The economic news this week is stark. Inflation has hit a 30-year high and the average British worker is entering their third drop in real wages in a decade. But what’s really sobering is that the worst is still to come. Next month, the regulator Ofgem announces the maximum price for heating bills, and energy company bosses are already warning that they will almost certainly be double last winter’s levels. The new price cap kicks in from April, at just the point that national insurance goes up alongside council tax increases in many boroughs, and there’s a stealth rise in income tax. If government ministers think they’re unpopular now, they should check back once voters are paying what economists estimate as an extra £1,200 a year for the average household.
Without immediate state action, the human fallout of all of this will be severe. Two big points need to be borne in mind: first, when basics are shooting up in price, households cannot put off their purchases or buy something cheaper. You either switch the heating on or not; you either have enough food or you go hungry. Second, although prices are going up for everyone, not all families have the same financial buffer against this storm. As it is, debt charities are already warning of many more people trying to borrow to keep on top of their bills. Fuel poverty looks almost certain to shoot up.
What should be done immediately has been sketched out by Labour’s Rachel Reeves: a windfall tax on oil and gas companies, with the proceeds going towards the least well-off to help with bills. Labour is also proposing scrapping VAT on fuel bills for a few months, which makes better sense politically than it does in policy terms. The amount households save would be small and financial support should be better targeted.
In any case, it would not be a surprise to see the business secretary, Kwasi Kwarteng, steal one or both of these ideas. What he should also do, but won’t, is restore the £20 cut from universal credit and increase benefits, which are not going up in line with prices. Still, Labour should continue to press the government on this policy.
Much more of a mistake would be for Whitehall to hand money to utility firms, as has been suggested: that hands money to shareholders rather than to households. Over the longer term, the state needs to build up a much bigger renewables base so that the UK is less dependent on international oil and gas markets.
What doesn’t help is for the Bank of England to raise interest rates again, as looks likely. There is no evidence of workers pushing for higher wages, but there are already signs of companies raising their prices in line with their material costs.
A quarter-point increase in the base rate will do nothing to prevent that, nor will it curb fluctuations on international oil markets. All it does is signal a certain complacency on Threadneedle Street about the prospects for the UK economy, which are not that rosy. The high growth, high productivity miracle promised by Boris Johnson just last autumn is being revealed instead as a high-cost, high-inequality flop.