The profound squeeze on living standards has become the defining, explosive feature of British politics. Each week seems to bring more pain in the form of higher bills. Water bills are forecast to rise again next year, on top of the energy price cap that recently increased to £1,755 a year. For rightwing populists, the cost of living crisis is the gift that keeps on giving, allowing them to blame the experience of declining living standards on migrants and perceived “outsiders”. Unless Britain’s crisis of livability is addressed, Labour will probably be the handmaiden of a Reform victory.
We often hear that the cost of living crisis is caused by rising energy prices linked to Vladimir Putin’s war on Ukraine, or by disruption caused by the climate crisis. These factors, while hugely important, are not the whole story. The structure of Britain’s economy amplifies the effects of inflation and makes life more expensive. When external shocks hit our economy, they translate into people paying even higher prices here than they do elsewhere. This is because essential services, such as energy, housing and transport, have been designed as opportunities for profit extraction.
Take the energy sector. Recent analysis from Common Wealth, the thinktank I direct, estimated that a quarter of the typical energy bill in 2024 was profit. That is equivalent to every household paying £416 a year so other people can grow rich. The water industry tells a similar story. Almost a third of the average bill goes towards funding shareholder dividends and interest payments. And the rail sector is much the same: more than 100% of its post-tax profits are distributed to shareholders, but most of the industry’s income comes from government subsidies.
The cost of living crisis is often framed as a regrettable but somewhat inevitable outcome of market forces and geopolitics. In truth, it reflects political choices about how we organise the provision of basic necessities. Households across Britain are paying a vast “privatisation premium” to access essential services. According to our estimates, the public have funded almost £200bn in dividends to the shareholders of the privatised water, energy and transport companies since the 1990s. Picture the impact: every time you get paid, a slice of your payslip flows out of your bank account and into that of a utility company, where it joins other streams of income from people across the UK, flowing into a gigantic river that siphons wealth away from working people and towards investors.
You could think of this privatisation premium as a poll tax that nobody voted for. Because these services are essential to everyday life, we have no choice but to pay for them, no matter how much they cost, often to monopolies that face no competition. The public pay twice over for essentials: first, through higher bills that pad corporate profits, and second, through higher taxes that help subsidise the private providers of essential services. This hidden tax is inherently regressive, because it hits people on lower incomes the hardest. Labour should take direct aim at this premium, and redistribute income from companies and their shareholders back towards ordinary households, or stop this money from being extracted in the first place.
Greater Manchester’s bus network, known as the Bee Network, is a case study of these possibilities. Since returning to public control, a simpler and more effective integrated fare structure has been introduced, and the average ticket price has fallen by 15%. While the network is not yet under full public ownership, it shows the potential for improving services and cutting the cost of essentials.
But the government is in a bind. The corporations that profit from the cost crisis are the same ones it is desperately trying to get to invest in its plans for infrastructure, housing and the green transition. These companies have enormous leverage – and they know it. Look at how Thames Water’s creditors have recently behaved. Since the government is unwilling to nationalise the water company, creditors have it over a barrel. They have handed the government an ultimatum: relax environmental standards for 15 years, or we will walk away and the whole company will collapse.
Or take Ofgem’s systematic favouring of providers over consumers. The regulator has seemingly been reluctant to correct billions in excess profits because it’s scared that investors might take flight. Squeezing out the privatisation premium while these companies still hold the keys to our infrastructure, and still wield all the power, is a dangerous game for the government to play. It will amount to a negotiation between equals.
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There is an obvious way out of this. Water, energy and transport should be brought back into public ownership and run for public benefit rather than private extraction. This isn’t just about fairness – it’s sound macroeconomic policy. When essential services move out of the market and become free at the point of use, two things happen at once. Households stop paying prices that include the privatisation premium, leaving them with more disposable income. And these rising private costs vanish from inflation statistics, much as GP visits and hospital stays don’t appear in the consumer price index.
That statistical shift is not just an accounting trick. Since inflation has momentum – companies raise prices partly based on what they see happening elsewhere in the economy – structurally lower measured inflation helps keep future price rises in check. The Bank of England might even find it has more room to cut interest rates, since the inflation figures it targets would no longer be driven up by profiteering in essential services.
True, taxes may need to rise. But unlike the flat prices that include the privatisation premium and hit everyone equally, and therefore the poorest hardest, taxation can be progressive. Design it right, and most households can keep the savings from eliminating shareholder payouts while still contributing to the cost of essential services according to their ability to pay. What we are really talking about here is recognising that “inflation” and “cost of living” measure different things. Clever policy can improve both – but only if we are willing to challenge the business models that currently extract wealth from basic human needs.
Everyone should be able to afford a decent and dignified life. Confronting the cost of living crisis will require addressing the business models that have hollowed out Britain’s foundations and left the public to pick up the tab. The ones that reward asset-sweating over asset-building, that prize financial engineering over productive investment. These are not economic accidents. They are features of the British economy. Unless Labour dismantles them, and builds a new era of public provision, it will have no hope of truly improving people’s living standards, and its political fortunes will continue to decline.
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