The new 'Venezuelan' economic strategy?

Mass consumer subsidies is a sign of spiralling economic weakness

“I am very proud of our record of helping people on low incomes, and not only the personal tax allowance increases, but the rest of our help with the cost of living—fuel duty freezes, council tax freezes, free school meals and help with child care. The coalition has listened and is helping. Of course, all those measures take time to feed through. Everyone knows that in some parts of the country people are yet to feel the turnaround, and that was always inevitable. Many people are only now beginning to experience the end of the post-recession squeeze.”

Sir Edward Davey, then Secretary of State for Energy and Climate Change, 5th June 2014

There are some things in life that are hard to predict. There are other things that are inevitable. The return of “cost of living” politics is the latter, not the former.

We know why. “Its comes up on the door step all the time.” “It’s high up in the polls.” “We need something that will cut through.” The cost of living has been a prominent intellectual feature of British politics going back to the 19th Century. Arguably, we squandered our entire economic advantage in that period through embracing free trade for ‘cheaper bread’ which was then exploited by our geopolitical rivals to undermine our industrial competitiveness. Keir Starmer and Rachel Reeves are not, therefore, alone in embracing it.

However, in defence of Gladstone and Cobden, their support for cheap bread was linked to a wider economic theory. It was also pursued from a position of industrial and financial strength. It hard to say that either of these two things is the case today.

The best that, economically, can be said for today’s cost of living advocates is that given our service-based economy, cost of living measures help to circulate cash in the system and keep businesses going. Whilst that Keynesian approach might ring true in recovery from a major economic recession, we are over two years since the last ‘technical’ recession at the end of 2023. This cannot be justified as an ‘emergency’ measure. As seen from the quote above, the relative stagnation in living standards has been an operating fact in British politics for over fifteen years.

We are also not pursuing this from a position of industrial or financial strength, as I have argued repeatedly on this Substack. We are not ‘sharing the proceeds of growth’ more fairly across the economy through these interventions. In the 19th Century, Britain had financial capacity which it could afford to ignore, that is not the case today.

Rail fare freezes (cost £770m over five years), fuel duty freezes (another £4bn this Parliament and costing £130bn since 2010), temporary energy bill cuts (cost £7bn over five years), the energy price cap (which costs billions a year).

Of course, subsidies are not a bad thing if they are based on a broader policy or social objectives. Childcare subsidies for example, are different in quality to the ‘consumer subsidies’ mentioned above because they are (usually) couched in terms of helping child development and giving all children the best start in life. The long term benefits both socially and economically are obvious. A rail freeze, less obvious.

Outside of war, the usual approach in Britain (or much of Europe) was targeted financial support for those that need it to help afford the essentials (e.g. tax credits).

However, since the financial crisis, we have started to drift towards a consumer subsidy model which is closer to developing countries in Latin America, like Venezuela, or Asian countries such as India or Iran. These are attempts to manipulate prices and household incomes for political ends. Just like in developing countries, our consumer subsidies not particularly well targeted and risk becoming hard to shift in the future (as we have seen from the fuel duty freeze). Directly subsidising the cost of something makes any price rises ‘political’ in the future. Already, too much of our economic attention is being taken up by how to maintain what we already have in place (e.g. fuel duty).

The real solution to the cost of living crisis is, as I have argued before, two-fold. Firstly, it is boosting domestic production (if we want cheaper food, provide support that grows more of it here, if we want cheaper energy, produce more of it) through long term investment. Secondly, we need to rebalance our trade (e.g. reduce imports, increase exports) so that inflation is not made artificially higher through the weakness of our currency. The billions spent on the measures in this Parliament alone could have been used to invest in these measures that would have long term benefits.

Mass consumer subsidies are attractive because they are a lever that can be pulled immediately and are perceived to provide ‘credit’ to politicians. The latter is particular dubious and has a very low opinion of the public. The Conservatives efforts to offer pre-election tax cuts (and introduce the energy price cap) did not boost their popularity in the last election. Moreover, I’d argue that giving people something temporarily that will create losers when you take it away is a recipe for political disaster. I am sure that is what Treasury officials advise when these measures are considered.

Longer term, the lesson from these developing countries is that (as we can see in Venezuela or Iran) if you do not fix the fundamentals, you are not going to make yourself popular. You actually create the conditions for more radical political incidents because it encourages you to do nothing to address the real causes of your economic weakness.

We are not going to see revolutionary mass protests on the streets of Westminster anytime soon, but our political economy is becoming Caracas.