Chancellor Rishi Sunak spent a week listening to the advice of conservative MPs on how to direct the course around what Labor called the “iceberg” that looms over British politics.
Whether it is tax cuts, increased social benefits or the abolition of “green levies” on energy bills, all potential mitigations are costly and there are no easy solutions.
Sunak admitted that something will have to be done because economists warn of the worst squeezed standard of living from the financial crisis. “With Covid, he was not afraid to do an unconventional thing and go big,” said one of the chancellor’s allies.
But since he has just spent £ 400bn to support the economy during the coronavirus pandemic, his room for maneuver in dealing with the cost of living crisis is very limited.
With inflation above 5 percent and with the increase – and with the increase in interest rates – the chancellor told her colleagues that she would not lend to get out of trouble, thus increasing the cost of debt service.
“Nigel Lawson would not do that,” Sunak told the cabinet this week, referring to Chancellor Margaret Thatcher during the 1980s. Tax cuts financed by new cuts in public spending, meanwhile, are considered politically unpleasant.
The cost of living crisis will peak in April, when a large increase in energy prices coincide with an increase in taxes that will jointly cost a typical household more than £ 1,000 a year.
Tory MPs are pressuring the chancellor to act ahead of the May local elections, and there are at least four potential options:
Abolition of VAT on energy bills
Boris Johnson once advertised the freedom to reduce the value added tax on domestic energy from 5 percent to zero as a “dividend for Brexit”, but the Prime Minister said this week that it would be a “blunt instrument”.
This policy would cost £ 2 billion, according to the Resolution Foundation, a think tank, thus reducing energy bills by around £ 100 per household. But, as Johnson pointed out, the reduction would benefit everyone, not just the poor.
In April, the energy price cap covering millions of households could rise to £ 700, to almost £ 2,000 per household, in response to rising wholesale gas and electricity prices. So just cutting VAT – with the support of some Tory MPs and Labor – would only reduce the problem.
Withdrawal from the planned tax increase for April
Jacob Rees-Mogg, leader of the House of Commons, called this week Planned increase in national insurance contributions of 12 billion pounds in April be rejected. When his colleagues from the cabinet challenged him, he could not say exactly where he would find the savings to finance the reduction.
Sunak is also freezing income tax thresholds in April, drawing more people into larger tax zones. The Daily Telegraph, Johnson’s former employer, asked this week, “Do people really vote for Tori?”
Sunak cannot afford to cancel the two tax moves, which on a combined basis will cost a typical household 600 pounds a year from April. Downing Street has indicated it will proceed as planned.
Elimination of green levies from electricity bills
About 20 Tory MPs and colleagues this month called for the suspension of green levies on electricity bills that pay for renewable energy schemes.
But ministers point out that the levies are intended to finance Britain’s gas transition. Clumsily, Britain has just chaired the UN COP26 summit on climate change.
Torsten Bell, executive director of the Resolution Foundation, said shifting £ 160 of green and social levies from the electricity bill to general taxation would add £ 4.5 billion to the total tax bill, which is not an attractive offer for Sunaka.
Increased support for the vulnerable
Targeted assistance for energy bills is already available via discount for warm homes, which provides a discount of £ 140 for 2.7 million poorer households. Sunak is considering enlargement.
But the scheme is funded by levies on the energy bills of better-off households. If the program were to expand to 8.5 million households and taxpayers fund a £ 300 payment, Bell said it would cost up to £ 2.5 billion.
Paul Johnson, director of the Institute for Fiscal Studies, said Sunak could alleviate the cost of living crisis for the poorest households by sharply increasing social benefits in April and offsetting costs by freezing for the next two years – hopefully inflation rises as inflation rises.
But he pointed out that a big political problem for Johnson and Sunak are the problems faced by millions of people – potentially Tory voters – with low and medium incomes. “If 10 million people give £ 500, that’s £ 5 billion right there,” said Paul Johnson.