The cost of living crisis is dragging a country into recession – and seven steps to avoid it

When asked by YouGov about their economic expectations for the coming year, most people said their hopes have never been lower. The country is in an economic crisis

Britain is facing a major crisis: the economy is about to crash. If you listen to our guides you wouldn’t know. That worries us.

Politicians speak of a livelihood crisis. But with major utilities fearing that four in 10 households will not be able to afford to properly heat their homes this winter, this is much more than a cost-of-living crisis.

It is a poverty crisis that creates the risk of recession. Worryingly, none of the major economic forecasters – not even the International Monetary Fund, which predicts the UK will be the slowest-growing country in the G7 by 2023 (growing 1.2%) – seems to understand that Britain is at great risk is recession.

When asked by YouGov about their economic expectations for the coming year, most people said their hopes have never been lower.

We believe the nation is right and the forecasters are wrong.

Ordinary people realize something that most politicians and economists have forgotten – one person’s expenses are another person’s income.

If people only have enough money for food, energy, council tax and housing, the rest of the economy is left with nothing to survive.

This leads to an economic crisis – businesses close, unemployment rises, mortgages and loans default, and then the banks run into trouble. We think this could happen.

We know that retail sales are down 1.4% over the last month. The weak policies of the government – too busy with Partygate to care – are hopelessly inadequate. Here’s our seven-part plan to keep the recession at bay:

1. Admit that we have a crisis

The government has to admit that we are in a deep crisis that will get much worse in a hurry. And it has to admit that this is a much bigger problem than just energy costs. Admitting that we are facing a meltdown is the first step in dealing with it.

2. Lower bank rates

The government needs to change economic direction. The best way to signal this is to lower interest rates. Curiously, in the face of what the government has dubbed the living crisis, the Bank of England (which has failed to notice the unfolding of the last recession) has hiked interest rates and hence mortgage costs, believing that taxing budgets even more will cure inflation .

That would only apply if households had too much money. But most don’t have enough.

3. Lower taxes

This is not the time for tax hikes, which the government is doing by raising Social Security, income tax and some VAT rates. It worsens the crisis. We need tax cuts. Temporary cuts in the energy and road fuel tax rate make sense. Ditto for big cuts in Social Security to keep people in work. Some inflation is driven by the wealthy: raising taxes on them makes sense.

4. Increase benefits

As important as tax cuts are, they are not as important as benefit increases to help those who need them most. Universal Credit’s cut of £20 a week last year was a punishment for many, and the fact that benefits and pensions have not risen by the rate of inflation this year is punishing those on the lowest incomes.

Universal credit needs to be increased, while increases in pensions and benefits should be adjusted for inflation.

5. Expenditure on jobs

Recessions occur because people and businesses stop spending and jobs are lost. Despite the Prime Minister’s false claims, the number of jobs in the UK has fallen by almost 600,000 since the pandemic began.

To avoid a recession, the government now has to spend a lot more. The war in Ukraine has shown that we need massive investments in new energy generation, greener transportation, housing improvements like insulation, and improving the security of our food supply. All of this requires investment, but in many of these areas jobs can be created quickly and the chance of quick returns is very high. We must subsidize jobs.

6. The EU

The government’s refusal to align many of our trade rules with those in Europe makes no sense for the business community and increases costs here. Saying we can follow EU rules on goods would seriously lower costs for businesses and lower inflation, and that makes sense.

7. How to fund it…

Here are three ways to pay for these steps. The first is to increase wealth taxes. The second is quantitative easing. Third, we could redirect savings by changing pension tax breaks and ISAs to encourage green investment. And don’t worry about the so-called debt: if we create jobs and wealth, the debt will take care of itself.

Is that possible?

All of these things could and should be done immediately. Politicians could bankrupt millions to balance the government’s books.

Balancing the balance sheet is far less important than ensuring that everyone can live without fear of poverty. What amazes us most is that politicians don’t understand this.

• David Blanchflower is Professor of Economics at Dartmouth College and the University of Glasgow. He is a former member of the Bank of England’s Monetary Policy Committee.
• Richard Murphy is Professor of Accounting at Sheffield University Management School and an activist for economic justice.