The pressure is mounting for Rishi Sunak – the question is when will he crack? After the Bank of England warned the economy was heading for a recession caused by the cost of living crisis, with inflation set to top 10% by the autumn, demands on the chancellor for a fresh package of emergency support for struggling families have reached a crescendo.
Threadneedle Street forecasts the second-biggest income squeeze since modern records began in 1964, with inflation racing to the highest level since the 1980s.
So far, Sunak has shown reluctance to act. Despite the bleak outlook, the view from No 11 is that time is on the government’s side for two key reasons.
First, lower energy use over the summer could take some of the sting out of last month’s record 54% rise in the Ofgem price cap. The current limit applies until October, buying him some time. Treasury sources say Sunak is keen to wait and see how volatile wholesale prices progress between now and August when the energy regulator announces its next cap period from October.
Second, the chancellor is keen to talk up the £22bn in support for this financial year, including in his spring statement and energy rebate package. All told, the Office for Budget Responsibility reckons half the blow to household finances is covered and a third of the overall hit to living standards.
However, the economic outlook is only getting worse. We are already halfway through Ofgem’s six-month monitoring period for wholesale energy prices used to inform the next price cap and the picture is clear. Gas prices may have fallen back in recent weeks but remain elevated. The Bank of England expects bills to go up by 40% to about £2,800. On top of the April rise that is an eye-watering hit for families with winter approaching.
Observers say Sunak is most likely to announce further support in August when next cap is announced. This could include ramping up the repayable loan to cover bills due in that month, or increasing the warm homes dscount open to low-income households.
That may not be enough. A steady stream of negative economic updates is in the post and pressure is mounting for a mini-budget before then. Official figures this month are likely to show inflation reached 9% in April, the highest level for 40 years. Consumer confidence has collapsed, while monthly retail sales have tumbled.
Sunak has argued he cannot do everything, though after the billions of pounds deployed during the Covid pandemic the argument is paper thin. It also neglects that different choices could have been made to help poorer families, rather than middle and higher earners, within the same overall spending envelope.
Top of the bill would be to raise the value of benefits. Viewed as the most powerful way to help the poorest households, economists say Sunak could bring forward a 7.5% rise for pensions and benefits due in April 2023.
Dave Innes, the head of economics at the Joseph Rowntree Foundation, said that with inflation heading towards 10%, compared with benefits that rose by just 3% in April, that the poorest in society faced the biggest real-terms cut to benefits in 50 years. Making up for the gap could cost about £15bn, according to the Resolution Foundation.
“Clearly that is placing a huge strain on people’s financial position who were most vulnerable going into the cost of living crisis and that’s an unacceptable situation,” Innes said.
Sunak has said further state support could risk adding to inflation, but that is a disingenuous position. The Bank reckons four-fifths of the inflation shock comes from outside the UK. The Bank’s governor, Andrew Bailey, said on Thursday that the poorest families, and workers in the weakest position to bargain for higher wages, would pay the heaviest price. The impact of Covid and the war in Ukraine are the primary drivers of inflation, not public spending and benefit claimants.
James Smith, the research director at the Resolution Foundation, said action to raise benefits was the best tool for the job, when the poorest 10% of households spend double as a share of their income on essentials like energy, fuel and food than those in the top 10%. “There’s a choice that can be made about who is supported,” he said.
Leading business groups are increasingly worried that the lack of action could lay the conditions for a recession. Company bosses are likely to take matters into their own hands in the coming weeks, as they suffer their own energy crisis; on top of tax hikes, staff shortages, Brexit disruption and supply chain issues. Jobs and investment could suffer.
After weeks of scandal, Sunak’s battered public image may be at rock bottom, but a less-than-awful Conservative local election round may help the chancellor’s case for biding his time. However, with families increasingly suffering, and the economy on a slippery slope, every day without action will make for a more challenging period ahead.
