Opinion Piece: Cost of Living Debacle

This article was written by Ed Downpatrick, Strategy Director – Fintuity. Please note that as an opinion piece, all views are solely that of the author.

We are faced with supply chain blockages, energy shortages, and the gradual release of the boa-constrictoresque grip of the pandemic which leaves behind a corpse-like entity living on borrowed time. There is balance in everything and no such thing as a free lunch and given that most areas of the economy ground to a halt at least twice over the least two years, it is no surprise that there is a rebalancing, no matter how cruel that may be. Our sympathies, possibly our greatest, go out once more to the self-employed. Those who weren’t eligible for government grants were especially badly affected during the pandemic and now the costs of running their businesses, assuming they still exist, have increased further within an already challenged business environment.

We are in the midst of a big squeeze. Anyone who drives a car or depends on the roads for work will have felt this pinch all too keenly. War in the East and a desire from the biggest oil producers to keep the supply tight, and the prices therefore high, have caused petrol and diesel to sky-rocket to hitherto unseen levels, the cost of filling a family car passing £90 for the first time. The government’s modest 5p fuel cut is not yet being implemented by all providers with the likes of Esso, trapped in a 1000-strong franchise model, powerless to do so unless part of an Esso Tesco Alliance service station, of which there are 197, because the stations are owned, operated, and priced independently. Supermarkets aside, motorists will not see the cost of fuel fall until suppliers are able to bring in new fuel at the lower rate. You might logically deduce that the cost of goods that need any kind of shipping must therefore increase, and you’d be right. A lorry company pays its drivers, pays for maintenance, pays its corporation tax, and all-importantly, pays for fuel. In order for the business to survive it must maintain a certain profitability, within a band let’s say, but with upward pressure on that band something has to give, and that will be the cost paid by those supplying and delivering goods, the only compensatory measures being government support or consumers paying more for the same goods. This is a rudimentary example of how inflation comes about.

We add to the bonfire a stunting to growth that started with the financial crisis of 2008 and has been exacerbated by the pandemic which will see the average worker in Britain £11,500 worse off per year. Low growth together with rising food and fuel (vehicular and household) prices are to blame. Ofgem, the energy regulator, estimates that pre-payment customers will see a rise of 54% to their bills whilst the consultancy Kantar estimated a near 4% increase in the annual household grocery bill. The Resolution Foundation has stated that typical working-age incomes are to set to fall by 4% in real terms in the next financial year, which is a loss of £1,100. The foundation also said that the poorest quarter of households will suffer most greatly – to the tune of 6%. To offset the increases to the costs of our lives, we would hope that they could enjoy the real-terms mitigation of real wage growth but inflation is forecast to outstrip what is otherwise strong nominal wage growth, meaning real wages are due to fall until the end of 2023 with household incomes facing their biggest hit since the mid-1970s. After the restrictions to personal freedoms of the last two years, this is a bleak outlook indeed. Our freedoms have come at a cost. Families and individuals will suffer, but so too business owners. Think of some of those hardest hit in the pandemic. Restaurants, events companies, tourism businesses… The ‘treat sector’, one might say, meaning non-essential businesses. With such a big hit to household discretionary spending power, isn’t it likely that these businesses will be the kind to suffer once more?

Rishi, to some folks dishy, but after that Kia Rio bullsh*t, what a silly billy, has hit us with a kick in the delicates stealth tax which, when twinned with the inflationary pressures above, will make life pretty unaffordable for a good many of us. The good news is that we don’t live in an authoritarian society and at some point, something will have to give. There will be a fine balance between governmental mercy and the longer-term plan of investing in academia, skills, R&D, and new technologies that will ‘level up’ as well as boost economic, and concomitantly, wage growth. Pray that the corporate sector grows, even those on the left should, because unless wages increase by 9% in April, real post-tax wages will fall. We are going to bear the cost of a new health and social care levy coming into force in 2023 via a 1.25% increase in N.I. contributions and we will be squeezed by a four-year freeze of the personal allowance and higher-rate threshold, the latter of which will drag many into higher rates of tax as their incomes increase faster than the thresholds. Given such an outlook, if you are in a position to do it, we would recommend taking tax advice.

On Energy…

The cost of moving away from fossil fuels, which we ironically need more than ever to ween ourselves off that which we receive from Russia, has sent energy bills soaring. I want to give a shout-out to tidal energy, a potential panacea. Tidal, unlike solar and wind, has no intermittency problem. Tide comes in, water flows through the turbines, electricity is generated – same thing happens when the tide goes out. A considerable amount of electricity could be generated from derelict brownfield sites, e.g., abandoned shipyards, chemical works, and salt pans, on industrial rivers in the UK where an excavated basin and turbines would be dug and installed. The most suitable sites, of which there are approximately 40, also happen to be in areas which would benefit enormously from new job creation, the ‘levelling-up’ effect, if you will. To recover capital costs, housing could be built on the roof of respective basins and industrial processes requiring intensive and expensive cooling from frozen food factories to memory banks (think Google, Microsoft, Facebook, the NHS which bear vast costs keeping mammoth computer centres cool) could be taken off grid by transferring the required cooling to the cold water circulating in the tidal basin. Green hydrogen could also be manufactured by electrolysis using on-site electricity when not required by the National Grid. We would gain dependable income streams from electricity generation, using the basin water for cooling, and selling the green hydrogen. This must be the next big step in energy independence and levelling up.

There is talk of a short-term switch to coal, Chinese coal at that, to reduce pressure and bring prices to more affordable levels, but this would be a significant environmental and ecological back-step at a time when reducing carbon emissions is, by all scientific reckoning, absolutely critical.

Our advice…

As a simple front step, give your finances a holistic health check and unless in an unassailably secure position, look what money is going where and structure accordingly. This type of check could be greatly assisted by a qualified financial advisor who, crucially, understands financial structuring, investments, pensions, and borrowing through a tax-savvy lens.

This article was written by Ed Downpatrick, Strategy Director – Fintuity. Please note that as an opinion piece, all views are solely that of the author.