The governnment still has options to deal with the cost of living squeee

Kieran Neild-Ali

April 6, 2022

Last Friday, the energy price cap was raised, increasing the price of what a supplier can charge for each unit of gas and electricity we use. The Money Saving Expert Martin Lewis urged households to take meter readings on the eve of the change, ensuing bills reflected the pre-price cap rise prices. 

Millions heeded his advice leading to websites and phonelines crashing as people rushed to submit their readings. The sense of panic is understandable. The 54 per cent rise in the energy price cap means a household using a typical amount of gas and electricity will now pay £1,971 per year, amounting to a £700 increase. 

But this is not a one-off shock, another rise in the price cap is expected in October. 

It is easy to lash out at ‘corporate greed’ as the cause of this financial hardship, as some have done. However, any such accusations lack any understanding of the economics behind the market distortions that have exacerbated the energy crisis, long before the Ukraine War. A podcast by the IEA provides the reasons why the energy price cap is bad policy and should be scrapped.

Although it is necessary to understand the cause of this hardship, it also important to assess the options available to deal with it — people want assurances that measures will be put in place to alleviate the cost of living crisis.

The nation has become accustomed to state help since 2020 and we see Rishi Sunak as the knight in shining armour who saved the economy from total collapse during Covid. Surely, he will ‘help out’ again? Not this time, the tone has shifted, and the spending taps are being tightened. 

The Treasury now accept that state spending has reached a ‘high water mark’ and efforts are being made to end state profligacy.

The Chancellor told listeners to the BBC’s Newscast podcast: “We’re facing a very difficult situation with the price of things going up and I want to do what we can to ameliorate some of that, but I’m also honest with people that we can’t ameliorate all of it, sadly”. A rather defeatist response to what is a defining moment of his tenure in Number 11. 

But the perception that state intervention and spending is the only tool at his disposal is wrong. Hacking at the historically large tax burden is a steadfast way to help struggling people, and the Chancellor has made a start, but it is simply not enough.

Taken as a whole, government action consists of a council tax rebate (for Band A-D) worth £150, raising the threshold for National Insurance payments, saving 30 million people £330 a year, a commitment to cut Income Tax in 2024 and a few cuts to VAT. Even a back of a fag packet calculation will show this fails to meet the huge pressures we are seeing.

We need to see more drastic cuts to tax on people’s income and spending. With fiscal headroom estimated to be upwards of £75 billion, there was more room for manoeuvre. Tinkering around the edges of NIC is not enough, the rise should have been axed altogether. Promising to cut Income Tax by 1p in 2024 was little more than election campaigning. People need help now, not when the Tories feel like facing an election. The announcement also brushed over the fact thresholds on Income Tax have been frozen, meaning we are all paying more by stealth as inflation increases prices and wages.  

Brits can’t even drown their sorrows at the pub as the government has returned VAT rates on hospitality to 20 per cent, hitting businesses with yet more costs and inevitably increasing the price of a pint. This measure was greeted with dismay by Hospitality UK, who warned this will “restrict the sector’s efforts to stifle price rises for consumers”. There are options on the table, Rishi has just chosen the wrong ones.

Rather than defeatism, we need effective action. Not in the form of more intervention but by allowing people to keep more of their money and helping businesses to keep their prices low, not forcing them to up prices to pay for increased taxation.


Written by Kieran Neild-Ali

Kieran Neild-Ali is Communications & Marketing Assistant at the Institute of Economic Affairs

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