Rishi Sunak’s response to the cost of living crisis has received a mixed reception, with charities and anti-poverty groups saying it provides temporary relief for millions of households but leaves those on the lowest incomes facing an uncertain future.
The package of measures will boost the incomes of 8 million low-income households with one-off increases to welfare payments in this financial year The chancellor rebuffed calls for permanent increases in benefits to cope with rising prices.
Average energy bills are expected to rise by £1,500 this year, with a £700 increase in April followed by a further £800 rise in October, under the regulated price-cap mechanism.
House and energy costs have increased 19.2% since April 2021
The chancellor said these households would be largely protected when they received payments worth up to £1,200 this year, made up of a £650 benefit boost paid directly into bank accounts in two stages – in July and autumn – a £400 rebate on energy bills in the autumn and the £150 cut to council tax bills that took effect in April.
The chancellor also announced top-ups for disabled individuals and pensioner households worth £150 and £300 respectively.
There was praise for the simplicity of the package, in contrast to the complex mix of subsidies announced in the chancellor’s spring statement.
In March, Sunak loaned households £200 cut to bills, to be paid back in future years. The scheme – dismissed by Labour as a ‘buy now pay later’ offer – has now been replaced with a grant, and increased to £400, making it easier to administer.
Sunak has opted to make payments direct to the bank accounts of those who receive benefits and pensions, instead of distributing the new money via the warm homes discount, which is managed by energy companies and has been criticised as complicated to claim.
Ofgem estimates the average annual energy bill will reach £2,800 by October
However, Andrew Harrop, general secretary of the Fabian Society, described the measures as a “sticking plaster”, a response echoed by the left-of-centre thinktank, the IPPR, which said it leaves millions of families facing an uncertain future.
“Today’s measures offer temporary relief, but any long-term solution must ensure our social safety net is fit for purpose,” the IPPR said.
Government critics said ministers were focused on providing subsidies to cope with rising energy prices when families were also under financial pressure from inflation in the cost of food, clothing and transport.
Inflation increased to 9% in April while the latest data for earnings in March saw the average pay increase without bonuses stuck on 4.2%.
The last time UK inflation hit 9% was in 1982
Ben Harrison, director of the Work Foundation thinktank at Lancaster University, said a lack of support over the last six months had already caused significant damage, and “delaying part of the payment to the autumn risks compounding this”.
Referring to a measure of insecurity called the UK Insecure Work Index, Harrison said: “One in five workers in the UK live in severe insecurity, meaning how many hours they can work or much money they will earn. Making piecemeal announcements every few months only adds to the anxiety and uncertainty they face.”
Aveek Bhattacharya, chief economist at the Social Market Foundation, praised the chancellor for adopting a simple system of cash payments to alleviate the cost of living crisis, but was critical of delays that had caused unnecessary hardship.
“Months of trepidation and uncertainty could have been avoided had the government made these announcements at the start of the year,” he said.
The 120,000 households that have hit the government’s ceiling on payments – known as the benefits cap – will receive the extra payments, according to the Treasury.
“This payment will be tax-free, will not count towards the benefit cap, and will not have any impact on existing benefit awards,” it said. So people already capped will still receive the money.
Sunak pledged to increase benefit and pension payments next April by the rate of inflation in September, when it is the usual practice for the DWP to agree the uplift in benefits. It could mean a double digit increase in benefits and pension payments should inflation continue rising in line with Bank of England forecasts to above 10%.
A pledge was needed after the chancellor suspended last year’s triple lock on pensions, which guarantees an increase in line with the higher of inflation, earnings, or 2.5%, after an increase in earnings to above 8%. Instead, pensions increased by 3.1% in April, the same rise that was applied to universal credit and other means-tested benefits.
Higher inflation is driving down the value of state benefits
The Resolution Foundation thinktank said the three support packages – for working families, pensioners and disabled people – provided about £1,200 for households, fairly evenly spread across the income brackets.
However, if previously announced packages are included, the combined effect is more progressive, it said, delivering an average cash gain to households in the bottom fifth [of earners] of £1,195, compared to £799 for households in the middle quintile, while households in the top quintile are set for an average cash loss of £456.
Real household disposable income per person is set to fall2.2% in 2022-23, the largest single-year fall since ONS record began
Simon French, chief economist at the stockbroker Panmure Gordon, said his provisional estimate of the impact on households showed it reduced the record-breaking squeeze on average disposable incomes in this year financial year.
A forecast by the Office for Budget Responsibility of a 2.2% reduction in disposable incomes in 2022-23 would be eased to 1.3%, which is “still a very painful squeeze, but no longer unprecedented”, he said.