Chancellor Rishi Sunak this week listened to advice from Conservative MPs on how to steer a course around what Labor called the “iceberg” of cost of living that threatens British politics.
Whether it is lowering taxes, increasing welfare benefits or suspending “green charges” on energy bills, all possible mitigations are expensive and there are no easy solutions.
Sunak acknowledged something needs to be done as economists warn of the worst compromise on living standards since the financial crisis. “With Covid, he was not afraid to do the unconventional thing and to go big,” said one chancellor’s ally.
But after spending £ 400 billion to support the economy during the coronavirus pandemic, his room for maneuver to deal with the cost-of-living crisis is severely limited.
With inflation above 5 percent and rising – and with rising interest rates – the chancellor told colleagues he would not borrow his way out of trouble, thereby contributing to the cost of debt service.
“Nigel Lawson would not have done that,” Sunak told the cabinet this week, referring to Margaret Thatcher’s chancellor during the 1980s. Tax cuts funded by new cuts in public spending have meanwhile been seen as politically distasteful.
The cost of living crisis will peak in April, when large energy price increases coincides with tax increases that would typically cost a typical household more than £ 1,000 a year.
Tory MPs pressure chancellor to run ahead of local elections in May, and there are at least four possible options:
Deletion of VAT on energy bills
The freedom to reduce value-added tax on household energy from 5 percent to zero was once put forward by Boris Johnson as a “Brexit dividend”, but the prime minister said this week it would be a “blunt instrument”.
The policy would cost £ 2 billion, according to the Resolution Foundation, a brainstorm, cutting energy bills by about £ 100 per household. But, as Johnson pointed out, the cuts will benefit everyone, not just the poor.
In April, the energy price constraint covering millions of households could rise by up to £ 700, to almost £ 2,000 per household, in response to rising wholesale gas and power prices. Such a VAT cut alone – backed by some Tory MPs and Labor – would only hurt the problem.
Throwing away planned tax increases for April
Jacob Rees-Mogg, leader of the House of Commons, asked this week April’s planned £ 12bn rise in national insurance contributions dropped. When challenged by cabinet colleagues, he could not say exactly where he would get the savings to fund the cuts.
Sunak also froze income tax thresholds in April, sucking more people into higher tax brackets. The Daily Telegraph, Johnson’s former employer, asked this week, “Is that really why people vote Tory?”
Sunak cannot afford to reverse the two tax moves, which on a combined basis would cost a typical household £ 600 a year from April. Downing Street has indicated they will proceed as planned.
The removal of green charges from electricity bills
About 20 Tory MPs and peers have called for the suspension of green charges on electricity bills paid for renewable energy schemes this month.
But ministers point out that the levies are meant to fund Britain’s transition away from gas. Uncomfortably, Britain has just chaired the UN COP26 summit on climate change.
Torsten Bell, chief executive of the Resolution Foundation, said moving the £ 160 green and social levies from electricity bills to general tax would add £ 4.5 billion to the overall tax bill, which is not an attractive proposal for Sunak. not.
Increasing support for the vulnerable
Targeted assistance on energy bills is already available through the hot houses discount, which offers a price reduction of £ 140 for 2.7 million poorer households. Sunak is considering expanding it.
But that scheme is funded by a levy on the energy bills of better-off households. If the scheme is extended to 8.5 million households, with the taxpayer funding a payment of £ 300, Bell said it would cost up to £ 2.5 billion.
Paul Johnson, director of the Institute for Fiscal Studies, said Sunak could alleviate the cost-of-living crisis for the poorest households by sharply increasing welfare benefits in April and recovering costs by freezing them for the next two years – hopefully when inflation recedes. .
But he pointed out that the big political issue for Johnson and Sunak is the problems facing millions of people – possibly Tory voters – with low and middle incomes. “If you give 10 million people £ 500, that’s £ 5 billion just there,” says Paul Johnson.