How to deal with the cost of living crisis in the UK – the main economic ideas | UK cost of living crisis


BOris Johnson said he would not introduce any new measures to deal with the cost of living crisis. Major spending decisions are delayed until his successor as prime minister takes office. However, the result of the Conservative leadership election will not be announced until September 5.

Meanwhile, a significant increase in the regulated energy price cap, which caps gas and electricity bills, is due to be announced this Friday. It is expected to rise from just under £2,000 to £3,600 a year for the average household.

While the nation waits to hear if further aid is forthcoming, the Treasury works through a menu of options. Here we outline the main ideas and assess the political and economic impact of each.

Targeted aid for the most vulnerable

The most limited option for the Treasury is to direct additional household aid to those on the lowest incomes, many of whom are already fuel-poor and struggling even before the bill rises this winter. More than half of UK households, 54%, will be in fuel poverty by October and even more in January.

The most targeted way to get money to the most vulnerable is to increase Universal Credit and Pension Credit. Liz Truss has also promised to reverse the rise in National Insurance – although many poorer households have not been affected by this since Rishi Sunak’s last cost of living intervention as chancellor.

Jessica Elgot, Chief Political Correspondent: That’s the most likely level of support Truss is willing to offer, citing the cost of Sunak’s package announced earlier this year and the need to fund his promised tax cuts. She called it “Gordon Brown’s economy” for having a high tax burden and then high amounts of state aid. But such a path would mean starting his term as prime minister with tax cuts that benefit the rich and extra help for the poorest. which means that the majority of workers earn very little. Members are concerned that this is not a good electoral strategy.

Richard Partington, Economics Correspondent: The charities are calling for the existing energy support payment of £1,200 for 8 million households on means-tested benefits to be doubled. There is a strong economic case for such targeted support, as poor families spend more of their budget on basic necessities – such as energy and food – than wealthier households, which which exposes them most to the shock of inflation. The Resolution Foundation estimates a “cost of living” inflation rate for the poorest 1.5 percentage points higher than for the wealthiest.

Double the fuel discount from £400 to £800

Sunak announced earlier this year that eligible UK households would receive a £400 off to help pay your energy bills from October. Officials have been looking into the possibility of people receiving additional help, possibly up to £800, as price hike forecasts are now significantly higher.

The rebate is easier to administer, but a bit of a blunt instrument because more well-to-do households will benefit from the rebate.

Jessica Elgot: It sounds more like the type of package Sunak would support, but Truss said she was in favor of targeted support rather than an increase in the £400 grant for each household, and her allies including the chief secretary of the Treasurer Simon Clarke have bashed about the whole £400 scheme – despite saying they won’t cancel it.

Richard Partington: The argument against universal support is that many wealthier households have been saving money during the pandemic while working from home, with the Bank of England estimating around £180bn of ‘savings surplus’ . Since inflation is the result of demand exceeding supply, some economists argue that putting more money in the pockets of those who can afford to keep spending will fuel the inflationary fire. However, others say the scale of the energy shock requires more people than usual to receive help.

Abolition of VAT on energy bills

This measure, initially proposed by Labour, is another option being developed to reduce bills. VAT on home energy is charged at a rate of 5% and would save a typical consumer £154 over the year, and cost the Treasury around £4.3bn initially. Removing the VAT would help those who face the greatest increase in their energy bills – those who consume the most.

Jessica Elgot: Sunak rejected that as chancellor but made it a key part of his political bid as a candidate for the Conservative leadership. This was widely pilloried by the Truss campaign as a howl U-turn, making it difficult for him to adopt it in No. 10 without losing face. But it has the advantage of allowing a new prime minister to refer to the measure as ‘Brexit freedom’”.

Richard Partington: One of the consequences of the increase in energy bills is that the Treasury will collect more than expected on the VAT billed to them. Giving back some of this money to families in difficulty therefore makes sense. However, Sunak previously feared it would be difficult to reinstate the tax in the future, which could cause problems for the government’s budget deficit amid weaker economic growth and mounting spending pressures.

A windfall tax on oil and gas companies is more likely if Sunak wins the leadership race. Photograph: Jane Barlow/PA

A new exceptional tax

Nadhim Zahawi, as Chancellor, has been candid with energy companies on the option of extending the windfall tax on oil and gas companies announced by Sunak in May. Truss said she is opposed to windfall taxes, although Sunak hasn’t ruled it out if he wins – although that seems unlikely.

Extending the tax could bring in £4billion, giving the government some much-needed leeway to help pay energy bills. Labor said the existing windfall tax could be strengthened to remove the ability for energy companies to claim tax relief on more than 90% of the tax if the money is reinvested.

Jessica Elgot: There were raised eyebrows in both leadership camps when Zahawi started talking about the possibility of a windfall tax. Truss and his likely future chancellor, Kwasi Kwarteng, are strongly opposed to the tax, saying it makes Britain an unpredictable place to invest. Truss also said that profit is “not a dirty word.”. But there is massive public anger over the extraordinary profits, which Zahawi alluded to, so it may be an unpopular position to defend them.

Richard Partington: The continued rise in energy prices has helped the world’s five largest oil companies make record profits of nearly £50bn, lining the pockets of shareholders at the expense of consumers. This shows a clear case for a larger windfall tax. However, chopping and changing the plan could undermine the argument that the policy is ad hoc, which could lead companies to reassess their investment plans.

Eliminate price gouging and absorb costs

This is the plan gaining momentum, backed by Labor and the Lib Dems, so it would be unusual for the Treasury not to start preliminary work on this possibility. This would involve freezing the energy price cap at its current level of just under £2,000 a year rather than allowing it to rise based on global wholesale gas prices.

Labor say the plan would cost just under £30billion, although that’s assuming it would only apply for the next six months – so it could cost significantly more in the long run.

Jessica Elgot: Both candidates have ruled out that possibility, despite overwhelming public support for the measure, which is backed by 85% of Conservative voters. However, given the past experience of conservatives rejecting and then adopting grassroots cost-of-living policies, it’s not impossible that this one might look appealing in the cold September daylight.

Richard Partington: There are clear advantages and disadvantages. A universal cap could prevent headline inflation from rising further, potentially saving the government money on inflation-linked borrowing. However, it would have a high price and would need to be in place for a year (inflation is based on the 12-monthly change in consumer prices). Free market economists argue that this would destroy price signals; encourage the use of energy, rather than reducing consumption and investment in insulation. This would benefit the rich as well as the poor.

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Deficit fund for suppliers to cover rising fuel prices

The idea has been suggested by the ScottishPower boss that the government could set up a deficit fund to cover the difference between what people pay and how much it costs to supply their homes with gas and electricity.

The fund could be guaranteed by the government, or a willing financial institution, and repaid over a period of 10 to 15 years to smooth out costs. Suppliers would be expected to use the period the program was in place to focus on green energy investments while policy makers decouple electricity prices from gas prices.

Jessica Elgot: This could be a way for Truss to U-turning on the price freeze while claiming it’s a way to spur investment and get better value for taxpayers’ money. But that would still require massive sums that she said she was unwilling to spend – and that would be on top of the billions in extra spending she’s taken on tax cuts and defence.

Richard Partington: Spreading energy bills over a longer period would alleviate some of the pain today, which would improve the short-term economic outlook. However, this would increase costs for the future and ultimately be a cost ultimately borne by consumers rather than the state. If prices stay high, it would mean higher bills for households in the future. However, it could help ease the transition, rather than having a hard time every time the Ofgem price cap is updated.


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