By Susan Pashkoff
27 May 2022 updated 28 May 2022
If you were looking for long-term solutions to the problems in the British economy, you would have been disappointed with Rishi Sunak’s package. He stressed the package was based on the Tory government’s perceived tools of an independent monetary policy (i.e the Bank of England), fiscal responsibility and supply-side activism would be used to combat the cost-of-living crisis.
However, none of Sunak’s measures will actually have a long-term impact on the structural problems in the British economy, especially relating to working-class incomes, based on and derived from the undermining of the safety net of welfare benefits through the way Universal Credit (UC) was set up and decades of stagnation in wages and living standards both caused by austerity measures introduced under George Osborne and further cemented by various Tory governments.
Sunak argued that changes since the Spring Budget in March warranted this increased fiscal spending; these were:
- the Ukraine War
- concrete information on winter energy costs – despite the fact that the Office of Budget Responsibility had already predicted the energy cap would be at £2,800 last March.
- inflation growth had already exceeded expectations warranted the increased fiscal spending.
So he argued that while this is an international problem, the situation in Britain can be addressed somewhat to ameliorate the position of the “most vulnerable”. He didn’t mention Brexit and the rising costs of imports, they are also specific British components to rising prices.
Sunak’s measures targeted those with the lowest incomes, specifically those dependent on benefits. However, this package, consisting of one-off payments to households (not individuals), is essentially a sticking plaster on an open gaping wound.
The roots of the issue derive from austerity measures leading to a stagnant economy. The Covid pandemic further weakened an economy weakened by government policy. It created further problems through a general lowering of incomes as neither the furloughs nor the £20 uplift to Universal Credit (UC) kept wage incomes afloat and further impacted both working conditions and the precarity of employment.
However, in an extremely dire situation where inflation is eating up incomes and leaving people with horrific choices between eating and heating, this is a desperately needed sticking plaster.
According to the Resolution Foundation:
“Yesterday’s measures are progressive, with a set of universal payments to all households complimented with large payments for those on means-tested benefits and pensioners. Figure 1 shows that twice as much of the £15 billion package is going to households in the bottom half of the income distribution as the top half. The average gains from yesterday’s announcement are £823 across the poorest fifth of households, compared to £500 for the middle fifth of households, and £296 across the richest fifth…”
Previous measures by the government were clearly insufficient to help those dependent upon fixed incomes. Benefit and pension increases were already far below the rise in inflation using all indexes. This is partly a result of the fact that the increase is calculated on the basis of figures from the previous September – before inflation had really taken off. Moreover, these increases are determined by increases in the Consumer Price Index (CPI) which is a very poor reflection of the consumption patterns of the working class, especially those on fixed incomes. The higher Retail Price Index (RPI) is a rather more accurate index.
So, what did the government offer?
Sunak offered a £15 billion influx of funds targeted to those households who were especially exposed to the rapid rise in the cost of living in Britain, so three-quarters of this support is going to the most “vulnerable” households. This targeted support helps with rising energy prices but does not address rising food prices which are the other most significant component of this rapidly rising inflation.
These households were ‘vulnerable’ in the first place is due to successive Tory government’s economic policies which eroded the social welfare safety net and stagnated wages which were eroded by rising prices of energy and food.
The government offered a one-off £650 lump sum to all those that already receiving Universal Credit; this is expected to impact 8 million households and will be paid in July. This is very welcome, but it does disadvantage families with larger numbers of children as everyone gets the same amount irrespective of size. As such, since these households are often headed by lone mothers, they are losing out compared to those families that are smaller or composed solely of individuals.
According to the Women’s Budget Group:
“The one-off payment will also be insufficient for larger families with children, who are facing increasing costs with food and energy but no additional support compared to single people or couples with no children. If the Treasury fails to address these issues, we could see people, in their most vulnerable moments, left behind.”
For 6 million people on disability benefits, a one-off payment of £150 to help with covering rising energy prices that arise due to the specific needs of disabled people (e.g., medical machineries like breathing apparatus that need electricity to run or additional use of cleaning equipment). These one-off payments are not mutually exclusive, so that means that disabled people on UC will have a lump sum increase of £800. The funds will be sent out by the DWP to those on UC.
Those still on Legacy Benefits (predominantly disabled people) and those trapped by the UC Benefit Cap (predominantly women with limited or no access to child care) are included in the £650 one-off lump sum payment. These two groups are without a doubt the most impacted by the increased cost of living. The government has been trying to force those on legacy benefits onto Universal Credit, but not everyone has switched over.
Moreover, while the £650 to those on UC is extremely helpful; this will not be available to those new applicants to UC. The government seems to be assuming that unemployment will not be increasing or that people’s current conditions will remain unchanged.
For those only receiving the housing benefit component of UC, £500 million will be provided to the Household Support fund that is administered by Local Authorities to cover increasing costs due to energy prices rising.
For 8 million pensioners who already qualify for a winter fuel allowance, there will be a one-off £300 cost of living winter fuel payment. The government also raised the fact that the pension credit available to pensioners is not being claimed. The triple lock will be applied to the state pension.
Finally, the previous measure announced in the Spring Budget of loans available for the amount of £200 (to be repaid to the government over 5 years) has become a grant and upgraded to £400. This is obviously a positive change.
The idea of making a loan to cover their increased costs of heating and repayment at RPI of inflation was actually an incompetent policy. This is a universal payment that will go directly to the energy companies towards household bills irrespective of where people reside; so if you live in Scotland or in Cornwall you get the same £400 despite differences in the amount of heating/energy you use.
There was no further increase in the far too low minimum (national “living”) wage to help those barely surviving this cost-of-living crisis. For the increasing number of those in work also claiming benefits, If they are already claiming UC, there is the one-off payment of £650 and the possibility of payments from local authorities if they are eligible for housing benefits solely. Those that earn too much to receive UC or even the housing benefit component – or those who don’t know they are eligible received little help beyond the £400 grant applied to increased energy bills.
£5 billion of these funds are to be raised by a 25% Windfall Tax (Energy Profits Levy) on excess profits of energy producers which will last until energy prices fall back into line with the cost of production. According to Sunak, the purpose is two-fold. The first is to bring profits more in line with the cost of production increases. Second, this tax provides £5 billion of the increased government expenditure to help with the cost of living crisis. However, this tax is combined with a subsidy to energy producers as an incentive for reinvestment in Britain. In effect, this will encourage increased production of fossil fuels rather than sustainable energy investment.
According to the Institute for Fiscal Studies:
“The new energy profits levy of 25% – much higher than the 10% Labour had proposed – takes the overall tax rate on North Sea oil and gas profits from 40% to 65% from now until December 2025 (or sooner ‘if oil and gas prices return to historically more normal levels’). That is a much higher rate than is paid by onshore companies, but broadly typical of the historical rates of North Sea taxation since the 1970s.
Far from this tax rise discouraging investment in the North Sea, a new ‘super-deduction’ means that North Sea investment will be massively subsidised while the higher tax rate is in place.”
According to Sunak, this subsidy for reinvestment provides “relief” for oil and gas companies who will get a subsidy paid by the government on reinvestment of 90% of the value of the investments so that the majority of the company’s costs of further investment will be covered. The government will cover the overwhelming majority of the risks of investment rather than energy firms. This subsidy while we are supposedly trying to decrease the production and generation of fossil fuels in the face of the climate crisis is clearly absurd and counterproductive.
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