This cost of living crisis needs more than one answer

There are two halves to the current financial difficulties facing so many households. Thus far the government has failed to address either of them

May 18, 2022
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The chancellor’s Spring Statement did not do enough to lessen the crisis for people on low incomes. Photo: Belinda Jiao / Alamy Stock Photo

Words matter, and how we describe a problem shapes the solution. Right now, we’re utterly failing to get to grips with the cost of living crisis. Part of the problem is that we imagine there’s one issue, when really there are two quite different ones in need of different solutions. 

The first is genuinely a crisis, requiring immediate, urgent action. People on low incomes are facing a level of hardship that should be unimaginable in a civilised country. In the just the first four months of this year, the number of people in food insecurity jumped from 4.7m to 7.3m. Record numbers are turning to foodbanks and debt advisers. Some charities have stopped providing fresh food because people can’t afford to cook or plug in a fridge. We’re hearing stories of people trying to cook baked beans over a candle, leaving a bowl of water in the sun with a bin liner on top so they can wash up without running the hot tap, not showering or spending all day on the bus. The government’s response so far is transparently inadequate. We urgently need more action now. 

To tackle this crisis, the government must target help on those with the lowest incomes. This was obvious before Christmas. It was obvious at the chancellor’s Spring Statement in February. And it was obvious in April before benefits were uprated. The government has so far refused to use the tool designed for this job—the benefits system, highly efficient, with the right people already identified. There is no excuse to continue to fail to act. Universal Credit is an admirably flexible system, as we saw during the pandemic. The old-style “legacy benefits” are more rigid, but during the pandemic the government extended additional support to those on Working Tax Credits through a one-off additional payment. 

The second challenge is the hit to living standards for people on middle incomes. This group is more diverse. Some will be financially secure and even have built up additional savings during the pandemic. Others, with few savings, are more precarious, already in debt and at risk of being pulled into real difficulties if their costs rise too far. This group are cutting back on non-essential spending and are deeply worried about the prospect of further big energy price rises in the autumn. The situation is concerning (and politically dangerous) but it is not a “crisis” in the same way as the first. These people need and deserve support, but they are not having to go without food or other essentials. 

The government should act before the next big price rises in the autumn, but it is not as urgent as getting to grips with the immediate crisis for those on low incomes. Help for people on middle incomes should include cutting National Insurance (much better targeted than income tax cuts), moving green levies from energy bills to general taxation, delaying the repayment of the £200 loan already applied to energy bills and agreeing a long-term loan to energy companies linked to a lower rise in the price cap than is currently likely. We should also go further and faster with energy efficiency and insulation, on-shore wind and other medium-term measures to reduce both the level and volatility of energy bills over the next few years. 

So far, the government’s actions have revealed a strong preference for prioritising the second challenge over the first. The two main responses have been broad based. It spent significant amounts of money on the council tax rebate, fuel duty cut and the energy bill loan, while cutting benefits by around £500 in real terms. The chancellor spent £18bn at the Spring Statement and he kept back £10bn (which he could have spent while meeting his fiscal rules) to fund income tax cuts ahead of the next election. In his recent Good Morning Britain interview, the prime minister argued they could not raise benefits in case it increased inflation and led to interest rates rising, causing difficulties for mortgage holders. The economic argument was nonsense, as the IFS’s Paul Johnson tweeted: “Clearly not the case that increasing benefits in line with inflation would push up interest rates.” But it was also revealing. The prime minister appeared to be saying that he was happy to sacrifice those in the greatest hardship to protect far more wealthy homeowners. This is deeply concerning, to many Conservative politicians and others on the right of centre, as well as those of other political persuasions. 

The conflation of the two different cost of living challenges is compounded by the tendency of many politicians and commentators to focus on the question of a windfall tax on energy companies. This alone would solve neither the crisis for those on low incomes nor the challenge facing those on middle incomes. It is a solution for a third issue—the state of the public finances after the pandemic spending. That’s worthy of debate, of course. But it should not be allowed to distract from the need to act using existing funds. The government has shown that the true barrier to taking action is not a lack of money. The chancellor had plenty of money in February to raise benefits. He simply chose not to do so.