The next PM will be remembered for how they tackle the cost of living crisis

The attack on living standards is savage. New figures from the Office for National Statistics show that total wages have fallen by 2.5 per cent in real terms year-on-year in the three months of April to June. Basic pay was also down by 3 per cent – the sharpest decline ever recorded. As the Bank of England expects inflation to climb to around 13 per cent in the autumn, the squeeze on living standards is set to tighten yet further.

The reasons for this squeeze are widely appreciated. The surge of inflation has been driven by the combination of the disruption to the world economy as it recovered from the pandemic shutdowns, and the surge in energy prices, particularly of natural gas, following Russia’s invasion of Ukraine.

Much of this surge has been beyond the control of individual national governments and central banks, though the banks including the Bank of England have been rightly criticised for acting too slowly in response. But governments do bear responsibility for protecting vulnerable citizens from the most serious consequences of the squeeze, for what is happening is monstrously unfair.

Everyone’s incomes are being cut in real terms, but some families have accumulated savings they were unable to spend during the lockdowns and have a cushion now. However, those so-called excess savings are unevenly spread. For many families, there is no cushion at all.

That is the challenge that faces the new government: how to deal fairly with a huge social and economic problem. The present administration has taken some measures to ease the burden of energy costs, but it is clear that this is not nearly enough. That is acknowledged by both the candidates to be the next prime minister, and the leader of the opposition. Indeed it has been Sir Keir Starmer’s intervention in the debate this week, setting out a plan that will save £1,000 on a typical family’s energy bill, that has put further pressure on Liz Truss and Rishi Sunak.

The civil service is currently framing practical plans based on what the two potential PMs have said they will do, so that the new cabinet will have a set of policies that can be put into action next month.

But the success – or otherwise – of the next government will not be determined simply by its emergency response to the energy crisis, or its ability to protect the most vulnerable from the current squeeze on living standards. It will turn on whether it can produce a coherent economic strategy that will increase the living standards, and the overall wellbeing, of all citizens. The new government must look longer term, as Voices commissioning editor Harriet Williamson argued here.

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The prospects for the new government are daunting, for quite aside from the current inflationary squeeze, there are widespread fears that the UK faces a recession next year. But there are some strengths that it can build on: the job market seems solid, and fiscal deficit has been coming down faster than expected. But ultimately what is needed is a detailed, thorough programme to improve the long-term competitiveness of the UK economy.

Real wages depend on what happens to real productivity. While there are many parts of the UK economy that are fully competitive internationally, there is also a long tail of underperformers. Fixing that is a slog that will continue long after the next election, and one that requires a huge and sustained effort by the entire country. Many detailed changes are needed, including management training, education more generally, investment in infrastructure, more effective regulation and so on.

The next government will be remembered for how well it responds to the current challenge of the cost of living crisis, but also for whether it can make a start on tackling these longer-term problems. Indeed, this squeeze on living standards should be a wake-up call not only for the politicians but for our society as a whole. We must do better if we are to ensure the wellbeing of all citizens in the years ahead.