Yahoo Finance Rishi Sunak’s support package leaves middle-class families £3,100 short
Rishi Sunak’s bid to ease the cost-of-living crisis by splashing the cash on households ironically risks further stoking inflation.
“We need to be careful,” the Chancellor told the CBI’s annual business dinner last week, as he warned of the economic risks of sending more money sloshing around the economy.
“At a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse – by pushing up prices still further, embedding high inflation expectations, and creating a vicious cycle of even higher interest rates and more pain for tens of millions of mortgage holders and small businesses.”
Those concerns have not stopped him from unveiling an extra £21bn of spending, two-thirds of which is funded by ramping up borrowing – adding to a budget deficit already expected to come in just short of £100bn this financial year.
Economists expect the giveaway to take the edge off the cost-of-living crisis, albeit far less so for the middle class. Sunak stressed it is targeted “to millions of the most vulnerable people in our society”.
While consumers being given more money to spend should help soften the blow to the economy, it simultaneously threatens to further stoke inflation which the Chancellor is trying to dampen, and force the Bank of England to raise interest rates faster.
Inflationary shock
Sky-high inflation this year will feed into benefits and state pension payments next year, as they are uprated by September’s inflation figure. Sunak confirmed the triple lock is in place, guaranteeing pensions will go up by the highest of inflation, average wages or 2.5pc, the latter being a safeguard designed in what feels like a previous age to make sure retired households saw a healthy cash rise in their incomes.
Analysts at the Resolution Foundation estimate that a 9.5pc rise in the welfare bill, based on the expected inflation rate in September, will add £15bn to the Chancellor’s outgoings next year – a jump just as big as today’s sizeable handout, and so adding to the price pressures tearing through the economy.
Paul Dales at Capital Economics says the extra borrowing and spending “will add to the already extensive inflationary pressure”, adding that “there is still a pretty good chance of a recession” despite the extra help. Such is the scale of the jump in energy prices.
Kallum Pickering, economist at Berenberg Bank, called the Chancellor’s policy “misguided”, warning he might not be able to stop dishing out cash to help with inflation, even as doing so pushes prices up further.
“Now that the Government has committed to keep energy costs affordable with direct fiscal support, it will be hard to reverse – especially if it stokes even higher inflation down the road,” he says.
If the Bank of England has to ramp up interest rates faster as a result, Pickering adds, it risks “triggering a recession. Unemployment would be much worse for living standards than high energy prices, that is for sure.”
Allan Monks at JP Morgan expects the Monetary Policy Committee (MPC) will have to add an extra interest rate hike this year as a result, taking the base rate from 1pc now to 2pc by the end of this year and 2.75pc by August 2023.
Windfall tax ‘insufficient’
Meanwhile, the move is bad for the public finances.
Sandra Horsfield from Investec says the windfall tax was “by no means sufficient” to cover the £37bn of spending Sunak has pledged to address Britain’s cost-of-living crisis.
“The rest would appear to come from higher borrowing and using some of the ‘war chest’ built up partly from past borrowing having been successively revised down,” she says.
“Bringing the public finances into better shape has been deprioritised in light of the size of the squeeze to household budgets.”
Yet with the added sting of yet another tax rise, it also risks inflicting pain on the economy.
Jagjit Chadha, director of the National Institute for Economic and Social Research, says: “We are once again being treated to the spectacle of politics getting in the way of good economics.
“When it comes to taxes, it is worth remembering that if we act in haste we may well repent at leisure.
“Taxes can and should come later, support must come now.”
When it comes to individuals, the Chancellor’s cost-of-living support package will unevenly benefit society. It will offset less than a fifth of the cost increases that middle-class families face this year.
Sunak announced a £200 discount for households’ energy bills this autumn, which will now be doubled to £400. This comes on top of the £150 council tax rebate given to 80pc of homes in England in council tax bands A to D.
Despite bills rising across the board, however, Sunak’s support risks falling short of protecting middle-class consumers who will not receive measures such as a £650 welfare payment for means-tested benefit households.
Middle-income families face bill increases of close to £4,000 this year, according to Telegraph analysis, with the state payout representing just 14pc of that total.
Energy bills increased by £693 on average in April and will rise further this October when the energy price cap surges to £2,800 – up 42pc from current levels. That means the average household will pay an extra £1,523 a year compared to last winter, regulator Ofgem has warned.
The average mortgage has become £1,872 more expensive per year, meanwhile, as rising interest rates pushed up the cost of borrowing by 0.75 percentage points on £250,000 of debt. Variable rate mortgage. annually.
Families will spend an added £271 on food shopping annually, according to analyst Kantar. The cost of transport has also risen, with consumers having to fork out an extra £194 for annual season tickets between Brighton and London.
Experts argue there is a risk many families’ financial resilience will be exhausted by October, despite the Chancellor’s support cost-of-living giveaway.
Nigel Morris, of tax firm MHA, says the Chancellor should have gone further by cutting taxes, particularly reversing the recent increase in National Insurance contributions. Morris suggests the Chancellor would need to bring forward the income tax cut planned for 2024 to help struggling workers now.
“A more rapid rethink on taxes and business incentives is urgently required to prevent an impending recession," he says.
“Reducing the standard National Insurance contribution rate back to 12pc and lowering the income tax rate from 20pc to 19pc, even if only temporarily, would provide some much-needed relief for businesses and families.”
A temporary cut to VAT would also ease the burden of rising costs, which was effective during the 2008 financial crisis when VAT was cut from 17.5pc to 15pc.
While Sunak may have offered a lifeline, it seems just a drop in the ocean as households drown in increased costs.
