The Cost of Living Crisis in Scotland: analytical report

Chapter 2: International Policy Responses

Introduction

This section examines policy responses taken by governments in response to rising costs and falling real term incomes. It begins by providing the context for these responses (in other countries) by describing public attitudes to rising inflation and costs.

Public attitudes to rising inflation and costs

Public perceptions globally illustrate levels of concern with the cost of living crisis. In July- August 2022, The Open Society Foundations commissioned polling of more than 21,000 people living in 22 countries to gather public opinion on key issues facing the world today.^[5] Almost half of respondents (49%) named inflation and cost of living as one of the top-three challenges facing their family/community and country today. Cost of living was ranked as a top-three concern in relation to people's family / community in Singapore (76% of respondents), Great Britain (70%), France and Serbia (58%), Poland (57%), Germany (45%) and Japan (46%).

Online polling conducted by Ipsos MORI in July 2022, across 28 countries, found that, on average, 40% of respondents expect their disposable income to fall in the next year. Expectations of falling incomes was highest in Turkey (58%), France (55%), Great Britain (54%) and Hungary (50%), where at least half agree that this will be the case.^[6] From the same polling, the 'state of the global economy' was considered to be the biggest contributor to rising prices (76%), followed by the consequences of the Russian invasion of Ukraine (72%). European countries are more likely to see Russia's invasion of Ukraine as a contributing factor to inflation. It is ranked as the biggest driver in Belgium, Germany, Denmark, France, Hungary, the Netherlands and Sweden. COVID-19 is ranked as the biggest contributor predominantly in Asian countries.

Rising prices for food, fuel and energy have led to protests and strikes in some European countries.^[7] In March 2022 in France, HGV, taxi, coach and construction workers protested over fuel prices.^[8] In Spain, lorry drivers went on strike over fuel prices and in Italy (also in March 2022), thousands of cities switched off the power at some their major tourist attractions to protest against increasing energy costs.^[9] During the summer in the UK (July – August 2022) a number of sectors took part in industrial action as staff pushed for pay rises and better working conditions. This included, in Scotland, a strike by the refuse workers after unions rejected a pay offer and nationwide rail strikes.^[10]

A YouGov European cost of living tracker, set up to monitor public attitudes across seven European countries, (Britain, France, Germany, Spain, Italy, Denmark and Sweden) shows that the public across Western Europe have negative attitudes about their governments' approach. Across all countries polled, at least 6 in 10 say the government is doing badly at managing the cost of living. The highest levels of disagreement (82%) are in Italy and Britain. There are slightly higher levels of satisfaction in Denmark and Sweden, where 27% agree their government is doing 'well'. ^[11]

Policies to address rising inflation in other countries

Since September 2021, governments have put in place a range of policies in response to high levels of inflation.^[12] While the policies vary in scope, the majority focus on supporting people with increased energy prices.

Table 1 summarises policy interventions (both proposed and enacted) by a range of other countries in response to rising inflation, with a focus on high income countries particularly in Europe.

As mapped across the top row of the table, these can be broadly grouped into nine different types of response, with the aim of reducing people's costs and outgoings, increasing income and supporting businesses. The next section will discuss these policies in greater detail in terms of the speed and the nature of the response.^[13]

To note, the table below considers the response from the UK Government. However, there are measures in place in Scotland that are not available anywhere else in the UK. The Scottish Government will have allocated almost £3 billion in measures that will help to mitigate the impact of the cost of living crisis on households. This package spans a range of support for energy bills, childcare, housing, health and travel, as well as social security payments.

Table 1: Summary of Policy Interventions in Comparator Countries

	Policy
Country	Reduced energy tax/VAT	Energy retail price regulation	Energy wholesale price regulation	Cash transfers to most affected groups	Windfall tax profits	Energy business support	Travel discount	Fuel reduction	Rent cap or freeze
Belgium	✔	✔	✗	✔	✔	✔	✗	✔	✗
Canada	✗	✗	✗	✔	✗	✗	✗	✗	✔
Denmark	✗	✗	✗	✔	✗	✗	✗	✗	✗
Finland	✔	✗	✗	✔	✗	✔	✗	✗	✗
France	✔	✔	✔	✔	✗	✔	✔	✔	✔
Germany	✔	✗	✔	✔	✔	✔	✔	✔	✗
Ireland	✔	✗	✗	✔	✗	✗	✔	✔	✗
Italy	✔	✗	✗	✔	✔	✔	✗	✔	✗
Luxembourg		✗	✗	✔	✗	✗	✗	✗	✔
Spain	✔	✔	✔	✔	✔	✔	✔	✔	✔
Sweden	✔	✗	✗	✔	✗	✗	✗	✔	✗
United Kingdom	✔	✔	✗	✔	✔	✔	✗	✔	✔[14]

International Analysis - Speed of response

In considering how the UK compares to other countries, it is important to consider the speed of the response. As soon as the crisis began to unfold, in September 2021, some countries began to respond in the form of announcements about forthcoming support and formal actions. In September 2021, Spain, which was one of the first countries to take action, passed a Royal Decree Law to mitigate the impact of escalating natural gas prices on retail gas and electricity markets, with the aim of reducing customers' bills. This was updated again in October 2021 and included additional measures aimed at helping vulnerable customers.^[15] Also in September 2021, Italy approved short-term measures to help offset rising prices. This included a reduction in VAT on gas bills and an increase in the 'social bonus' for families in economic difficulty.^[16] In December 2021, it was announced that in Ireland (in 2022) all domestic electricity customers would receive €100 credit.^[17] In January 2022, Luxembourg increased its cost of living allowance by €200 to protect vulnerable households from rising prices. Subsequent measures were also announced in February and March.^{[18] [12]} In January 2022, Germany announced a package of one time grants to low income households that were paid over the summer of 2022.^[12]

As such, the UK government was slower to respond. Initial support measures were only announced in February 2022, which came after months of higher bills, public concern and calls from groups representing vulnerable households and small businesses to act.^[19] Significant further packages were then announced in March, May and September 2022.

International Analysis – Type of response

While Table 1 outlines the range of responses, it does not show the scale and detail of individual policy responses within different countries. For example, the nature of broad and targeted support, short- versus long-term response and the use of taxation on the revenues of electricity companies.

Broad and targeted support

The UK government, like most other countries, are providing a mixture of broad and targeted support. Broad-based support measures (such as the £400 payment to every household, a price cap and council tax discounts) are considered to be 'broad' as they benefit households across the income distribution. Similar initiatives are in place in Belgium (all households received a 'heating premium' of €100 by July 2022), in Germany (a one-off payment of €300 was provided to all workers in September 2022) and in Ireland (every household is due to receive a €600 energy credit split into three payments over winter in 2022-2023).^{[20] [21]}

Broad based measures can be criticised for not targeting those who spend the most on their energy, or as with capping price rises (like in the UK and France), it may reduce the incentive for households to use less energy.^[22] Also, by targeting the intervention at a household level it means that those with a second home may receive the payment more than once.^[23] In July 2022, polling conducted in the UK by The Social Market Foundation, found that the majority of respondents (6 in 10) would like to see more targeted financial support for households who are struggling with rising costs.^[24]

The most common intervention across different countries has been to provide targeted financial support to groups (mainly in the form of one-off payments) who are most affected by the crisis, such as those on lower incomes, and pensioners. For example, in Italy, a one off €200 bonus for 28 million workers and pensioners with an income lower than €35,000 was provided.^[25] In Spain, a package of measures announced in June included a 15% rise in pensions for particular groups such as widows and the disabled and a €200 payment to some groups of people on low incomes.^[26] In Denmark, the government provided a tax-free 'heat cheque' to low income households.^[27] Also in Denmark, senior citizens who qualify for social security are eligible to receive 5000 DKK tax-free (about £580), half of which will be made available by the end of September. A one-off, tax-free amount of 2000 DKK (about £230) will be made available for citizens who qualify for student support with disability or single parent allowance. In Sweden, the housing allowance for families with children is to be increased by 25%.^[28] For further detail on the packages of financial support within each country, including timings and costs, see Annex 1.

However, not all targeted support may go to those who need it the most. For example, as introduced in the UK, fuel reductions will benefit those who use more fuel and this tends to be higher income households.^[23] This compares to countries like Germany, Ireland and Spain who also provided discounts on public transport (see Box 2).

Windfall taxes

Another approach that has been proposed and/or enacted by 5 countries in Table 1 is 'windfall tax'. Windfall tax is a term used to describe a one-off tax imposed on companies that have made sudden and significant profits due to external circumstances such as war or a pandemic. There are however differences across the countries. In Spain, the temporary tax will be applied to energy companies and banks.^[29] The UK government introduced a 25% 'Energy Profits Levy' (windfall tax) in May 2022 on North Sea oil and gas operators but chose not to enhance it further in this UK Growth Plan.^[30] It is reported that there are currently no plans to extend Windfall tax in the UK, although that may change in future. Public opinion polling, conducted by YouGov in the UK, suggests that two-thirds feel there should be a windfall tax on oil and gas companies to help fund the Energy Price Guarantee.^[31]

At the end of September 2022, EU Ministers agreed on a package of emergency measures, including windfall tax for certain energy and fossil fuel companies. Further measures include, plans to reduce demand for energy including a mandatory target to reduce electricity consumption by 5% during peak hours. ^[32] They will apply from 1 December 2022 to 31 December 2023. The energy reduction targets will apply until 31 March 2023.

Short and long-term focus

In the short term, governments (including the UK) are providing direct payments to help people and businesses manage their rising costs.^[33] However, longer term policies should consider the root cause of rising prices in order to try and reduce future vulnerabilities and increase resilience. Across Europe, actions such as trying to provide more direct ways to control the price of electricity, (through nationalising the energy provider like in France), reducing energy use (with EU members agreeing to reduce gas consumption by 15% between August 2022 and March 2023)^[34] and providing funds to help people make their homes more energy efficient give consideration to wider structural issues.

For example, energy efficiency measures and incentives for take up differ across countries.^[35] In order to tackle energy efficiency, most European countries have used a combination of policies. Including: providing households with grants to pay for improvements, loans to meet high up-front costs, providing clear advice and support to consumers and setting minimum standards that force house builders to use more energy efficient products.^[36] (See Annex 1 for a review of European energy efficiency policies, including Scotland). Analysis provided by the Institute For Government, in September 2022, provides suggestions for how the UK can draw lessons from other countries to help improve energy efficiency.^[36]

Making international comparisons

It is important to acknowledge, when comparing these policies, that there are some key similarities and differences between the countries. Context is an important factor when considering the potential value of policies and their mitigating impact. Various factors may be influential when considering similarities and differences, including the size of the population, geographical terrain, size of the economy, environmental climate, and differing political and social attitudes. For example, whilst some countries may seemingly be aligned in terms of some of these factors (e.g. population, economic size), they may have important differences on other measures. For example, they may have a different trajectory on societal wellbeing measures.^[37]

Countries also differ in their dependence on energy and in their energy markets. Countries in Western Europe use significantly less Russian natural gas than those in Eastern and Central Europe.^[38] Additional factors such as different market structures (the pass from wholesale to retail prices), state ownership of the energy provider (like in France), public funding of services, social welfare schemes and levels of taxation (on wages and goods) will all play a part in the way that governments have been able to respond. A further example is that some countries already use 'social tariffs' in which a defined, cheaper tariff is offered to the most vulnerable households. This form of targeted assistance supports those on benefits or with a low income. In Belgium, almost one-fifth of households benefit from the tariff.^[39] Collectively, this demonstrates how the circumstances in Scotland (and the UK) are different to other countries. Further, that levels of inequality and therefore the disproportionate impact that cost rises will have on those groups most negatively affected by rising costs will vary by country.

Acknowledging some of these factors, Box 1 and 2 describe in greater detail the range of measures introduced by France and Germany in response to rising costs.

Box 1: Measures introduced in France^[40]

Electricity and gas: In France, the state owns 84% of EDF^[41] (the energy provider that supplies households with gas and electricity). This gives the French government greater control to cap energy prices. As such, energy price rises will be capped at 4% until the end of 2022 and then at 15% in 2023.

Fuel subsidy: Fuel rebate (on petrol/gasoline and diesel) to increase from €0.18 per litre to €0.30 in September and October, before falling in November and December to €0.10. This is applied automatically at all fuel stations in France.

Pensions: The index point for pensions will be raised by 4% in September 2022. This covers roughly 14 million people in receipt of a French pension.

Abolishing the TV license fee: The annual TV license has been scrapped. It was €138 per household, for about 23 million households.

Tripling the Macron bonus: The maximum annual bonus – which is exempt from income and social security taxes – will be tripled. This is a one off, tax-free pay-out that can be given to workers by their employers, if they choose. Companies will be able to pay up to €3,000 to their employees (and up to €6,000 for those with a profit-sharing scheme). The bonus can be paid between 1 August and 31 December 2022.

Rent cap: Rent increases to be limited to 3.5% per year for existing tenants. Some cities already have their own rent control schemes but the 3.5% cap is nationwide. The cap concerns annual rent increases falling between July 2022 and June 2023.

Housing allowance: Those who benefit from personalised assistance for housing will see that increased by 3.5%. This affects those qualifying for governmental financial assistance with rent, typically low income households.

One-off payments: €200 to 5.8 million low income individuals (who earn less than €2,000/month), plus €100-200 one-off payments to around 12 million vulnerable households.

Social benefits: Income support for the unemployed and underemployed will rise by 4%. ^[42]

Reducing gas demand: an energy 'sobriety' plan which includes specific measures for different sectors. Including, banning lit billboards between 1:00am and 6:00am and encouraging the public to reduce their shower time and turn appliances off when they are on standby.

Box 2: Measures introduced in Germany

Germany has a federal democracy.^[43] The Federal Government agreed two relief packages by March 2022. Measures included:

Tax cuts/benefits: including a rise in the tax-free allowance to €10,347 (+€363), and the employee allowable expenses lump sum to €1,200 (+€200). Also, increased tax benefits for those commuting further than 21km.

Increase in heating allowance: Students, trainees and those on housing benefit are eligible. Single person households receive €270; a two-person household €350; each additional resident €70. The subsidy is paid to eligible recipients of housing allowance by end of the year and before the adjustment to heating bill instalments.

Support for families and low earners: a one-off payment of €100 per child to all recipients of child allowance. Recipients of non-contributory benefits (Universal Credit) to receive an additional €100 payment, on top of €100 announced previously. Non-contributory benefits also to rise with energy price inflation in January 2023.

One-off payment (energy price lump sum): A one off €300 (taxable) energy allowance paid to all workers (including self-employed).^[44]

Fuel tax reduction: fuel tax was lowered to the European minimum between June and August 2022.

Travel discount: Between June and August 2022 people could travel on local and regional buses and trains (not long distance) with a €9 ticket. The number of people using public transport in Germany [in July] has risen by 74% over the same period last year. The rise is attributable for the most part to the introduction of the €9 ticket.

Energy efficiency: Launch of a campaign to improve energy efficiency in homes and businesses.

In September 2022, a third relief package was announced in order to protect households and businesses from rising gas prices until Spring 2023.^[45] This included:

• A temporary cap on gas and electricity prices and to remove the gas levy on consumers that was due to come into place on 1^st October
• Levies on windfall profits made by the electricity market
• One off payments for pensioners (€300) and students (€200)
• Increased child benefits in 2023 and 2024
• Housing benefit reform to provide targeted support to low income households from 2023

Conclusion

In response to rising costs, governments have provided a range of broad and targeted support to people through directed payments and also by reducing the costs of transport and housing. Initiatives which make public transport more affordable will help those who are struggling with rising fuel costs. Rent caps and freezes help to minimise costs for people and reduce inflation.^[46]

In considering how the UK response compares to other countries, there are two areas of focus - the speed and the nature of the response. Governments from comparator countries were quick to respond, some as soon as September 2021, as the crisis began to develop. Considering the nature of broad and targeted support, most governments have offered a suite of measures that are universal (such as a payments to all households and capping rises to energy bills) and also targeted (e.g., one-off payments to particular groups). These have a beneficial, short-term impact. Longer term initiatives include schemes to make homes more energy efficient, energy 'sobriety' schemes, and EU initiatives to impose windfall taxes and reduce the reliance on Russian gas.