Sunak tries to ease cost-of-living squeeze as interest rates rise | Economic Sciences

At 11am, regulator Ofgem increased the cost of the average energy bill by £700 a year. At noon, the Bank of England raised interest rates for the second time in a row and warned of rapidly rising inflation. Sandwiched between these two cost-of-living bombs, Rishi Sunak appeared in the House of Commons with the government’s attempt at damage limitation.

The chancellor said his £9bn package would eliminate the spike in energy bills made inevitable by rising global gas prices. Even so, the Treasury measures will cover only half of the expected increases coming in April. All households will be worse off, and charities warn that more children in Britain’s poorest households will go hungry as a result.

Sunak announced that all households in England, Scotland and Wales would receive a £200 discount on their bills in October. However, this is intended to be a temporary respite because the money will be recovered at the rate of £40 per year from 2023 onwards.

energy graph

That assumes wholesale power prices will decline in the interim period, which, as Sunak acknowledges, is by no means guaranteed. As it is, the top price is on track to rise by a further £200-£300 in October.

The other main measure was the refund of £150 of council tax bills on households in bands A to D in England, with the Treasury making money available to devolved administrations to reduce bills by similar amounts. Sunak says that 80% of households in England will benefit, although because council tax bands have remained unchanged for more than 30 years, many relatively well-off people will benefit.

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The Institute for Fiscal Studies estimates that only 56% of those living in properties in band A to D are in the bottom half of the income distribution, defined as disposable income after housing costs of less than £ 24,800 for a couple without children. Some will be in the highest income group.

There were alternatives. The government could have increased universal credit or increased the generosity of the warm housing discount, but chose not to. Given its current political problems, the government was willing to offer support to more of the most needy households but, as a result, the package attracted criticism for not being generous enough and for not directing enough support to those who will need it most in what will be a disastrous year for the standard of living.

Fears that spring 2022 could be a “perfect storm” for the cost of living were heightened by the Bank of England’s latest rate hike.

It was not simply that the Threadneedle Street Monetary Policy Committee voted to raise borrowing costs, but that a quarter-point increase to 0.5% was seen by four of the nine members as insufficient to stave off inflationary pressures. and they wanted a half-point raise instead.

Sunak began his statement to MPs by bragging about how well the economy was doing, citing falling unemployment and reduced government borrowing. The Bank painted a much bleaker picture, expecting the annual inflation rate to peak at over 7% in April, with the recovery from plan B Covid restrictions to be followed by a marked slowdown in the economy.

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The UK faces a triple whammy in the coming months: businesses and mortgage payers pay higher interest rates; prices rise faster than wages; and higher energy costs. Sunak’s package will ease the pressure, but not much.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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