This post is by Joe Tetlow, senior political adviser and Sam Alvis, head of economy at Green Alliance. It was originally published on Business Green.
Even before Russia’s invasion of Ukraine, UK inflation was spiralling. Driven by the wholesale rise in the price of gas and the reopening of the global economy, by the start of this year inflation had hit a 30 year high. And the widening gap between inflation and wage growth is making the cost of living even harder to manage for households.
Western sanctions designed to hurt Russia mean inflation will rise even further. Petrol and diesel prices have hit record highs. The Consumer Price Index for food and non-alcoholic drinks increased 4.3 per cent over the past 12 months, the fastest rate since September 2013. And inflation for services is going up too as business costs also increase. This crisis is only heading in one direction, and it requires an urgent economic and political response.
Households need help with the cost of living
In February, the chancellor announced a package of measures designed to ease the cost of living, with a combination of council tax rebates and loans for households. Only a month later, on the eve of the spring statement, this already looks out of date.
Pressure on the chancellor from Conservative MPs and the public is growing. Nine out of ten people are currently concerned about the price that households in the UK have to pay for their home energy, with levels of concern highest amongst the elderly.
Citizens Advice estimates that nine million households, around a third of UK homes, will be pushed into fuel poverty this year. And there are already warnings that the Ofgem price cap could exceed £3,000 in October. Ministers can point to the global roots of the crisis, but that won’t ease the pain for struggling households.
Despite this gloomy outlook, the chancellor should be in a better position now to respond than he was when Ofgem raised the price cap in February. Tax receipts are expected to be at least £23 billion more than the Office for Budget Responsibility predicted last October. This revenue should also remain high for the foreseeable future; employment is high and wage growth is improving. While making households poorer, sustained inflation, particularly on oil and gas, puts more money in the chancellor’s coffers.
The chancellor needs to protect people from rising costs
In rejecting calls for a windfall tax on energy companies earlier this year, ministers pointed to the taxation already on oil and gas companies. The public will rightly expect to see that ever-larger pot spent well. But there will be a temptation for the chancellor to save it, through an expected period of low growth, to allow him to give more generous handouts or tax cuts closer to the election in two years’ time. Recent government briefings have attempted to pour cold water on any idea that the Treasury should spend it now. But not doing so would be a grave mistake. Households are hurting and facing unprecedented challenges. By 2024, they won’t have forgotten a chancellor who left them to cope when he had the money to help.
So what should he do now? The immediate focus should be to shield households from devastating price rises, and the Warm Home Discount is the best place to start. Less than 69 per cent of low income households are currently eligible. Its eligibility criteria should be expanded to allow more of the poorest households to access the £140 rebate. Expanding it to all Universal Credit claimants, and funded by government not from bills, would mitigate the impact of accelerating fuel poverty.
Much debated green levies have paid for insulation schemes for the poorest households, as well as renewables, so they should be protected. But moving them off consumer bills and onto general taxation would immediately cut £153 from the annual energy bill of a dual fuel customer who will be paying the price cap level from April onwards. General taxation is a fairer way to distribute these costs, as those on low incomes spend a much higher proportion of their income on energy.
Cutting energy waste is key to reducing costs
With planned government spending on energy efficiency far short of where it should be this parliament, using the government’s tax windfall should be an obvious move to reduce dependence on oil and gas for heating and cut the cost of living. Upgrading the energy efficiency of a million homes a year from EPC band D to C, as a start towards meeting the target of reaching 19 million homes by 2035, would reduce the average household’s gas demand by 20 per cent. This could be done through existing schemes, like the Local Authority Delivery and Social Housing Decarbonisation Schemes, which have both been much more effective at getting money out of the door than the aborted Green Homes Grant household voucher scheme.
The chancellor has a choice. He could leave households vulnerable, hoping the situation improves so he can splash out closer to the 2024 election, or he could act decisively now, to deal with the root causes of the crisis and make a generous offer to struggling households. The second option is the only sure way to bring about prosperity and security in the future.