Hard-pressed households are facing a “difficult” future as inflation rises but the Government cannot spend its way out of the problem, senior minister Jacob Rees-Mogg has warned.
The Brexit Opportunities Minister said increasing public spending to mitigate the impacts of the rising cost of living risked adding to inflation, pushing prices higher.
The squeeze in living standards is set to become the dominant political issue, with the Bank of England forecasting inflation could reach its highest rate in 40 years by October.
The pace at which prices are rising is outstripping increases in wages and benefits, leaving households feeling the pinch, particularly with soaring energy bills.
Mr Rees-Mogg told Channel 4’s Andrew Neil Show: “I’m not going to pretend to you that this is not difficult for people. It is difficult for people.
“There are limits to what the Government can do because in an inflation, increasing public expenditure, increasing the deficit would – in and of itself – be inflationary.
“But it’s quite right that the support that there is has been targeted at the least well-off, as it has been.”
The Government has promised £9 billion of help with energy bills as part of a £22 billion package which includes raising national insurance thresholds and cutting the universal credit taper rate.
The Bank of England’s grim forecasts suggest inflation will hit 10% by the end of the year, up from 7% now, and it has raised interest rates to 1%, the highest since 2009, in an effort to curb the rise in prices.
The Bank predicted that growth will contract in the final three months of 2022 as the cost squeeze sees households rein in spending.
Mr Rees-Mogg said: “The Government can change things in the longer and the medium term, it cannot change what is going to happen over the next few weeks and months.”
He acknowledged the inflation forecasts are “really troubling” but most of the reasons were outside the Government’s control, including constraints on supply chains following the pandemic and the war in Ukraine’s impact on energy.
“The problem with dealing with inflation, for all governments, for any government, is that the solutions are difficult,” he said.
“If you think back to 2008, the solution was to print money. Now for some people that made life easier.
“The solution in 2020 to Covid was to spend hundreds of billions of pounds, that made life easier for many people.
“Now, the solutions are difficult solutions. They are higher interest rates, which the Bank of England is doing.
“But they are also control of public expenditure, which is the Government’s part of this.”
Mr Rees-Mogg rejected calls for a windfall tax on energy companies to help pay for measures to mitigate the squeeze on household finances.
“Short-term raids on companies are not the answer to an inflationary problem,” he said.
“The Government needs to operate within the resources that it has got, that the nation as a whole has.”
The tax burden was “about as high as it’s been in 50 years” as a share of the overall size of the economy.
“There’s very little room for extra taxation, we have to live within our means,” he said.
Mr Rees-Mogg defended the firms using their windfalls to pay dividends, saying they benefitted pension funds and it was a “fanciful idea that there is tax that can be taken that does not ultimately fall on individuals one way or another”.