Why does business avoid scrutiny in cost of living crisis?
Another Sunday round of broadcast interviews and once again the cost of living crisis dominates as people struggle to afford soaring energy prices as well as rocketing food prices. The debate has now taken up the predictable pattern. Problem emerges. Opposition calls on government action. Media calls on government to act. Government attempts to do the bare minimum to get the press off its back.
Most of the debate appears to have settled around the issue of a windfall tax (initially dismissed by the Chancellor but now back on the table ) as well as reducing the planned increase in National Insurance. Certainly, there is more that HM Government could do to help poorer households through the current spike in inflation. But everyone knows that even a windfall tax won't tackle the rising prices in the shops.
The truth is that it is not government that sets prices but businesses. Despite this, the current debate assumes that businesses are passive observers in the cost of living crisis, bar the occasional stone thrown at the oil and gas companies.
What does the data tell us? Faced with a temporary spike in prices, businesses are making a choice to pass those costs to consumers. According to the ONS, 20% of firms have increased the prices of the items that they are selling. In some sectors it is even higher. The wholesale and retail sector, for example, has seen over 34% firms increase their prices. To pass on costs to consumers is a conscious choice by firms. Why are they passing on these costs?
Many business leaders would say that these price rises are critical to maintaining jobs, wages and investment. It is true that since the price spike began, employment has remained constant. However, employment is still over half a million lower than before the pandemic began. Wages too are falling in real terms, already down 1% during the last quarter likely to be worse. NatWest's Chairman has been quoted in The Sunday Telegraph warning that discretionary spending by households may fall by 20% - a recession triggering fall. Business investment too has not recovered since the pandemic and was flat even before inflation started to rise towards the end of 2021.
Yet the news is not bad across the board. The one thing that has recovered since the pandemic is profits. According to the ONS, the net operating surplus of UK firms (a measure of profits) is back to pre-pandemic levels. Share buybacks, a way of paying out to shareholders by the FTSE 100 have increased to £28bn in the year-to-date, a 47% increase. Tesco has announced plans to hand back £1bn to shareholders through share buybacks, double its previous target, despite rising prices for consumers. BP has announced $4bn in share buybacks every year till 2025 at a time when the price at the pumps are at record levels. All this comes after the taxpayer spent tens of billions of pounds during the pandemic to support all forms of business and to keep the economy moving, taking on record debts which the Chancellor is now raising taxes to deal with. It is a myth to say that dividends and buybacks pay for our pensions. According to research by the TUC, UK pension funds hold less than 3% of UK-quoted shares, down from over 30% in 1990. Bumper dividends and buybacks will make the richer households and foreign holders of UK shares richer, but they are not going to help the average family (either in work or retired).
All this points to a worrying culture within UK plc, where solidarity only flows one way. Businesses are quick to ask for tax cuts (many are now lobbying for the planned rise in Corporation Tax to be cancelled to help deal with rising costs), but at the same time are not prepared to restrain their own dividends and use their profits to help keep prices down.
This is why we need structural reform to UK businesses. So long as businesses continue to see the short-term interests of their shareholders and owners as their own responsibility, this free rider problem will never be resolved. We need to diversify our economy, promoting business such as social enterprises, which consider profits to be one of a number of factors and are prepared to make sacrifices for the greater good. Legislative reforms such as a 'Better Business Act', are also essential.
Until policy makers recognise that business reform is as important in dealing with the cost of living crisis as changes to taxes or green levies, we will not make progress. Tax cuts will not offset inflation, but will simply be eaten up by the system.
Business reform is complicated, but it cuts through to the issues of power and prosperity which impact voters. Thorough reform of our institutions is essential if Britain is to get through this current period of economic and geopolitical instability. The Prime Minister and Chancellor should use the debates triggered by the cost of living crisis to start with British business.