The pressure is mounting for Rishi Sunak – the question is when will he crack? After the Bank of England warned that the economy was heading into a recession caused by the cost of living crisis, with inflation set at 10% in the fall, demands on the Chancellor for a new program of emergency aid to families in difficulty have reached a crescendo.
Threadneedle Street is predicting the second biggest squeeze on incomes since modern records began in 1964, with inflation hitting its highest level since the 1980s.
So far, Sunak has shown reluctance to act. Despite the bleak outlook, No 11’s view is that time is on the government’s side for two main reasons.
Firstly, lower energy use over the summer could dampen some of the record 54% rise in Ofgem’s price cap last month. The current limit applies until October, buying him time. Treasury sources say Sunak is eager to see how volatile wholesale prices will progress by August when the energy regulator announces its next cap period starting in October.
Second, the Chancellor is keen to talk about the £22bn of support for this financial year, including in his spring statement and energy rebate scheme. In total, the Office for Budget Responsibility estimates that half of the hit to household finances is covered and a third of the overall impact on living standards.
However, the economic outlook is only deteriorating. We are already halfway through Ofgem’s six-month monitoring period for wholesale energy prices used to inform the next price cap and the picture is clear. Gasoline prices may have fallen in recent weeks, but they remain high. The Bank of England expects bills to rise by 40% to around £2,800. In addition to the April hike, it’s a smash hit for families as winter approaches.
Observers say Sunak is most likely to announce additional support in August when the next cap is announced. This could include increasing the repayable loan to cover bills due that month, or increasing the hot house count open to low-income households.
That may not be enough. A steady stream of negative economic updates is on the way and pressure is mounting for a mini budget by then. Official figures for this month are expected to show inflation hit 9% in April, its highest level in 40 years. Consumer confidence plummeted, while monthly retail sales fell.
Sunak argued he couldn’t do it all, although after the billions of pounds deployed during the Covid pandemic the argument is paper thin. It also overlooks the fact that different choices could have been made to help poorer families, rather than middle- and high-income earners, within the same overall spending envelope.
The top of the bill would increase the value of benefits. Seen as the most powerful way to help the poorest households, economists say Sunak could propose a 7.5% increase in pensions and benefits due in April 2023.
Dave Innes, head of economics at the Joseph Rowntree Foundation, said with inflation heading towards 10%, compared to benefits that rose just 3% in April, the poorest in society have faced the largest reduction in real terms of benefits in 50 years. Closing the gap could costs around £15 billionaccording to the Resolution Foundation.
“Obviously this is putting enormous pressure on the financial situation of those most vulnerable to the cost of living crisis and this is an unacceptable situation,” Innes said.
Sunak said additional government support could risk worsening inflation, but that is a fallacy. The Bank estimates that four-fifths of the inflationary shock comes from outside the UK. Bank Governor Andrew Bailey said on Thursday that the poorest families and workers least able to negotiate higher wages would pay the heaviest price. The impact of Covid and the war in Ukraine are the main drivers of inflation, not government spending and benefit claimants.
James Smith, research director at the Resolution Foundation, said action to increase benefits was the best tool for the job, when the poorest 10% of households spend double their income on essentials like electricity. energy, fuel and food than those in the top 10%. “There is a choice that can be made about who is supported,” he said.
Major business groups are increasingly concerned that inaction is creating the conditions for a recession. Corporate bosses are expected to take matters into their own hands in the coming weeks as they endure their own energy crisis; in addition to tax hikes, staff shortages, Brexit-related disruptions and supply chain issues. Employment and investment could suffer.
After weeks of scandal, Sunak’s degraded public image may be at an all-time low, but a less-than-awful round of Tory local elections could help the chancellor’s case bide its time. However, with families increasingly hurting and an economy on a slippery slope, every day without action will create a tougher time ahead.