Illustration: Xia Qing/Global Times

Editor's Note:
The cost of living has been increasing across the UK since early 2021. The annual rate of inflation reached 11.1 percent in October 2022, a 41-year high. Rising costs including mortgage rates, rent, energy bills and food, are making it difficult for millions of households to keep their heads above financial choppy waters. What are the reasons for the rising cost of living? Can the UK government solve the problem? Global Times (GT) reporter Wang Wenwen talked to Michael Burke (Burke), a London-based economist, on these issues.

GT: What do you think are the reasons for the rising cost of living across the UK? 

Burke: As we know, the inflation rates in most Western countries are way away above China's, where output didn't fall as much as it fell in the Western countries. The real cause of the inflationary crisis is US fiscal and monetary policy. In fact, the US Federal Reserve, central bank of the US, created money on a scale never seen before. At the same time, the Biden administration increased government consumption by unprecedented levels, even compared to wartime highs.

As the textbooks tell us, if you increase demand without increasing supply, you get inflation. And that's exactly what happened. And it's a global phenomenon. It's basically the US response for whatever reason, whether they were trying to turbocharge the economy coming out of lockdown, or they had an eye on catching up with economic rivals. Whatever the issue was, that's where the surging inflation was located.   

It is related to the Ukraine crisis in some ways. But it's not the main driver. The big rise in energy prices took place before the war ever started. But the real effect, which was a spike really in prices because of the war, was a lot to do with sanctions. 

And European governments, in particular, have made a real mess for themselves, because their industries, particularly German industries, are really struggling, because of both the scarcity of energy and its higher prices. I think it's going to get worse as well, because of recent oil sanctions. 

GT: Why can't the UK government effectively manage the prices? What help should the UK government offer to its people? 

Burke: Well, in fact, as we talk about the cost of living crisis in general, we should mention that the direct actions of the government in a number of areas have actually made the situation far worse. 

Firstly, part of the cost of living crisis is tax increases. They increased taxes in the March budget on ordinary people. And their budget, the recent one being the so-called autumn statement, has only made matters worse as well so that the government has a direct role in impoverishing people. 

In this country, energy infrastructure used to be owned by the state. It was then privatized. And many of us argue that privatization was a massive mistake in terms of the well-being of the population, because what was a public good before without profiteering is now geared toward private sector profits, which hasn't led to a big increase in investment, in fact far from it. 

And the government allows this, the government has allowed huge profiteering. We almost see on a daily basis energy companies reporting a huge increase in profits, huge payouts to shareholders. But this is directly on the back of the profiteering they're doing in relation to the energy prices. They could be bringing them down. 

At the same time, the government has a windfall tax on energy companies, but the reality is that the subsidies they have for investment mean they're not really paying windfall taxes at all. 

If you take that all together, you said that the government is first adding to the cost of living crisis itself, and secondly, doing very little to alleviate the burden of higher energy prices imposed by private energy companies. 

GT: How do you comment on the political chaos in the UK that we've seen in the past few months? 

Burke: There is political chaos, but it's an unusual situation. Obviously, there have been many prime ministers, foreign secretaries, chancellors, and so on, all in a hurry after one another. The issue is that the British economy is in a terrible situation. It's partly to do with the general difficulties of the Western economies after lockdown and the very bad policies that have been adopted. But it's also related to Brexit, which is self-inflicted damage. 

The British government is trying to get out of the crisis in a Big Bang way, in a way not hugely different from the way that the Biden administration tried to get out of it - with this big surge of spending and inflationary money creation. Britain can't do that because it doesn't have the US dollar, so it is instead trying to achieve a big boost to profitability by driving down wages. And because that's quite politically difficult in many ways, that's led to the big turmoil inside the Conservative Party, the ruling party. 

But they all agreed on the project. They have big differences about the pace of the project, and what is achievable over what time scale. And then of course, they're all very largely concerned about losing their seats at the next general election, which looks likely for very many of them. 

There are all those different factors at work. The strange part of the situation is they're actually all agreed on the central project, but because the project is itself risky, which is driving down wages to drive up profits and everything that goes with that, then they have very fierce disagreements over the tactics. 

GT: Are you disappointed about the UK, which used to be an empire on which the sun never sets?

Burke: I'm not disappointed in it. I think it's part of a long process. I would say the interesting feature about that is while the empire is almost entirely gone, it lives on in the minds of a lot of people in British political circles. And part of their response to Brexit is to say they were going to have trading relationships. They call it empire 2.0, so that it still lives on in their minds. And it's nonsense. You could see it politically. You could see how it lives on in how they all want to interfere in Hong Kong. You can see it's still in Ireland. You can see how it exists still in the disgraceful treatment of refugees. No disappointment on my part. I just wish people would right wake up to the reality that the empire has gone and they've got to live with it.