Cost of living crisis: four things the government could do to help | UK cost of living crisis

The cost of living crisis affecting millions of households is about to get worse.

Gas is the foundation of electricity generation in the UK, directly powering millions of homes and accounting for around 45% of electricity supply. Its price has skyrocketed, up 400% in the last year and 1,000% since 2019, according to the ICE futures market.

The prospect of a tripling of the energy price cap in October to £3,600 – from £1,254 in 2019 – is behind the Bank of England’s warning of a long recession from of this autumn, characterized by galloping inflation, a fall in the standard of living and an increase in unemployment.

The central bank’s response is to raise interest rates to lower inflation. Liz Truss, ahead in the race to become Tory leader and prime minister, has a remedy: sweeping tax cuts to spur growth. The work would provide targeted support for those struggling the most with their bills, coupled with measures to increase investment.

But there are calls to do more. Here we discuss some options.

A lower ceiling price

What if regulator Ofgem said bills would not rise in October? Roughly half of the current inflation rate of 9.4% can be explained by increases in energy costs, which would limit further price increases. A lower inflation rate would lessen the pressure on workers to negotiate higher wages, and without high wages, the Bank would have less need to raise interest rates.

Around 23 million households have their household energy bills governed by the Energy Price Cap. Ofgem says if it kept the average dual fuel tariff at £1,971 in April, the rising cost of wholesale gas would be swallowed by the industry.

The regulator decided not to go this route because, in its view, forcing the utilities to absorb the costs would make them all loss-making and drive many of them out of business. They would need a government grant and billions of pounds in rescue loans for those who went bankrupt.

But the government could go that route and become the owner of a merged utility company. France already owns most of its national electricity supplier, EDF, and is set to buy the remaining shares to keep prices capped. Inflation in France is 5.8%.

A higher exceptional tax

Britain produces gas and oil in the North Sea. As chancellor, Rishi Sunak agreed to apply an additional 25% levy on windfall profits from the industry which he said would bring in £5billion.

To address his previous concerns that a windfall tax would hamper investment, he allowed companies to offset 80% of their new investment costs through tax. Combined with existing tax breaks, oil and gas companies get 91 pence of their corporation tax for every pound spent on investment.

But there is no evidence that windfall profits are invested. The industry plans investments 10 to 15 years ahead, and windfall gains are typically returned to shareholders in the form of higher dividends and share buybacks. It’s the same now. So the government could apply the 25% without any tax relief, generating a sum closer to £15billion.

More generous benefits

The government’s Energy Bill Support Scheme offers a £400 cut on bills in October for every household, a means-tested one-off payment of £650 to eight million low-income households, £150 for those on benefits disability and £300 for pensioners. This was designed when the forecast for the October price cap was £2,800.

MEPs on the Trade, Energy and Industrial Strategy Committee warn that the package has been ‘overshadowed by the scale of the crisis’.

The National Institute for Economic and Social Research said ‘any tax relief would be best directed towards Universal Credit’, which it said should increase by £25 a week for at least six months from October. In addition, the energy subsidy is set to increase from £400 to £600 for 11 million low-income households.

The bills are so high that subsidies wouldn’t be considered inflationary – just to keep the wolf out.

Salary cap at the City

Bank officials said they raised interest rates by 0.5 percentage points – the biggest margin in more than 25 years – because they feared wage increases next year could exceed the inflation and generate a wage/price spiral.

They admit there’s little evidence that workers are using their muscle to get big pay rises right now, but that could change if inflation stays high.

To underscore the weakness in wage demands so far, the latest official figures show average wages rose 4.3% on the year to June and 6.2% with bonuses. The vast majority of bonuses are paid out in the financial, professional and business services sectors.

If the Bank is so worried, it could cap the bonuses of the City companies it regulates. It would lower average wages and end the most egregious example of wage growth, with city businesses immune to the energy crisis handing themselves huge payouts.

Other sectors where wages have soared are being hit hard by staff shortages, mainly due to UK visa restrictions on EU workers. Higher salaries are welcome in hospitality, travel and leisure, but companies are trapped by a lack of qualified replacements when staff move for higher pay to a rival, forcing them to turn away customers. Removing visa rules and allowing free movement would be another way to ease wage pressures.

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