Larry Smith – Un-squeezing the middle

The morning after he was crowned leader of the opposition, Ed Miliband made a bold attempt to redefine Labour as the voice of mainstream Britain. He argued the party under his direction would speak not just for a set of vested interests but “the squeezed middle in our country and everyone who has worked hard and wants to get on.”  With one fell swoop he sought to rework Tony Blair and Gordon Brown’s appeal to ‘aspirational’ voters for an era of economic stagnation while challenging the Government’s assertion that its policies were seeing ‘those with the broadest shoulders’ pay the biggest price for the consequences of the financial crisis.

Miliband’s mission has undoubtedly had an impact. Commentators on both the left and right of the political spectrum have devoted countless articles to discussing whether the Labour leader was right to make such a pitch. Politicians from both parties are attempting to define the notion of a ‘squeezed middle’, with Liam Byrne coming with perhaps the most plausible effort – families earning between £20,000 and £50,000, accepting some regional variation. There has also been some discussion about the issues facing Miliband’s target demographic.

Although not a definitive account of the ‘squeezed middle’, the following article seeks to contribute to debate about the broader problems restraining the living standards of individuals and families who fall into the bracket. In focusing on both national and global challenges, it aims to offer some ways in which Labour could tangibly improve its political position whilst remaining credible on public spending and policy delivery.

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Part I: four core problems

Rising prices

While dwarfed by other causes of inflation, a rise in prices caused by a shortage of basic resources around the world is having a notably detrimental effect on the living standards of those on median incomes. A spike in the cost of oil resulting from political instability in the Middle East has hit thousands of motorists at the petrol pump, while natural disasters affecting large rural areas of Australia, Brazil and Japan have resulted in higher food costs. Closer to home, the Government’s decision to raise the level of Value Added Tax (VAT) on most goods has reduced the spending power of consumers in every income bracket. Some companies have attempted to absorb the increase by deducting it from pre-existing profits, but many others are passing it onto the consumer in order to maintain their profit share and position in the marketplace.

The effect of migration

The impact of large-scale immigration on Britain and its middle class is well-chronicled. Tabloid scare stories as well as the sheer number of migrants entering the country over the past decade have led people from nearly every section of society to worry the system is ‘out of control’ and to question the mass movement of people prompted by globalisation. At the same time, many in Labour’s new target group have long-standing grievances about the pressure that migration puts on already scarce resources that they use on a regular basis. The maximisation of agency workers by big companies has resulted in a downward spiral of incomes for many workers, particularly those with construction skills. Migrants working in areas of the public sector with a shortage of workers have competed with their British-born colleagues for key worker housing, and increasingly vie with middle-class families for basic services such as schools and social care. All of these problems are likely to cause even greater resentment as wages fall further behind prices and state provision decreases as a result of government spending reductions.

The supply of housing

A difficult housing market has stymied the ability of middle-income workers to purchase a decent home. Additionally, the sell-off of council homes, coupled with refusal by successive governments to spend significant amounts of public money on housing stock has forced many of those on the waiting list for social housing (1.8 million in total) to rent private accommodation that would otherwise be occupied by those directly above them on the social scale. This has limited properties available to those in Labour’s new target demographic, creating considerable resentments about the lack of fairness inherent in the system.

The cost of higher education

The rising cost of higher education is hitting both parents looking to support their children in further study, as well as young people on median incomes seeking to pay off their loans while in jobs that do not enable them to erase their debts quickly. The large headline sums involved as universities set undergraduates tuition fees are likely to intimidate families and students in the basic tax bracket, as is a proposal inserted by Liberal Democrat ministers designed to deny parents the option of paying fees up front before their children enter higher education. Equally troublesome is the large amount of interest graduates are forced to pay on their basic student loan should they fail to find employment immediately after leaving university. The cost of this will rise even further should the Bank of England decide to raise rates to around 1 per cent in order to ward off any further bout of inflation.

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Part II: a new set of solutions

Target a cut in VAT

A rise in wages, implemented through cutting income tax is often mooted as a way of helping middle-income earners deal with rising living costs. But while such a step might help ease pain in the short-term by putting more money in people’s pockets, it would not in and of itself make a dent in spiraling inflation. Worse, it could actually end up re-running one of the central problems of the 1970s, creating a precedent for successive wage increases (and industrial action) every time prices go up as a result of external factors.

What Labour can certainly do is offer to dull the impact of the VAT rise on overall inflation, at least until companies rebuild their profits to a reasonable level. Such a move could be delivered through simply cutting the tax, which would have the obvious effect of reducing high prices on goods which middle class consumers are currently facing. To ease pressure further, the party could also look to introduce a policy advocated by the Federation of Small Businesses (FSB) that would increase the threshold at which companies have to register for VAT. Under the FSB’s estimates, moving this threshold up from its current level of £73,000 would hand £900m back to small and medium-sized firms, many of which are owned by people on middle incomes. It would be easier for the Shadow Cabinet to agree on a more concentrated VAT cut such as this, largely because it is less likely to offend senior figures who want Labour to back a broader rise in the tax to demonstrate the party’s credibility on deficit reduction.

Develop existing migrant controls

 Easing the stress that large-scale migration places on the employment prospects of the squeezed middle is a realistic ambition, which can partly be achieved through relatively straightforward reform of existing immigration controls. Labour should not be afraid to look at ways in which the last Government’s Points-Based Migration (PBS) system can be altered so high-skilled foreign workers can continue to assume top-level employment. This would yield great benefits to the UK economy while placing least stress on public services, and ensure the upper end of Labour’s new demographic is not directly competing with non-EU immigrants. As former head of liberal think tank CentreForum and migration expert Alasdair Murray has written, the Tory/Lib-Dem Government’s decision to virtually close Tier 1 of the PBS (highly skilled migrants, entrepreneurs, investors and graduate students) should be reversed in favour of a restricted entry based around awarding extra points to highly-skilled migrants holding a job offer. This would provide an incentive for them to immediately enter the workforce in a high-skilled capacity, lower the risk they would occupy positions for which they are not suited and boost the number of SMEs and startups which could hire native workers on middle incomes. Labour could also consider Murray’s idea of abolishing the Shortage Occupation List, which has provided a means for migrants to enter some forms of lower skilled jobs despite a supposed ban. The restrictions imposed on migrants who enter the UK through shortage list, which included banning them from changing jobs, are damaging both to migrants and the labour market as a whole. Such measures would – once they took effect – go some way to restoring voters’ belief that Labour had simply stopped listening and stopped understanding their clearly expressed concerns about mass-immigration.

Initiate a root and branch overhaul of housing

Enabling middle class workers to buy affordable properties depends in a large part upon increasing their income, and ensuring they have a sustainable supply of credit to pay their mortgages. But it also requires a rise in the basic number of properties available to them. In considering how more homes could be constructed, Labour could offer to extend the Coalition’s piloting of community land auctions. Under these schemes, councils would announce their intention to build on the outskirts of towns and invite local landowners to name a price for their land. These owners would be forced to compete with each other, enabling local authorities to buy their land at a fraction of current costs. Parcels of that land could then be sold on at the usual rate, with the money saved in the process marked for a greater number of council-backed property developments and higher quality homes. In areas where there is limited space available for further construction, particularly London, Labour should take up work done by John Healey as Housing Minister in re-establishing a culture of renting. A stronger requirement for landlords to provide written tenancy agreements and better regulation of letting agents could give the upwardly mobile the confidence to lease good quality accommodation instead of purchasing substandard property.

Yet given that a lack of social housing, especially in the Southeast has forced those at the bottom of the income scale into renting so many properties that might otherwise be available for those directly above them to purchase, Labour must go further in pushing back against decades of underinvestment in housing stock. This is essential if it wishes to relieve congestion in the system. The party should apologise for having extended Mrs Thatcher’s policy of gutting the housing budget up until the eve of the financial crisis and place the Fourth Option, which proposes direct state spending on council homes, at the heart of its policy review.

Reform the fees system

During the leadership election, a consensus emerged that the best way of ensuring higher education costs did not prevent those on middle incomes from applying was to replace tuition fees with a graduate tax. On the surface, a tax that students pay only upon entering employment would be preferable to the Government’s new system, principally because it would remove much of the anxiety generated by the high fees now being set. But Alan Johnson and John Denham – former ministers who oversaw higher education under the last Labour administration – have both since stated that there are major problems with implementing the measure. There are also doubts as to whether another idea often mooted – a substantial reduction in the level of tuition fees – would be tolerated by the higher education sector given the upheaval it has gone through in the last decade.

Thus, it is likely the party will have to consider rather more incremental steps if it wants to lighten the load for undergraduates and their parents. The Coalition’s requirement that universities charging students higher sums must improve social mobility could be widened to cover those slightly higher up the tax scale, while a commitment might be given to remove a stealth clause of the Education Bill that allows universities to apply variable rates of interest on student loans. Assuming the public finances are in a slightly better state, funds could also be spent to encourage families who can afford the cost but are intimidated by the idea of more debt to take a closer look at system. This might take the form of more government guidance and advertising, or financial incentives for educational charities improving access to higher education in deprived areas that agree to widen their scope.

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All of the solutions discussed in this essay are subject to problems of execution. And assuming levels of public borrowing continue to remain off target, Labour would need to cost a great many of them carefully in order to retain public credibility. Cherished commitments, including increasing NHS spending, maintaining the number of courts and prisons in existence or delivering a High Speed Rail line north at a cost £32 billion in the next parliament might have to be jettisoned in order to make them a reality. But if challenges of implementation can be overcome and the necessary sums made, the benefits the Party may reap in terms of building an enduring voter base are untold. The prize is there for the taking.

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Article image by Mrs Inman

Larry Smith

About Larry Smith

Larry Smith currently works for strategic communications firm Quiller Consultants, having joined the company after being part of Ed Miliband’s campaign for Labour leader. He previously served as parliamentary aide to one of Labour’s Whips and was for a time political assistant at Socialist International, the global association of labour and social democratic parties. He studied Modern History at Balliol College, Oxford.