Rishi Sunak’s £15bn cost of living package may only be a temporary plaster, the CEBR think tank warns.
CEBR says the measures will help struggling families in the cost of living crisis, but more would be needed next year unless energy prices fall back:
Under the support measures announced this spring (both in February and this month), bottom-income-decile households in England are estimated to receive just under £1,200 in help, more than £800 of which comes from the latest package. As such, the support announced will go a significant way in protecting the very poorest from the energy price shock.
However, further targeted support will likely be needed if prices do not fall in spring 2023, meaning that the sizeable spending commitments made so far this year may prove to be a temporary plaster.
CEBR also warn that handing a £400 energy bill credit to all UK households in October could push up inflation.
Richer households not in fuel poverty could spend the money on other items, driving up prices, they explain:
With better off households more able to absorb higher the cost of higher food and utility bills, much of the £6bn spending is likely to be unnecessarily burdensome on the public purse.
It may also risk stoking a certain degree of demand-pull inflation in 2023, a development that will be closely followed by observers including the Bank of England. Having said that, the support will be welcomed by those on moderate incomes, whose lifestyles are likely facing a considerable blow from continued energy price rises.
Rishi Sunak says he remains a “fiscal conservative” despite unhappiness within the Conservative party about the £15bn cost of living package he announced on Thursday to help people manage rising fuel bills.
The chancellor did not rule out further emergency relief next year as he conducted a round of broadcast interviews to discuss the measures.
The package of relief was more ambitious than predicted but Sunak was quick to insist he had not changed his politics.
“First and foremost I’m a fiscal conservative; I believe it’s incredibly important that I manage the country’s finances responsibly,” he said on Friday morning.
“That means, after suffering the shock we did, to get our borrowing and debt levels back on a sustainable trajectory.”
Here’s the full story:
Shares in energy companies have dropped this morning, as investors analyse yesterday’s 25% windfall tax on oil and gas producers’ profits.
Harbour Energy, the biggest UK North Sea oil and gas producer, have fallen 7.5%, leading the fallers on the FTSE 100 share index.
Electricity generators are also falling, after Rishi Sunak dropped a heavy hint that their extraordinary profits could face higher taxes too (see opening post). SSE (which runs wind farms and hydro-electric) are down 3%.
Centrica, which holds a 20% stake in the UK’s existing nuclear power plants alongside its North Sea oil and gas production arm, have dropped 5.3%.
Drax, operator of a large biomass power station in North Yorkshire, are down 4.5%.
Investec analyst Nathan Piper says:
In our view, this multi-year tax increase (from 40-65% overall) is likely to check investment in the UK North Sea, with a follow-on impact on jobs and production.
Piper points out that the new levy is structured to allow energy companies to recover much of the windfall tax back by investing more:
To some extent, Harbour, given extensive reinvestment opportunities, is able to mitigate the tax. The levy includes an uplift in current capex in an attempt to stimulate investment.
Rishi Sunak’s £15bn support package should help the UK avoid falling into a recession, analysts at Deutsche Bank say:
In a note to clients, Deutsche’s chief UK economist Sanjay Raja, says the £400 energy bill rebate and the ‘material benefits boost’ of £650 to the lowest income households will give a ‘modest’ lift to growth, of around 0.4% of GDP
Raja says the UK’s cost of living support is now above the average for Europe’s largest economies:
In total, Chancellor Sunak has now pushed close to 1.5% of GDP in support measures to help households through one of the worst income shocks since the Second World War. This is now, on average, above what has been announced across the Euroarea Big 4.
But he points out that much of the support won’t kick in until later in the year:
That will leave households to weather the oncoming real income shock for several more months without much added support.
Overall, however, the modest lift in GDP should support our view that the UK will just about avoid a technical recession around the turn of the year, though we still continue to think that intensifying headwinds leave the economy on the brink of one.
Chancellor Rishi Sunak has insisted he remains a “fiscal conservative”, despite rolling out £15bn of support yesterday, and not ruling out another one in the ufuture.
Asked if he is prepared to return with another emergency package next year even if it requires more borrowing and taxes, Sunak told BBC Radio 4’s Today programme:
“People can judge me by how I’ve acted over the last couple of years.
“I’ve always been prepared to respond to the situation on the ground, what’s happening to the economy, what families are experiencing and making sure we’ve got policies in place to support them through that.
“In terms of ‘is it one-off?’, what’s happening next year, I’d go back to what I said earlier. I do want people to be reassured and confident that we will get through this. We will be able to combat and reduce inflation, we have the tools at our disposal and after time it will come down.”
“First and foremost I’m a fiscal conservative, I believe it’s incredibly important that I manage the country’s finances responsibly. That means after suffering the shock we did to get our borrowing and debt levels back on a sustainable trajectory.”
But…..two-thirds of yesterday’s £15bn package will be financed by higher borrowing, with the energy profits levy raising £5bn.
The UK’s tax burden is heading to its highest level since Clement Attlee’s post-war government, as this chart from March shows, following the shock of the pandemic – which has also worries some senior Conservatives.
So, as Augustine of Hippo might put it, Sunak is keen to commit to fiscal conservatism, but not yet…
The Institute of Fiscal Studies says Sunak’s £15bn package is redistributive – meaning the poorest households will now be “approximately compensated” for the rising cost of living.
High earners will still be worse off overall.
That’s due to tax rises such as the health and social care levy [a 1.25% tax on earnings] and the freeze to income tax thresholds which will drag more people into higher tax bands.
Wealthy people who own a second home in the UK will actually receive £800 of support — because the £400 energy bill grant is applied to each household.
So if you own several properties, it would be a four-figure windfall.
Shadow chancellor Rachel Reeves says this is simply not right — and shows that the government have rushed the package out to distract from Sue Gray’s report into Partygate.
She told Sky News:
“If the Government hadn’t have been resisting Labour’s calls for a windfall tax and this additional support for months, the Government could have taken the time to get this package right.
“It is not right that if you own a second or a third home you should get this £400 payment multiple times. You can now get a situation where somebody who’s incredibly wealthy gets £400 on three or four occasions because they own so many properties.
“This is only happening because this package has been rushed through because the Government has been resisting this.”
Sunak argues that this universal payment is the best “practical” way to get help out there, and that the impact will be limited.
He told BBC Breakfast:
“Second homes account for one or two per cent of the property stock.”
According to the Department for Levelling Up, Housing and Communities’s English Housing Survey, English households owned around 495,000 second homes within the UK in 2018-19, out of the almost 25m homes in the UK.
So they’ll be collecting around £200m of support on their energy bills — unless they follow the chancellor’s lead and give it to charity…..
One criticism of the chancellor’s £15bn support package is that every household will receive £400, regardless of their wealth.
That’s because Sunak has decided not to claw back the existing £200 reduction on energy bills this autumn, and instead doubled it.
The chancellor says this universal payment is the best way to get help to everyone who needs it, including those on middle incomes who need support too.
But Sunak clearly doesn’t need the money –he and Indian heiress wife Akshata Murty made their debut on the Sunday Times Rich List last week, thanks to their £730m fortune.
So he’ll be handing it to charity.
And the chancellor suggests others who don’t need the extra support should do the same.
He tells Sky’s Niall Paterson:
“You, like me, can also give that money to charity if you don’t need it.
I’m sure you will, and set an example.
Rishi Sunak also says he feels ‘ very confident’ about the UK’s economic outlook.
The chancellor told Radio 4 that the surge in energy prices, and the UK’s tight jobs market, were pushing up inflation:
“We are experiencing inflation pressures from both a tight labour market, although that is something to celebrate, but also the energy price shock,”
“I’m very confident about the outlook for our economy over time.”
The chatter at the World Economic Forum this week was that some countries are likely to be pulled into recession by the shocks hitting the world economy — which could even lead to a global recession.
One investor told me that it would be ‘tight’ whether the UK avoided recession or not.
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
A day after announcing £15bn of fresh help for the cost of living crisis, Rishi Sunak is hitting the TV and radio studios to explain his screeching u-turn on an energy windfall tax.
Not that the chancellor sees it that way. Speaking on Sky News this morning, Sunak argues that he’s taken a pragmatic approach on taxing the surging earnings at the energy sector.
Sunak argues the government wanted to find a way to tax those profits fairly (as Labour have been pushing for for months), but waited for Ofgem’s estimate for energy bills this autum (they’re set to shoot to £2,800, intensifying the cost of living squeeze), before deciding the 25% levy on profits.
The chancellor argues:
It was right to wait until we had some more certainty about what would happen to energy bills in the autumn.
Shadow chancellor Rachel Reeves warns that the government simply took too long to act, when it was “blindingly obvious to everybody else” that help was needed.
And more could still be needed next year, she tells BBC Breakfast:
“I think the big question that still needs to be answered is how are we going to stop ourselves from being in exactly the same position this time next year?
“All economists are saying that the energy prices aren’t going down any time soon. So, what longer-term measures are the Government going to take to ensure we’re not back here this time next year?
Sunak also dropped a big hint that electricity producers (who avoided the ‘energy profits levy’) will face extra tax too.
Sunak says he thinks “extraordinary profits” are being made in that sector due to elevated gas prices due to war in Ukraine, so the goverment will “urgently look” at the scale of those profits and decide what to do:
We do have plans in place to reform that market.
France, Italy, Spain, Portugal and Greece have all taken steps to reform those markets.
We have a plan to do the same thing, Sunak says, so his team are figuring out how quickly they can do that and what the appropriate steps would be in the interim.
But…. if other countries have managed it, why is the UK behind? Our financial editor Nils Pratley says the Treasury simply started its work “too late” (here’s his analysis).
Chancellor Sunak also brushes aside concerns that the new package will be inflationary.
The impact will be ‘minimal’, he insists — much less than 1% — because most of the package is targeted at those most in need, and money is being raised (through the windfall tax, which could rais £5bn) to help pay some of the bill.
“The combination of those two things is the responsible approach”
And he also pledges that benefits and pensions should rise well ahead of inflation next year, when they are uprated in line with this September’s inflation reading, which could be as high as 10%.
That could push up the benefits bill by £25bn, Sky estimates:
Sunak doesn’t dispute that figure – saying his package is a ‘bridge’ to get people to that point next year.
- 1.30pm BST: US PCE price index inflation report for April
- 3pm BST: University of Michigan index of consumer sentiment