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Policymakers don’t have an answer to the cost of living crisis

Protecting poorer households from the catastrophic surge in energy bills will require far more seriousness than we've shown to date
May 12, 2022

When I was at school, a friend exited an A-level history exam ashen-faced. He’d answered the wrong questions: having spent two years studying the First World War, he was tricked by the sight of a question on its lasting consequences into starting to answer the overlapping but very different set of questions on the Russian Revolution.

It was a stark illustration of how badly things can go if you get the question wrong: a lesson that politicians would do well to grasp. Successful policymaking and politics is to a large extent about recognising the question the country needs answering.   

Sometimes that’s difficult: impressive foresight would have been required to know that the top priority was preparing for a pandemic back in 2019, or the banks going bust in 2007. But even when the question is blindingly obvious, politicians can get it wrong—if they came into politics to answer a different one or are unable to adapt when the world changes. Think of Labour going into the 2019 election with no resolution to Brexit. 

Today, the domestic policy exam question facing the nation is just as clear: how should we respond to surging energy prices that will stretch many low- and middle-income households’ budgets beyond breaking point? Four in 10 of us found it difficult to pay our energy bills in April, the same month that the energy price cap rose by 50 per cent. A further rise in the autumn to £2,500 risks putting 7.5m households—especially the poorest third of families—into fuel stress this winter, as they will spend more than 10 per cent of their family budgets on energy. 

More than a decade of near-stagnant living standards has made a further squeeze feel normal. But if anything, that context highlights how dangerous—and far from normal—the present situation is. Coping with rising energy bills after a period of strong earnings growth is one thing; doing so when wages had only just returned to their pre-financial crisis level as we entered the pandemic is another thing entirely.

And this is not just a standard tough year among many. Households face income falls of over £1,000—the worst since the mid-1970s. The biggest hits are in store for the households that are struggling most already, with a further 1.3m people—including 500,000 children—falling into absolute poverty. This is what a recession, not a recovery, looks like. 

The government might argue the Bank of England is sitting this exam, because it’s the Bank’s job to control inflation. But a huge rise in the global cost of gas isn’t the kind of inflation the Bank can do much about. The current round of interest rate rises is instead about preventing future wage-driven inflation resulting from our faster-than-expected labour market recovery, as unemployment returns to the lows of the early 1970s.

If the Bank can’t do much about rising gas prices, the Treasury might make the same claim for itself, and with some justification. Ultimately government can’t prevent high gas prices making us all poorer. But it does have choices about when, how, and by whom that pain is borne. 

The exam question is clear: how do we avoid the worst impacts of this catastrophic surge in energy bills on low- and middle-income households? But so far we’re not remotely serious about answering it, instead opting for support that is insufficient and badly targeted. 

Council tax rebates of £150 don’t match up to the scale of price rises and exclude one in eight poor families. A £200 energy bill reduction today funded through higher bills tomorrow is a big gamble on gas prices falling swiftly. Rishi Sunak’s March Spring Statement, meanwhile, prioritised tax cuts over targeted help for those worst affected by the rising cost of living: for every £3 promised, only £1 is going to the poorest half of the population. This is C-grade stuff at best. 

The prime minister has promised to do more, but until now that has meant Cabinet discussions about deregulating childcare provision and MOTs. If that’s the best we can do, then we’ve lost the plot. Both policies would take years to implement and be more use to better-off households. Seventy-six per cent of those earning over £45,000 use formal childcare, compared to 52 per cent of poorer parents. More people have cars than kids, but a third of poorer households have no car access, compared to just 5 per cent for the richest. 

To get a grip on the question, we need to recognise that a big cost rise for almost everyone is harder for low- to middle-income households to bear, and use the system we have for swiftly getting money to poorer households: benefits. Benefits have been uprated by just 3.1 per cent, at a time when inflation is likely to exceed 8 per cent. That’s indefensible, given what 2022 has in store. Different answers are available. The Dutch recently announced they are giving each poorer household €800 to get them through this nightmare. 

The government is being set a hard exam by surging energy prices, reinforced by the war in Ukraine. This is not the feel-good recovery from the pandemic any of us had in mind. But it’s a feature of politics that you generally don’t get to choose the exam question, so let’s just get on with answering it.