of living crisis" affecting all classes of the United Kingdom will jeopardize the economic recovery of the United Kingdom, which is highly dependent on the consumption of ordinary people.

In this sense, for Johnson, who is deeply involved in the "party door" scandal and faces increasing pressure to resign, even if he can barely survive this political crisis, the bigger and more severe challenge he faces in the future will be the "cost of living crisis".

(The author has worked as a senior journalist and editor in many well-known media outlets in the United Kingdom.) Author WeChat public number: Weicheng to see the world)