Cost of living and the Spring Statement — what are the verdicts?

Stephen Barclay MP (previous Chief Secretary to the Treasury) and Rishi Sunak MP (Chancellor of the Exchequer). Image from https://www.mailplus.co.uk/edition/comment/56803/pint-sized-rishi-sunak-is-king-of-all-he-surveys-so-why-does-he-feel-like-hes-coming-up-short

Introduction

There is a cost-of-living crisis in the UK. Inflation is at 6.2%, the highest that it has been in 30 years. Fuel, food, and energy, all of which are essential to our daily lives, are some of the commodities most heavily impacted by this.

On Wednesday the 23rd of March, the Chancellor of the Exchequer (Rishi Sunak) announced his spring statement to the House of Commons, which contained measures designed to support families and individuals through this crisis.

This leaves us with some pretty fundamental questions. What is inflation? What commodities are inflated, and why? How badly is inflation impacting people? What are the measures introduced in the spring statement? How far will the measures in the spring statement help to soften the impact? Let’s dive in…

What is inflation?

Inflation is a straightforward concept. The Office for National Statistics continually monitors the prices of over 700 items that people might regularly buy, from a loaf of bread to the cost of a holiday, and then compares them with the price of that same item one year ago. The average percentage change across the whole of those items is the current rate of inflation (1). This value is also referred to as the Consumer Price Index (CPI).

The thing to remember is that inflation isn’t an inherently bad thing, the Bank of England works with the Government to maintain a low and stable rate of healthy inflation of around 2%. The trouble is that right now inflation has reached 6.2%, over three times the target for healthy inflation (2).

So not only is it high, but it’s still climbing, and thus, unstable.

Why is there inflation?

Now, this is possibly the biggest and most complex question to answer, so we will try to keep the answer as straightforward as possible, as there are several contributing factors.

The first thing to recall is that to calculate CPI, the measurement of inflation, the prices of over 700 items are considered. This means that not necessarily every item on that the price of every item on that list is inflated, but certain items are undergoing particularly high levels of inflation, thus causing the overall increase beyond the healthy 2% level that we mentioned previously.

Right now, the most inflated prices of consumer goods are fuel, energy, food, and clothing, as illustrated by this handy chart from the ONS below.

Contribution to inflation of different categories of goods and services. Fuel costs represented under transport, and energy costs represented within housing and household services. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/february2022

These items are all essential for the day-to-day needs of people, and so the impacts of the current high levels of inflation are felt by people more so than if the cost of restaurants and hotels had become highly inflated.

There are two major factors contributing to the high levels of inflation we are currently seeing. Firstly, the ongoing crisis in Ukraine, and resultant exclusion of Russia from the global market, who are the world’s second greatest producer of both oil and gas (3, 4). This squeeze on the supply of oil and gas has driven up the prices of fuel and energy. The increase in the cost of energy on the international market has resulted in Ofgem, the UK’s energy regulator, raising the energy price cap, the maximum amount you can be charged by your supplier for being connected to the energy grid and the price per unit of electricity and gas, by 54% (5)

However, the second major cause of the current levels of high inflation is the continued disruption to global supply chains due to the ongoing Covid-19 pandemic. The Economics Observatory (an organisation that aims to bridge economic knowledge gaps between academic research, government, and the general public) explain how the pandemic has created a change of demand from services to goods, increased shipping costs due to increased fuel costs, and the combined disruptions of sickness and public health measures such as travel restrictions have all collectively created pressure on supply chains that have driven up prices (6).

How is it impacting people?

For those with the lowest incomes, this means making extremely difficult household financial decisions. This could be between keeping the house warm as we come out of winter, replacing school uniforms, or ensuring that there is food on everyone’s plate at home. The cost of doing all three of these things has increased significantly, and some families simply cannot afford to do all three.

An additional contributing factor to the pressure on the household finances of working people is the 1.25 percentage point increase in the rate of national insurance contributions (NICs) that was announced late last year. The Resolution Foundation, a think tank that focuses on how to improve living standards, explain how this tax burden falls largely upon the shoulders of working people and leaves additional sources of income such as rental income and private pensions untaxed (7).

The Spring Statement

Now that we have some context to the current cost-of-living crisis, we arrive at the spring statement delivered by the chancellor, and its measures aimed at cushioning people from some of the impacts of the current economy. We should also remind ourselves that the Spring Statement is one of two economic statements made by the chancellor to Parliament each year.

There are three major policies, designed to support those most in need during the current economic situation, for us to consider (8):

· The threshold at which people start to pay national insurance contributions has been increased from £9,880 to £12,570, in line with when income tax payments are started from.

· A 12-month reduction on fuel duty of 5p per litre of fuel.

· A £500 million increase to household support fund, distributed by local councils, for the 2022/23 financial year.

How far will these measures help?

Combined impact of changes to household incomes in 2022/23. Analysis by the Resolution Foundation shows that for working households, those with the most money will be hit hardest, while working households with lower incomes will receive the most benefit from the announced changes. https://www.resolutionfoundation.org/publications/inflation-nation/

What do the experts think on how each of these measures will help?

First, we will consider the increase to the threshold at which national insurance contributions start to be paid, in line with when basic income tax is paid, a move described as ‘sensible’ by leading financial advisor Martin Lewis (9). Analysis by the Joseph Rowntree Foundation, a charity that aims to solve poverty in the UK, found that despite a positive impact on working households by increasing the payment threshold, the failure to increase benefits in line with inflation, and the previous 1.25 percentage point increase in the rate of NICs, means that middle-income households of working age are £40 per year worse off, while a household in poverty of working age is £350 per year worse off (10).

With respect to the 5p cut in the rate of fuel duty, if the full 5p is passed on to the consumer at the pump, then the Resolution Foundation calculate that this could save the typical household that drives around £75 per year, but that this still only reverses 13% of the increases in fuel prices over the last year (11).

Speaking to the Local Government Chronicle, Martin Reeves, the finance spokesperson of the Society of Local Authority Chief Executives and Senior Managers (Solace Group), described how the measures in the spring statement, including the doubling of the household support fund, will ‘go some way to easing the financial pressures on households’ (12). He goes on to explain that the support measures were taking place in the context of growing caseloads with increasing complexity for local authorities and that at the local level there needs to be a strategy shift ‘from crisis support to long-term resilience-building’.

Conclusions

So, what’s the verdict? While the measures introduced by the chancellor in the spring statement have been recognised as going some way to support people through the current cost of living crisis, the overall verdict seems to be that it did not go far enough. The potential to raise funds from streams of income such as rental properties is still being left untouched by the government, benefits have not been raised in line with inflation meaning those dependent upon this support will continue to struggle, and there were no immediate measures to directly intervene with the cost of energy.

TL;DR

There is a cost-of-living crisis in the UK due to 30-year high levels of inflation, especially in essential goods such as energy, fuel, clothes, and food. The chancellor’s spring statement measures fall short of what is needed to help the most vulnerable people manage this crisis.

References

1. https://www.bankofengland.co.uk/knowledgebank/what-is-inflation

2. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/february2022

3. https://www.statista.com/statistics/264767/countries-with-the-largest-oil-production/

4. https://www.statista.com/statistics/264771/top-countries-based-on-natural-gas-production/

5. https://www.ofgem.gov.uk/publications/price-cap-increase-ps693-april

6. https://www.economicsobservatory.com/what-is-supply-chain-inflation-and-why-is-it-driving-up-consumer-prices-now

7. https://www.resolutionfoundation.org/publications/nationally-insured/

8. https://commonslibrary.parliament.uk/research-briefings/cbp-9505/

9. https://www.moneysavingexpert.com/news/2022/03/spring-statement-2022-national-insurance-rise-tax-cut-/

10. https://www.jrf.org.uk/press/600000-will-be-pulled-poverty-result-chancellors-inaction

11. https://www.resolutionfoundation.org/publications/inflation-nation/

12. https://www.lgcplus.com/finance/sunaks-extra-0-5bn-cannot-address-underlying-cost-of-living-pressures-23-03-2022/

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