WHEN it comes to the cost of living crisis, British Chancellor Rishi Sunak likes to portray himself as powerless in the face of forces beyond his control.
After being criticized for not reversing the £20 Universal Credit cut, Sunak said he ‘can’t do it all’. Asked why his spring statement was so light on measures to reduce the cost of living, the Chancellor replied that he “cannot help everyone because it is too expensive”.
The hundreds of billions spent during the pandemic crisis to prop up Britain’s biggest banks and businesses again suggest there is still enough government money for those at the top, but not for those at the bottom.
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Moreover, Sunak’s supposed impotence looks more like dishonesty as many examples can be found of governments taking action, not only to provide financial support to those in need, but also to regulate big business. in terms of the prices they set and the profits they make. manufacturing. What this proves is that the cost of living is as much a political issue as it is an economic one.
Here are some of the best examples of countries struggling with the cost of living crisis.
The “price-quality shield”
SIX HUNDRED kilometers east of Madagascar, in the Indian Ocean, is a small island called Reunion. The island was colonized by France in 1642. Slavery was not abolished until 1848, almost 50 years after the French Revolution. For a short time in the 19th century, it was the world’s leading producer of vanilla. Today, the island of La Réunion is an “overseas department” of France and has 868,000 inhabitants.
Why am I telling you all this about a French island off the southeast coast of Africa? Because Reunion has perhaps the most ambitious approach to controlling the cost of living in the European Union (for which it is officially referred to as an “outermost region”).
This policy is called the “price quality shield” (BQP). In English, the “price-quality shield”.
The BQP brings together 153 products considered essential for living and sets a maximum collective price. The BQP is renewed every year and is currently set at €348, one euro less than in 2021. And this, despite inflation which has increased by more than 3% on the island at this time.
Whether it’s a local product or one of the biggest brands in the world, they are all subject to the BQP red sticker on supermarket shelves. Items on the BQP list include toothpaste, diapers, rice, sausages, and frozen fish. The products are selected to cover the daily needs of a family with children.
“The idea is that producers, importers and distributors make an effort on their profit margins,” said Pascal Gauci, secretary general for regional affairs in the Reunion government, of the policy.
The BQP has been in place since 2012, set up to combat the rising cost of living in the “overseas departments” compared to mainland France. But only now has it become a major talking point in French politics, in an election year dominated by the inflation crisis.
“Reunion is ahead of the game,” said Jean-Luc Mélenchon, the leftist leader of “La France insoumise”, at an election event on the island in February. “Here you control 153 prices. We will do this throughout France.
Melenchon narrowly failed to qualify for the final round of the French presidential election, which was won by incumbent President Emmanuel Macron, but his radical ideas for tackling the cost of living crisis helped galvanize a wave of support for his candidacy.
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That momentum carried over to the June legislative elections, where he has realistic hopes of leading a broad left-wing coalition to a majority, which would make Melenchon the country’s prime minister. The BQP could still make its way to mainland France.
Macron’s energy cap
WHAT the La Réunion quality-price shield illustrates is that it is possible to control prices, if the political will is there. France provides yet another crucial example in the case of energy bills.
The French government’s 4% cap on energy prices for 2022 means rising heating costs for French households is a fraction of that in the UK, after the cap was raised to a record 54% British energy in April.
What explains such a difference in energy prices?
About 85% of French households use EDF Energy as a public supplier. The fact that EDF has almost a monopoly and is publicly owned makes it much easier for President Macron to impose such a cap, even though, according to EDF, it cost the company 7.7 to 8.4 billion euros. ‘company. Ministers have since cushioned that blow by buying €2.1bn of new shares that have been made available in the majority-state-owned company.
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A second, less discussed part of the price cap was that EDF would be forced by the government to sell power from its 56 atomic nuclear reactors to competing French power suppliers at a fixed wholesale price, to ensure that these companies can also afford to pass on to consumers a price increase of no more than 4%. Macron, a former banker and staunch supporter of capitalism, effectively controls domestic wholesale and retail energy prices from the Elyse Palace.
There is of course a crucial political context to this. Macron introduced the cap just months before the presidential election. Perhaps more importantly, four years ago he faced mass protests and roadblocks that lasted well into a year after he replaced a wealth tax with a tax on fuel, angering the “yellow vests” who resided mainly in rural towns and villages. across France. The French president had learned the lesson by 2022. Yet another proof that prices are political.
The emergency rent ceiling in Spain
SPAIN has been one of the European countries hardest hit by rising prices, with inflation up 9.8%, the biggest rise since 1985. The centre-left coalition government has been subjected pressure to act and at the end of March he announced an emergency rent cap of 2%, in principle only until June 30, but with the inflation situation not improving, it is likely that the cap will be extended.
The rent cap makes sense because even before the cost of living crisis started, 3.5 million Spaniards who rented were already spending an average of 40% of their income on housing. Freeing up rent money will allow more to be spent on rising food and fuel prices. And unlike the food and energy sectors, the costs of homeownership – largely home maintenance – are not increasing.
The Spanish government’s budget for 2022 also included a new “housing allowance for young people” whereby anyone between the ages of 18 and 35 with an income below €23,725 per year can receive €250 per month for housing costs. . Critics have warned that this can only incentivize private landlords to raise prices further, although even before the introduction of the emergency rent cap, maximum rent increases in Spain were linked to the rate of inflation .
Suffice to say that nothing would prevent the Scottish government from also introducing an emergency rent cap.
Windfall tax in Italy
WHILE Boris Johnson ruled out any windfall tax on the North Sea oil and gas giants which were raking in billions during this crisis, Italian Prime Minister Mario Draghi announced in early May that he was increasing the one-off levy on energy companies, which was originally announced in March at 10%, at 25%. The ‘national unity’ government’s windfall tax applies to profit margins that increased by more than 5 million euros between October last year and April this year.
The 25% tax is expected to raise 11 billion euros, giving some insight into the current scale of profits for oil and gas companies, with Italy ranking only 39th in the world for oil production. The money will be used to pay a one-time cash payment of €200 to pensioners and workers who earn up to €35,000 a year, tax breaks for energy-intensive businesses and financial incentives to invest in renewable energy and home insulation.
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It is likely that with the much higher number of oil and gas companies in the UK, the windfall 25% tax announced in the Chancellor’s major policy U-turn will bring in well over £11bn. BP made £5bn in the first quarter of 2022, despite a big loss on the sale of its 20% stake in Russian oil company Rosneft. Another UK-based company, Shell, made nearly £7.5bn in the first quarter, three times more than in the same period last year.
No one could plausibly claim that these companies did anything to deserve such astronomical profits. Indeed, even BP chief executive Bernard Looney has said that oil trading is “a slot machine at these kinds of prices.”
Regulate prices and profits
WHILE there have been numerous household tax cuts and fuel subsidies introduced by governments across Europe, the key measures highlighted here have all concerned the regulation of big business. These examples show that it is possible to tax mega-profits and control prices if governments want it.
The idea has been entrenched in European politics for decades that the economy works best when we let “the market” decide, and that the government’s job is to play around the edges, adding a little extra social spending here and a little tax. where necessary, but without ever intervening in prices or profits. This idea must be placed firmly in the dustbin of history for any government serious about tackling the cost of living crisis.
