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UK cost of living crisis merits a full response

Few governments would be able to survive a hit to voters’ living standards like the one facing Britain over the coming months. First there is the increase in the price cap that limits the amount of energy companies can charge their customers. Then UK households face tax rises, in the form of a scheduled increase in national insurance and freezes in the main thresholds for income tax. To cap it all, the 0.25-point base rate rise from the Bank of England on Thursday – its first back-to-back rise since 2004 – will mean higher mortgage costs. All this is a recipe for a year of stretched household budgets and economic misery for millions.

For a government under as much pressure as the one led by Prime Minister Boris Johnson – facing calls to resign over parties that breached coronavirus rules – it risks being existential. So it is understandable that Chancellor Rishi Sunak wants to widen the scope of the social safety net. Instead of targeting support solely at those who face a choice between “eating and heating”, he is sending more money to middle and higher earners who will also see their spending power fall over the coming year.

To help reduce the impact of the energy price cap increase – estimated to add about £ 700 a year to a typical household’s bills – Sunak announced programs costing about £ 9bn. One key element is a £ 150 rebate on council tax – totaling £ 3.6bn – in April for each property in the lowest four tax bands in England; money will be made available to the UK’s devolved governments to offer similar schemes. The chancellor estimates that will cover 80 per cent of households. In addition, all bill payers will receive a flat £ 200 discount on electricity bills in October – costing £ 5.5bn – that Sunak intends will be recouped by adding £ 40 annually to bills for five years from 2023.

The government deserves credit for resisting siren calls to cut the 5 per cent rate of value added tax on energy bills. While that would have political appeal – it could be sold as a benefit of Brexit as the EU rules limit how much the tax can be cut – it would have mostly benefited the better-off. Richer households tend to spend more on heating in absolute terms, thanks to larger houses, but poorer ones spend more as a proportion of income. A VAT cut would have done little for those who need it most.

Similarly, a mooted cut in “green levies” would have done more to reassure rightwing backbenchers than address the problem. If anything, the UK’s vulnerability to higher gas prices underlines the costs of a decade’s failure to insulate its draughty homes, a necessity to hit its net zero target by 2050.

Even so, the package could have been better targeted. The council tax bands being used are based on property valuations from 1991. That makes them a worse measure of “need” than the existing welfare system – many young professionals live in formerly cheap accommodation in London, for example. Sunak is, rightly, increasing the scope of the existing warmer home discounts scheme – where energy suppliers give discounts to needy customers – but making it even more generous would be a better use of scarce resources.

The government is taking a point on energy prices eventually falling. While it is sensible to smooth the impact of the gas price rise, the Treasury has no special powers to forecast the cost of gas next year, and the higher bills from which Sunak intends to recoup the cost of this year’s discount may equally come at a bad time. The chancellor’s moves are unlikely to be the last time the government has to intervene to ease the cost of living crisis.

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