The Cost of Living Crisis in Scotland: analytical report

Chapter 3: Analysis of the UK Government's Response

Introduction

This chapter of the report examines key policy interventions announced in 2022 by the UK government to help address the cost of living crisis. There may be further developments in the coming weeks and thus the information in this chapter relates to the period up to the end of October 2022. It describes the content of the packages and summarises analysis by a range of policy and research organisations including; Institute for Fiscal Studies (IFS), International Monetary Fund (IMF), Institute for Public Policy Research (IPPR), Joseph Rowntree Foundation (JRF), the Resolution Foundation and the National Institute for Economic and Social Research (NIESR).

UK Government Cost of Living Support Package

On 26 May 2022 the Chancellor of the Exchequer announced a Cost of Living Support Package in the UK Parliament.^[47] The package included the following key measures:

• All households with an energy meter will receive £400 of support with their energy bills through an expansion of the Energy Bills Support Scheme.
• More than 8 million households on means-tested benefits will receive a payment of £650 in 2022, made in two instalments.
• Pensioner households will receive an extra £300 this year to help them cover the rising cost of energy this winter.
• Around six million people across the UK who receive disability benefits will receive a one-off payment of £150 in September
• To support people who need additional help, the UK Government is providing an extra £500 million of local support, via the Household Support Fund.
• In addition, the Chancellor committed, subject to the Secretary of State's review, that benefits will be uprated in April 2023, by September's Consumer Price Inflation (CPI)^[47]

The package of measures represented a significant financial intervention comprising over £15bn of targeted support to UK households. A number of reports were published that analysed the strengths and weaknesses of the package and how it would affect different groups. Report findings indicated a number of key themes that are summarised below.

The package of measures is broadly progressive. The Resolution Foundation calculated that twice as much of the £15 billion package would go to households in the bottom half of the income distribution as the top half.^[48] However, the support package does not take into account individual household circumstances. This means some groups will do better from this package of lump-sum payments than others as the system of flat payments does not reflect the different levels of need within the benefit system or different levels of energy usage. For example, larger households will receive the same lump sum payments as smaller households despite having higher costs.The Resolution Foundation state that large families face the greatest risks of severe fuel stress this winter. Among working age households receiving means-tested benefits, households with three or more children will see energy bills pushed up by £500 plus a year more than those without children, but will get the same one-off payment. ^[49]

The support package does not recognise the diversity of need amongst disabled people and their carers.Organisations such as SCOPE^[50] and Disability Rights UK^[51] have been quick to identify the need for more tailored solutions, rather than blanket payments, which recognise, for example "that disabled people also often need more heating to stay comfortable, extra electricity to charge assistive technology devices and petrol to get about due to limited transport options".^[52]

Households that narrowly fail to meet the eligibility threshold for means-tested benefits will not receive an additional £650 payment and be worse off than similar households.The flat rate amounts apply in full to those entitled to very little in benefits, and yet not at all to those whose income is very slightly too high to be eligible, meaning significant inequity in the treatment of very similar households.^[53]

The support package announced financial support to better off households. For example, there are a large number of relatively well-off pensioners who will receive an extra £300 (in addition to the £400 payment that all households will receive). Around 3.7 million UK pensioner households in the richest half of the population will receive payments.^[48]

The interventions in the package provide short-term support.IPPR referred to it as a 'sticking plaster' and suggested further work is needed to 'future proof current homes' and 'ensure our safety net is fit for purpose'.^[54] It is also worth noting that there will be a 'cliff edge' for many families when the extra payments are no longer available/have run out.

UK Government intervention on energy bills

On the 8^th September 2022 the UK Prime Minister set out a package of energy relief for households alongside support for businesses.^[55] The Prime Minister also announced plans for energy reforms, with the ambition to make the UK a net exporter of energy by 2040. The package is currently funded through higher government borrowing rather than a windfall tax and was un-costed at the time of the announcement although the subsequent UK Growth Plan costed the package at £60 billion over 2022-23. It should be note that the cost is highly uncertain as it is dependent on the future path of international energy prices. The package included three key measures:

• An Energy Price Guarantee: Typical household energy bills capped at £2,500 per year. Initially this was intended to remain in place for the next two years but a recent statement by the new Chancellor has indicated that this guarantee will only be in place until April 2023. The price guarantee already takes account of the £150 removal of green levies. Together with the previously announced £400 energy price rebate, this means that bills will remain capped at around £2,100 over this winter for a typical household.
• Support for Businesses: Businesses (including charities and public sector organisations like schools) will now pay the same energy prices as households for six months. In three months' from the announcement, there will be a review to consider how to provide ongoing focused support to vulnerable industries, such as Hospitality (further details relating to business support were announced on the 21^st September – see section below).
• Supply-side reforms: This includes lifting the current moratorium on fracking, launching a new oil and gas licensing round, speeding up the deployment of clean and renewable energies and a new joint Government and Bank of England 'Energy Markets Financing Scheme'. The intended purpose of these supply side reforms is to secure domestic energy supplies and increase energy resilience with the ambition to make the UK a net exporter of energy by 2040.

Research and policy organisations, that published reports analysing the package, raised a number of key points regarding its likely effects. First, that the Energy Price Guarantee is likely to have a positive impact on household finances and support demand in the economy in the short term.Capping energy prices, rather than raising the Energy Price Cap in line with the cap announced by Ofgem in August 2022 will save the typical household £1,074 on their energy bills over the next six months.^[56].

Secondly, that the Energy Price Guarantee may reduce the inflation rate in the short term but this might come at the cost of potentially prolonging elevated inflation and/or higher interest rates. Initial analysis by the Resolution Foundation suggested the guarantee will soften future pressures on incomes by reducing short-term inflation by around four percentage points in January 2023 (rising to almost six percentage points for the poorest tenth of households). It is estimated that an extra one per cent on interest rates would add around £11 billion in public borrowing in the first year. ^[57]

Thirdly, the Energy Price Guarantee is untargeted.The Resolution Foundation argued that while benefiting those who need to use more energy, the policy is not well targeted at those on low incomes who will struggle most to cope with higher costs. Half of the funding would go to the top half of the income distribution. Higher income households typically use more energy, so the top fifth may save around £1,300 this winter from the guarantee compared to £1,100 for the lowest income fifth.^[57]

Analysis also suggested that further UK Government targeted support will be required.Scottish Government modelling estimates with the price cap increasing to £2,500 for a typical household there will be around 860,000 (35%) fuel-poor households in Scotland, of which 600,000 (24%) will be in extreme fuel poverty, from October 2022.^[58] On 22 SeptemberJRF published analysis looking at the cost rises facing low income working-age households on means-tested benefits this tax year compared to last tax year and found they face a gap of £450 between now and April just to keep up with predicted price rises.^[59]

As with the May 2022 cost of living support package, the Energy Price Guarantee provides support in the immediate but not longer term. In particular the IFS argues that the Energy Price Guarantee fails to support longer term measures to reduce energy consumption or support more sustainable sources of energy.^[60]

The current package is funded from higher borrowing rather than alternatives such as enhanced windfall taxes on energy producers. The Resolution Foundation argued that the UK government was asking future taxpayers to accept a large and very uncertain, bill to help today's energy bill payers. The Foundation argued that more could have been done to reduce the pressure on tax and bill payers by addressing the windfalls some energy companies are seeing. ^[56] It should be noted that future UKG plans are unclear at the time of writing and that current decisions about windfall taxes may change.

UK Government support for businesses

On the 21^st September 2022 the UK Government published further detail of how it would support businesses through the energy price crisis. The Energy Bill Relief Scheme^[61] will provide support for non-domestic consumers across the UK in the form of a Government supported wholesale price. The scheme has the following key features:

• it will apply to fixed contracts agreed on or after 1 April 2022, as well as to variable and flexible tariffs and contracts. The level of price reduction for each business will depend on their contract and circumstances
• the UK Government will set a Supported Wholesale Price – expected to be £211 per MWh for electricity and £75 per MWh for gas. This is less than half the wholesale prices anticipated this winter. Equivalent support will also be provided for non-domestic consumers who use heating oil or alternative fuels instead of gas. The amount of this discount is likely to be around £405/MWh for electricity and £115/MWh for gas, subject to wholesale market developments
• the scheme will initially run for six months from 1 October 2022 to 31 March 2023. The UKG will publish a review into the operation of the scheme in three months to inform decisions on future support after March 2023. The discount will be automatically applied to bills with the first reduced bills being those received in November 2022
• as part of the package, changes to previous schemes were also announced. The discount will now be available to the 1% of households who did not previously receive it, such as park home residents and tenants whose landlords pay for their energy via a commercial contract, and an additional payment of £100 will be provided to households across the UK who are not able to receive support for their heating costs through the Energy Price Guarantee to compensate for the rising costs of alternative fuels such as heating oil and to compensate off-grid consumers.

The scheme was broadly welcomed by businesses.In response the Federation for Small Businesses in Scotland stated:

'It's hugely welcome to see some tangible support for Scotland's small firms, who have been enduring the most acute cost of doing business crisis for many months. It cannot come a moment too soon. For those who were facing four or fivefold increases in their bills, a reduction on the cost per unit will provide some welcome relief and allow them to plan their way through surviving the winter'.^[62]

However as with the cost of living support package and the energy price guarantee, thereis concern about the short-term nature of the support. The CBI stated:

'Businesses will also want to know more about the exit strategy and what happens when the six-month cap runs out. Working closely with business will be key to successful implementation'.^[63]

It is estimated that the total cost of the energy package, including business support will be around £60 billion in 2022-23.

UK Government Growth Plan and subsequent developments

On the 23^rd September 2022, the UK Government published a Growth Plan focusing on tax cuts and supply side reforms intended to grow the economy.^[64] The Plan was not accompanied by independent OBR forecasts. It contained a number of proposed elements including: reversing the recent 1.25% rise in national insurance contributions; reducing the basic rate of income tax by 1p; removing the additional rate of income tax for those earning over £150,000 per annum; and cancelling planned increases to corporation tax, among other measures.

Since the publication of the growth plan there have been a range of subsequent developments leading up the resignation of former Prime Minister Liz Truss on October 20^th 2022, and the appointment of Rishi Sunak as Prime Minister on 25th October. Taken together they mean that many of the key components of the Growth Plan will not be implemented. At the time of writing, a medium term fiscal plan is expected to be announced on the 17^th of November 2022. This will provide further information on changes to tax and spending at UK level in the months ahead.

Conclusion

Over the course of this year the UK Government has introduced several packages of interventions to support households and businesses in the context of rising costs. These interventions have been notable for their scale. Collectively, they represent a very significant financial intervention. At the current time, the UK Government has chosen to fund these interventions through increased borrowing, rather using alternative options including an enhanced windfall tax on energy producers and/or providers.

A range of research and policy organisations have argued that more targeted support is likely to be required to address the deficits associated with UK Government interventions to date. They have also argued that more longer term support will be required for households, businesses and organisations. The UK Government has committed to release an economic and fiscal forecast alongside its medium-term fiscal plan on the 17^th November. This will provide more information and allow for a more thorough analysis of the likely impacts of the measures that have been announced and how they will be paid for.