When he’s not bleating on about his flagship energy policy, or proclaiming that he is bringing socialism back, Ed Miliband is to be found shouting about the cost of living crisis to anyone who’ll listen. He certainly believes that the cost of living crisis will pave his way to Number 10: an electorate disgruntled that economic growth isn’t helping them will vote in 2015 for a leader they believe will make everyday life more affordable. But Miliband’s belief that greater redistribution will solve the crisis is wrong. The key to the cost of living crisis is cutting taxes.
Where Miliband is correct is in identifying that the increasing cost of living is a problem. Inflation in September 2013 in the UK was 2.7%, the highest in Europe, though much of this can be attributed to the effects of quantitative easing. British food prices are increasing 4.3% year-on-year, and the cost of energy is increasing 3.4% annually. However, wage increases are just 0.7% a year, meaning that there is indisputably a cost of living crisis. Miliband’s mistake is thinking that the state can solve the crisis. Only individuals can improve their own cost of living situation in this instance, and this can only be achieved by allowing them to keep more of what they earn.
British taxes are cripplingly high. VAT at 20%, the highest band of income tax still 10% above that in the USA, the average house purchase having stamp duty of £7,560. What’s clear is that if everyone had to pay less to the exchequer and could spend more on themselves, cost of living would not be so high. This wouldn’t hold up if taxes were being spent in an effective and efficient way. But, quite simply, British taxpayers aren’t getting back for their buck.
Fuel duty and vehicle excise duty raised £31.5bn in 2010. That same year, spending on roads was £9.9bn and the negative externality of road transport emissions was put at £3.5bn. Excess taxes were therefore £18.1bn, or £293 per person. Give every taxpayer £293 back with immediate effect and the cost of living crisis would dissipate significantly. In addition, the big political football of the moment, the cost of energy, is another where less regulation should abound. Regulation costs will have increased from 7% of the average energy bill in 2007 to 22% by 2020, an unjustifiable 15% increase. David Cameron has rightly recently identified energy regulations as excessive and in need of reduction.
Reducing the amount of regulation consumers are forced to pay for on their energy bill is a far more thought through and sensible policy than an energy price freeze which will only result in a lack of investment and short term price increases to compensate. Cutting taxes is the only way forward. George Osborne’s freezing of fuel duty is a step in the right direction, but it has to be reduced rather than frozen, because a 60% tax on anything is unacceptable. Whilst cutting regulations on energy and reducing motoring taxes will begin to address the cost of living crisis, there is one more reform that has to be implemented to finally restore parity- a massive restructuring of the income tax.
The first important action that the government must undertake is increasing the tax threshold from the £10,000 allowance introduced in the 2013 Budget, an improvement on the £9,440 allowance left by the last Labour government, to £12,500, which is the annual income of someone earning minimum wage working full time. No one earning minimum wage should have to pay taxes, it is embarrassingly illogical, and for the group most vulnerable to the cost of living crisis, this would be a step in the right direction.
The next would be implementing a flat rate of income tax, so as to not stigmatise success and to attract high earners to this country. More likely would be a two tier tax system, whereby those earning over £100,000 would pay a little more, but certainly no more than 30%. Of course this would mean a massive reduction of the welfare state and a huge decrease in state spending, but we must welcome that with open arms. Because only massive change like this can salvage this country from the cost of living crisis that engulfs us. And Ed Miliband’s socialism certainly isn’t that change.