Is the government set to make a bad cost of living crisis worse?

The state should protect those on low incomes, but recent decisions will only make life harder for the most vulnerable

October 12, 2021
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Alarm is mounting. Commentators increasingly refer to a cost of living storm that will imperil living standards. The government hopes we’re just seeing some short-term bumps, but several major trends suggest we’re heading into a very tough winter and a rocky 2022. The question is what form the crisis will take and what the government should do to mitigate the damage.

The first point of reference in any discussion of this kind is overall inflation. This is currently 3 per cent, higher than at any time since early 2012. The Bank of England expects it to go above 4 per cent this year and stay high through much of the next. Average weekly wages, meanwhile, are only expected to grow by 2.25 per cent (when you take out temporary Covid-19 impacts on the labour market), so real earnings will fall. A pay freeze remains for many in the public sector.

Beyond the headline inflation rate, some other costs are rising even faster, especially those taking a disproportionately big chunk out of low- and middle-income household budgets. The most topical is energy bills, where the recent price cap rise saw an increase of about 12 per cent for those on standard tariffs (£139 a year). Customers on pre-payment meters saw an even bigger hike of £153. In April, the cap will almost certainly rise again—perhaps by as much as 30 per cent.

The fact that so many energy companies are being driven out of business by the clash between high wholesale prices and capped consumer prices may mean reduced competition keeps prices higher, even once the immediate crisis has subsided. 

Add housing and childcare costs, and this feels like a perfect storm. Those on low and middle incomes tend to rent, mostly in the private rented sector. They have seen their housing costs rise by 5 per cent already, the fastest rise since 2008. Similarly, childcare costs have been rising above inflation for many years. 

There are, to be sure, factors which might help dampen the effects of rising costs. For those on the lowest hourly pay, April should see a rise in the National Living Wage, assuming the government continues on the path to raise the wage floor to two thirds of the average wage by 2024. That will likely be above inflation, probably delivering around a 2.5 per cent wage boost in real terms.

Additionally, some workers in sectors with intense labour shortages are seeing sharp pay rises, especially HGV drivers. Yet while this may benefit a small group, for most of us it will exacerbate the squeeze by further raising prices. We want to move to a higher (real) wage economy, but to achieve that we must improve productivity—labour shortages won’t deliver it.

The government could do so much more. Overall inflation is being driven primarily by global forces, over which the government has little control. But it could help to reduce the rising cost of housing and childcare by boosting the supply of homes for social rent and making better use of the public money poured into childcare. It could also reduce energy costs by stepping up plans to insulate homes and improve fuel efficiency, with greater support for those less able to pay and in the social rented sector, combined with more effective incentives and regulation for the rest of the housing market. And it could reduce our exposure to fluctuating global gas prices by increasing the UK’s storage capability.

In the immediate term, the government has most control over the support provided for those pulled into hardship by higher costs. However, despite fierce and widespread opposition, it has chosen to cut Universal Credit by £20 a week—the biggest overnight cut to benefits since the Second World War. This will precipitate a far more devastating cost of living crisis for those on the lowest incomes, many of whom have used up any savings and taken on more debt to make ends meet. While people on higher incomes saw a boom in savings during the pandemic, those already struggling saw their financial position deteriorate. This cut should be reversed in the forthcoming Budget.

For energy bills specifically, the Warm Home Discount should be reformed to widen its coverage and provide greater and more easily accessible support, especially for working-age families.

Finally, tax hikes will add to the pressure for many. The rise in National Insurance payments for employees will cost people on lower incomes around £100 a year. The corresponding rise in employer payments may also act to hold down wage growth.  

Potentially more significantly, in the coming years Council Tax will have to rise to keep pace with the cost of running services and top up funding? for the government’s social care plans. The Institute for Fiscal Studies anticipates rises of at least 3.6 per cent a year, possibly as high as 5 per cent. These are driven by massive cuts to council budgets from central government in the last decade, coupled with demographic trends that increase demand for services. Council Tax also has the dubious honour of being the UK’s only completely regressive tax—placing a much higher burden on those on lower incomes.  

Many factors have conspired to leave low-income families fearful, unsure how they can continue to afford even the bare essentials. They will not quickly forget if the government chooses to ignore them.