The Blog

The Cost of Living Crisis: A Generational Problem?

Looking beyond short-term political point scoring, could the current cost of living crisis be the symptom of something much wider?

ONS figures show disposable income in the average household has fallen from £526.40 in 2006 (adjusted for inflation) to £489 in 2012. These figures provide valuable ammunition for Labour's "cost of living crisis" argument - that the nascent economic recovery is providing scant benefit for the average household.

But looking beyond short-term political point scoring, could the current cost of living crisis be the symptom of something much wider?

Cost of living crisis

Labour's claim that the UK is undergoing a cost of living crisis carries real weight. IFS analysis has shown that although more people are in work now than in 2007, incomes have "fallen in real terms over that time as costs have generally risen faster than wages." And while inflation continues to outstrip interest rates, the value of savings decreases daily.

Osborne may cry fiction, but he's clearly rattled by the issue and recognises that taking pension contributions and national insurance cuts into account is not enough to change the daily reality for the average household. Pledges on rail fares, energy bills and free school meals may be motivated by political back-footedness, but they are too expensive to be about Westminster wins alone.

The feeling on the ground may be that the recovery is only serving the rich (read: The City), but figures don't support this. The recovery is unbalanced, yes, but not along income lines.

Paying for pensions

As reported by Chris Giles in the FT, in the decade between 2002 and 2012, Britain's economy grew 14% and GDP 7%, but "neither median nor household living standards went up at all". Had the rich been getting richer, whilst the rest stayed the same, those figures would have risen.

Rather, as Giles' piece continues, the cost of making good on final salary pension promises made in the booming 80s and 90s is squeezing wages. The total cost of employment to companies has remained the same, but the distribution has shifted.

To put it bluntly: the young are paying for the old.

This wouldn't be so bad were current and future generations not facing a higher state pension age and falling annuity rates. Defined benefit pensions may be on their way out, but the demographic shift to an ageing population means the trend of working more for less, and paying more for less, is unlikely to stop any time soon - if at all.

Cost of raising a child

Indeed, it works the other way too. According to a recent study by Child Poverty Action Group (CPAG), the cost of raising a child to the age of 18 has risen to almost £150,000, at a much faster rate than wages. Meanwhile: "lone workers and second earners working 30 hours or more per week on the minimum wage are actually worse off than working fewer hours" due to the astronomic cost of childcare in Britain.

And of course, the cost of a degree is continually rising as the value of a BA continually falls in the face of a) graduate oversupply and b) stagnating wages across the board.

It's not all economic factors. To a certain extent, the rising cost of raising a child is down to simple consumerism - the fuel of our economy. The cost of putting on a children's party has risen dramatically thanks to MTV's 'Super Sweet 16' and competition between parents.

The historical analysis

Whichever way you look at it, the overarching theme is clear: we have peaked.

Western liberal democratic capitalist economies are suffering from both the demographic shift to an ageing population and the cost of maintaining the conspicuous consumerism necessary to maintain continuing growth.

The decline of western hegemony is much discussed - usually in terms of the East, led by China and the Asian 'tigers', supplanting us in international primacy. But that doesn't hold water. China's GDP growth is slowing, which makes sense in a macro-historical sense. Their rapid growth is only what Britain went through in the 19th century. As the middle class emerges, the slowdown is inevitable.

Rather, what we are seeing is an ageing population - a consequence of triumphant medical science and rising living standards - creating an unsustainable bill for younger generations. One that will be passed down indefinitely. The cost of living will only increase as the ratio between workers and non-workers becomes ever more lopsided, the cheap goods from China we rely on dry up as their living standards increase and the cost of sourcing and providing energy skyrockets.

Free school meals for every child under 7 won't solve the problem. Freezing energy prices won't solve it either. Neither Osborne nor Balls have proposed anything beyond superficial tinkering. Short of massive growth driving real wages up - and effective prices down - it's hard to see what can stop us paying more for less. And the kind of consumption required to achieve that would entail ever more unsustainable use of dwindling resources.

We are living through the decline of western civilisation. And it has nothing to do with China. We are victims of our own success.