Cost of living crisis: what an ‘emergency budget’ for UK consumers from new PM Liz Truss should look like
For many Londoners, the cost to heat and light our homes this winter will be unaffordable, unless the Government acts now.
Research conducted by my firm, Nous.co, suggests that consumers are still significantly underestimating just how severely the cost of living crisis will hit them. There’s a big gap between seeing the forecasts in the news and applying them to our own situation.
Liz Truss and Kwasi Kwarteng however, must be under no illusions: this is potentially the most significant consumer crisis of our lifetimes. Let’s start by assessing the scale of the problem.
Median household disposable income in the UK is a little over £30,000 a year. The current forecast is that domestic energy prices will increase from £1,000 a year at the start of 2021 to £6,000 or more. That is in addition to other living cost increases totalling roughly £2,000, meaning a typical household is having to find an extra £7,000 per year – more than 20 per cent of take-home pay.
It goes without saying that most households don’t have that kind of spare cash. If nothing changes, many will be forced to go without heat. As the Centre for Sustainable Energy puts it, “cold homes are bad for health.” Blood pressure increases, colds abound, and there is an increase in heart attacks and pneumonia. That’s before the mental health-related outcomes: absence from work, social isolation, sleep deprivation and the like.
For the elderly and more vulnerable, the dangers are especially acute. Without intervention we are on the precipice of a humanitarian disaster. Urgent action for the poorest and most vulnerable is therefore essential.
However, there is also an economic catastrophe in the making. Even middle-income households badly squeezed by bills will radically cut back their spending. This will plunge us quickly into a deep recession.
Truss and the Government must act both wisely –and fast. Tax cuts will be too slow to put money back into the pockets of the public this winter.
First things first: protect lives
Truss and Kwarteng have to ensure everyone has enough energy to heat their homes. This demands an immediate programme of targeted help. The simplest way to administer this would be by having the government supply cheap financing for energy companies so they can provide the first £5,000 of energy per household at an 80 per cent discount.
This approach is fair in that it reduces energy bills most sharply for those in smaller and less expensive homes, while still ensuring there is an incentive to reduce consumption on the margin.
Next: protect jobs
That means helping small businesses as well as consumers.
Letting business energy costs rise six-fold would hit employment, so a business energy support programme is also urgent.
Third: control inflation
One easy anti-inflationary move is to clamp down on regulated businesses – such as mobile and broadband providers – from raising their prices above 5 per cent. This ensures households aren’t hit with above-inflation price rises on their utility bills, and helps reduce core inflation expectations.
Targeted support for lower-income households should focus on incentivising consumption of services, which keeps money circulating in the consumer economy. Voucher programmes along the lines of ‘eat out to help out’ for a broader swathe of services are one way to go. This would discourage hoarding and will help businesses continue to trade during the tough winter months ahead.
Fourth: reduce consumption taxes
In the face of recessionary pressures, reducing consumption taxes may also help to stimulate spending. The challenge here is timing: cutting VAT too early might encourage a binge in gift-giving. Better to focus those cuts to VAT on services and essential goods, which will help keep the UK economy ticking over during the tough winter ahead, and help smaller businesses keep the lights on.
Fifth: encourage skilled workers
While the coming economic challenges may tempt people back into the labour market, the Government needs to encourage the supply of workers that businesses need such as skilled migrants and foreign workers. Shortages in sectors like nursing, construction and childcare are driving up prices, and restricting the availability of services. Affordable childcare is a particular problem for Londoners which must be fixed fast.
A seasonal scheme to encourage specific skills groups to spend six months in the UK over the winter would have a double benefit: it would be a shot in the arm for businesses who are still acutely short-staffed, and it would help to provide more consumers in the vital services sector.
The bottom line
None of this makes for an easy balancing act, and a series of targeted interventions which respond to changing circumstances are likely to be required.
Most importantly of all, though, the new leadership must be firm and honest with people about how tough this period may prove to be, and how hard they will work for us: only if we believe the Government has our best interests at heart will there be a will to pull together to work through the many challenges.