How to tackle the UK cost of living crisis – the main economic ideas | UK cost of living crisis

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

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

As the nation waits to hear if more help is coming, the Treasury Department is working on a menu of options. Here we outline the main ideas and assess the political and economic implications of each.

Targeted help for the weakest

The Treasury Department’s most limited option is to direct additional household aid to those on the lowest incomes, many of whom are already suffering and struggling in fuel poverty, ahead of bill hikes this winter. More than half of UK households, 54%, will be living in fuel poverty in 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 pledged to roll back the Social Security increase – although many poorer households have not been affected due to Rishi Sunak’s recent livelihood interventions 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 their promised tax cuts. She has called it “Gordon Brown economics,” having a high tax burden and then high government aid. But such a path would mean she would begin her premiership with tax cuts benefiting the rich and some extra help for the poorest which means that the majority of working people get very little. MEPs are concerned that this is not a sound electoral strategy.

Richard Partington, Business Correspondent: Charities are calling for the existing £1,200 energy support payment to be doubled to 8 million households on means-tested benefits. There are strong economic rationales for such targeted support, as poor families spend more of their budgets on basic necessities such as energy and food than wealthier households, leaving them most exposed to the inflationary shock. The Resolution Foundation estimates that “cost of living” inflation is 1.5 percentage points higher for the poorest than for the richest.

Double the fuel discount from £400 to £800

Sunak announced earlier this year that eligible UK households would receive a £400 rebate from October to help with energy bills. Officials have been examining the potential for people to get extra support, potentially up to £800, as price hikes are now forecast to be significantly higher.

The rebate is easier to administer but a slightly more blunt tool as wealthier households will benefit from the rebate.

Jessica Elgot: This looks more like the sort of package Sunak would support, but Truss has said she prefers targeted support rather than increasing the £400 grant for each household and her allies, including the chief secretary of the Treasury Secretary Simon Clarke has slammed the whole £400 scheme – but has said they would not cancel it.

Richard Partton: Speaking against universal support, many wealthier households have been saving money while working from home during the pandemic, with the Bank of England estimating “excess savings” at around £180bn. Because inflation is the result of demand exceeding supply, some economists say putting more money in the pockets of those who can afford to keep spending will fan the inflationary fire. However, others say the magnitude of the energy shock requires more people than usual to receive support.

Abolition of VAT on energy bills

This measure, first proposed by Labor, is another option being worked on to reduce bills. VAT on household energy is charged at a rate of 5% and would save a typical consumer £154 over the year and initially cost the Treasury around £4.3bn. Abolishing VAT would help those facing the biggest increases in their energy bills – those who consume the most.

Jessica Elgot: Sunak rejected this as chancellor, but made it a central part of his political bid as the Conservative leader candidate. This was widely pilloried as a screech by the Truss campaign U-turn, making it difficult for her to embrace it in No. 10 without losing face. But it has the advantage It allows a new prime minister to invoke the measure as “Brexit freedom”.“.

Richard Partington: One consequence of higher energy bills is that the Treasury collects more than expected from the VAT levied on them. So it makes sense to give some of it back to families in need. However, Sunak previously feared the tax would be difficult to reintroduce in the future, which could pose problems for the government’s budget deficit amid weaker economic growth and mounting spending pressures.

An unexpected tax is more likely if Sunak wins the leadership contest.
An unexpected tax on oil and gas companies is more likely if Sunak wins the leadership contest. Photo: Jane Barlow/PA

A new happiness tax

As chancellor, Nadhim Zahawi has spoken openly to energy companies about the option announced by Sunak in May of extending the windfall tax to oil and gas companies. Truss has said she opposes windfall taxes, although Sunak hasn’t ruled it out if he wins – although that seems unlikely.

An extension of the levy could raise £4bn and give the government much-needed leeway to help with energy bills. Labor says the existing windfall tax could be tightened to remove the ability for energy companies to claim tax breaks for more than 90% of the levy if the money is reinvested.

Jessica Elgot: There were raised eyebrows in both leadership camps when Zahawi began to address the potential for a windfall tax. Truss and her likely future chancellor, Kwasi Kwarteng, are adamantly opposed to the tax, believing it makes Britain an unpredictable place to invest. Truss has also said profit is “not a dirty word“. But there’s a lot of public anger over extraordinary wins, which Zahawi alluded to, so defending it might be an unpopular stance.

Richard Partton: Persistently high energy prices have helped the world’s five largest oil companies to profits of almost £50 billion, lining shareholders’ pockets at the expense of consumers. This shows a clear case for a higher windfall tax. However, chopping up and altering the plan could undermine the argument that the policy is one-off and potentially prompt companies to reassess their investment plans.

Eliminate the price increase and absorb the costs

This is the plan which is gaining momentum and has Labor and the Lib Dems backing it. Therefore, it would be unusual if the Treasury did not begin preparatory work on this possibility. It would mean freezing the energy price cap at its current level of just under £2,000 a year, rather than allowing it to rise in line with global wholesale gas prices.

The plan would cost just under £30bn, according to Labour, although it is understood it would only apply for the next six months – so it could cost a lot more in the long term.

Jessica Elgot: Both candidates have ruled this out despite overwhelming public support for the measure, backed by 85% of Tory voters. However, given previous experience of the Tories rejecting and then embracing a popular cost-of-living policy, it is not impossible that it could appear appealing in the cold light of September’s day.

Richard Partton: There are clear advantages and disadvantages. A universal cap could stop headline inflation from rising any further, possibly saving the government money for inflation-linked loans. However, it would have a high price and would have to last for a year (inflation is based on the 12th-monthly change in consumer prices). Free market economists argue that this would destroy price signals; Incentives for energy consumption instead of reducing consumption and investment in insulation. It would also benefit rich and poor alike.

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Deficit fund for suppliers to cover fuel price increase

The ScottishPower boss came up with the idea that the government could set up a deficit fund to cover the difference between what people are paying and the cost of getting gas and electricity to their homes.

The fund could be subscribed by the government or a willing financial institution and repaid over a period of 10 to 15 years to even out costs. Suppliers are expected to use the period that the scheme has been in place to focus on green energy investments while policymakers decouple electricity prices from gas prices.

Jessica Elgot: This could be a possibility for Truss Backs the price freeze, claiming it’s a way to stimulate investment and get better value for taxpayers’ money. But it would still require huge sums of money, which she has said she is not prepared to spend — and that would be on top of the additional billions she has spent on tax cuts and defense.

Richard Partton: Spreading energy bills over a longer period of time today would ease some of the pain and benefit the economic outlook in the near term. However, this would result in future costs that would ultimately be 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 smooth the transition instead of having cliff moments every time the Ofgem price cap is updated.

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