At 11am the regulator Ofgem put up the cost of the average energy bill by £700 a year. At noon the Bank of England raised interest rates for the second time running and warned of rapidly rising inflation. Sandwiched in between these two cost of living bombshells, Rishi Sunak popped up in the Commons with the government’s attempt at damage limitation.
The chancellor said his £9bn package would take the sting out a rise in energy bills made inevitable by the rising global price of gas. Even so, the Treasury measures will cover only half the expected increases looming in April. All households will be worse off, with charities warning more children in Britain’s poorer households will go hungry as a result.
Sunak announced that every household in England, Scotland and Wales would receive a £200 discount off their bills in October. This, though, is intended to be a temporary respite because the money will be clawed back at the rate of £40 a year from 2023 onwards.
That assumes wholesale energy prices come down in the intervening period, which – as Sunak acknowledges – is by no means guaranteed. As things stand, the price cap is on course to rise by a further £200-£300 in October.
The other main measure was the £150 rebate from council tax bills in homes in bands A to D in England, with the Treasury making money available for the devolved administrations to cut bills by similar amounts. Sunak says 80% of households in England will benefit, although because council tax bands have remained unchanged for more than 30 years, plenty of relatively well-off people will benefit.
The Institute for Fiscal Studies estimates only 56% of those living in band A to D properties are in the bottom half of the income distribution, defined as disposable income after housing costs of less than £24,800 for a childless couple. Some will be in the highest income group.
There were alternatives. The government could have raised universal credit or increased the generosity of the warm homes discount but chose not to do so. Given its current political problems the government was keen to offer support to more than the neediest households but, as a result, the package attracted criticism for not being generous enough and for not targeting enough support at those who will need it most in what will be a dire year for living standards.
The fear that the spring of 2022 will represent a “perfect storm” for the cost of living was sharpened by the latest upward move in interest rates from the Bank of England.
It wasn’t simply that Threadneedle Street’s monetary policy committee voted to raise borrowing costs, it was that four of the nine members considered a quarter-point rise to 0.5% insufficient to head off inflationary pressures and wanted a half-point increase instead.
Sunak began his statement to MPs by boasting about how well the economy was doing, citing falling unemployment and the reduction in government borrowing. An altogether gloomier picture was painted by the Bank, which expects the annual inflation rate to peak at more than 7% in April, and for the bounce-back from the plan B Covid restrictions to be followed by a marked slowdown in the economy.
The UK faces a triplewhammy over the coming months: businesses and mortgage payers paying higher interest rates; prices rising faster than wages; and more expensive energy costs. Sunak’s package will ease the squeeze – but not by much.