Only last October Britain’s prime minister Boris Johnson was heralding labour shortages that he said would usher in a “high wage, high productivity” economy. He now faces the prospect of presiding instead over a deep hit to living standards this spring. A troublesome trifecta of rises in gas and electricity bills, a scheduled increase in national insurance contributions and freezing of income tax thresholds, and general price increases threatens to create the biggest cost of living squeeze in a generation.
For a government committed to “levelling up” disadvantaged regions, this poses serious political hazards; energy price increases will kick in just before May local elections that will be a test of Johnson’s popularity. UK households have so far been shielded from the worst of the rise in global gas prices by the government-imposed price cap. In April the cap will rise by a forecast 50 per cent or more, raising bills by about £700 a year for a typical family, or about 3 per cent of incomes — roughly equivalent to the hit from a recession.
Some ministers have pushed to scrap the NI increase, or reinstate the pensions “triple lock” suspended last year that guaranteed an annual rise based on inflation, average earnings growth, or 2.5 per cent, whichever is the highest. Chancellor Rishi Sunak has insisted higher spending on health and social care should be funded through tax rises, not borrowing. This newspaper agreed, but warned raising national insurance was the wrong way to go about it and said tax rises should be delayed while the economy recovered.
But providing support for households struggling with soaring energy prices is now a bigger priority than putting off tax rises. The NI increase, while it only applies to income from labour rather than investment, will still mostly take from the better-off, whereas it is poorer families that spend a greater proportion of their income on heating.
The government has a menu of potential responses, ranging from the mostly useless but politically appealing to the more useful but challenging. Cutting value added tax on gas further from the current 5 per cent rate belongs in the former category. It would be badly targeted and do little for struggling consumers. It would, however, make use of post-Brexit freedoms to diverge from eurozone VAT rates — appealing to a government looking for ways to demonstrate the benefits of the exit from the EU.
Targeted help makes more sense. The government could temporarily increase the universal credit benefit for the less well-off, helping with other price pressures as well. That this could be seen as reintroducing a previous temporary uplift in the benefit, to help poorer families cope with the pandemic, will reduce its appeal to a chancellor who wanted to demonstrate that emergency measures must eventually come to an end. To make it more palatable, the uplift could be called something else, but use the existing system to allow the government to deliver money rapidly to those most in need.
A final option would be to increase the scope and generosity of the “warm homes discount” scheme administered by the energy companies, targeting some poorer families and pensioners. This is presently funded though higher bills on other customers, but ministers could use general government funds to expand its coverage and lift payments from the current £140 per customer. Many on middle incomes will still feel the squeeze, but there is less that can or should be done about that. The high wage, high productivity economy is still a long way off. For now the government must focus on heading off a high cost, high poverty one instead.