The cabinet’s micro-measures fall short of easing the cost-of-living crisis

Despite the distractions of a conflict in Ukraine and political scandal in Downing Street, the Johnson government understands that the soaring cost of living matters more than any of these to the typical household.

That household faces an unprecedentedly bad time, according to figures from the government’s own forecaster, the Office for Budget Responsibility. Post-tax, inflation-adjusted incomes are due to fall by more in the current financial year – 2.2% – than in any period going back to the 1950s. And this figure is an average; there will be some households facing a much sharper hit. As we explained earlier, rising energy bills will impact lower income households by the greatest amount proportionally.

In the week before the local elections, the government has decided to show that it is acting, through a meeting of the cabinet to discuss “innovative ways to ease pressure on household finances” – with the proviso that these must be so innovative that they do not disturb the Treasury fiscally. ^[1]

The cabinet’s brainstorming session did not come up with the answers

Given this constraint, it is not surprising that the ideas spun out from this meeting did not quite meet the challenge. The cabinet divided over whether unilateral tariff reductions on certain foods should be included. ^[2] Whether or not this is wise as a trade deal negotiation tactic, it surely fails the test to be fiscally neutral. Likewise for the idea of encouraging people to claim benefits to which they are entitled – moreover, a policy that should be pursued regardless of the cost-of-living situation. The proposal to extend the moratorium on import checks with the EU may also be wise, given the lack of readiness of importers. But refraining from further damage to the economy is an odd definition of help – like a paramedic arriving in the aftermath of an assault and making great play out of not giving the victim an extra kick.

Other suggestions, such as an easing of childcare regulations or a change in the requirement for an annual MOT check-up, might be justified on their own merits, but are far too specific and small to count as a response to the widespread hit to household incomes coming this year. (The MOT suggestion might amount to a few hundred million pounds of savings, concentrated on drivers, and while also taking some income away from mechanics). ^[3]

Helping consumers should be a priority for government at all times

This is not to decry the whole process. I was a special adviser to Theresa May in 2017 when, as prime minister, she vowed to act on behalf of what were called “just about managing” families disproportionately likely to suffer from unfair conditions in consumer markets. Towards the end of her premiership, I compiled a list of the measures in train. It was long, extending from tougher price settlements on network infrastructure and an end to credit card fees down to a crackdown on escalating “ground rents”, and a requirement to make mobile phone companies split out the cost of the handset from the rest of the bill.

None of these amounted to much on their own. Even added together they would not have made a serious dent in today’s cost-of-living crisis. Rather, they were meant to address a slower-burning problem of structurally unfair markets that penalise the vulnerable. They took a certain degree of energy and focus from government – some of the measures consulted on, such as new powers for the Competitions and Markets Authority (CMA) to issue fines for breaches of consumer law, are only beginning to be enacted now. ^[4]

The government should be looking out for the consumer constantly, not just when cyclical conditions turn for the worse – otherwise, measures that take commitment to drive through never get completed. But this is no substitute for direct financial help for those most damaged by unavoidable, higher inflation.

It will cost the Treasury around £5bn a year to help ease the squeeze on households

On this, the restraint demanded by the Treasury is too great, and the implication that there is no fiscal room is disingenuous. The OBR at the March Spring Statement found that the major three-year fiscal targets are both likely to be met with considerable leeway. The requirement for a falling debt-to-GDP ratio will be met by 1% of GDP (or £27.8bn), and the need for a balanced current budget by over £31bn. Moreover, temporary measures targeted towards the very worst year – the current one, and next – will not significantly affect targets three years out. If executed as one-off payments, they will add to public debt – but at a much lower cost to that which would be incurred by many stressed private households.

There are several possible objections. In particular, the Treasury might observe that temporary measures risk becoming permanent, and that sending more money to households risks increasing inflation even more. But these are arguments for the measures to be well designed, not to give up providing any help at all. There are obvious mistakes to avoid, such as an unfortunate bias towards providing help through tax cuts – which too easily favour the better off households rather than those most in need, and often become permanent by default. Another is to avoid measures that actually lower energy prices, which undermine the important incentive to reduce energy use. ^[5] This is a clear flaw in the approach pursued in some European economies, such as France, that have effectively transferred money from the state energy giant EDF to households.

The problem of overheating the economy is a serious one, when inflation is soaring so much higher than the Bank of England’s formal target of 2.0%. But the implication is that the Bank might have to tighten policy slightly sooner than otherwise, an effect that is spread over the whole of the economy. The net effect, if the measures are well-targeted, is a net redistribution towards the households that are most immediately damaged by the soaring cost of living, in particular those most exposed to energy prices. That is still worth doing, particularly as the most afflicted might be forced to take actions, such as under-heating their homes in winter, or skimping on food, that cause a costly knock-on effect elsewhere in the health service or in social care.

The micro-measures discussed at cabinet might amount to a few hundred million pounds in consumer savings, enjoyed across the income range. The size of a package needed to help households is a political matter, but surely much larger. My personal estimate is that around £500 for about 10m households would be needed, at a cost close to £5bn for each year it is in place. The most obvious mechanism would be the existing benefits system.

That sounds very expensive – but so is the one penny cut in income tax announced in March, but scheduled for the election year by the chancellor. This, coincidentally, also costs about £5bn, but for every year into perpetuity, and is forecast to land when energy prices are on their way down. It draws attention to the fundamental point – the government can help, but only if its support is well-targeted and timed. Badly targeted help is worse than no help at all.

1. www.ft.com/content/6a494d20-8589-4759-92a7-551646f9629e, “Boris Johnson to crack down on companies pushing up household bills”, Financial Times, 25 April 2022
2. www.ft.com/content/971213de-5fb7-4cf8-a659-3ec0ec153e2f “Cabinet split on plan to cut UK food tariffs as grocery bills rise 5.9%”, Financial Times, 26 April 2022
3. There are about 29m MOTs performed each year, and the cost is £55 each
4. www.gov.uk/government/news/cma-welcomes-government-proposals-on-new-powers
5. Which could be pursued much further – see www.ft.com/content/8f5f79b4-20d0-43b2-9369-63f39b5d8294 Chris Giles, “Weaning ourselves off Russian gas starts on the home front”, 28 April 2022