Cost of living: letter to UK Government

To: Rt Hon Rishi Sunak MP, Chancellor of the Exchequer
From: Cabinet Secretary for Finance and Economy, Kate Forbes MSP

I am writing to outline the pressing need to act on the cost of living crisis. With inflation reaching a 40 year high of 9 per cent and forecast to rise higher; Brexit increasing food prices by over 6%; and the news that the energy price cap is set to rise to £2,800 a year in October, it is absolutely imperative that further action is taken to relieve the acute pressures being felt by households and businesses.

The Scottish Government has already taken action and will continue to do everything we can to ensure people, communities and businesses are supported as far as possible. But, given the restrictions of devolution, only the UK Government has the economic, regulatory levers and fiscal headroom required to address this urgent crisis.

As you know, the Scottish Government has been making the case for action for some time. Even after the measures you have already announced, the Resolution Foundation estimates that the typical working age household will be around £1,000 worse off this year. This crisis is being felt even more severely by the lowest income households, with estimates that the inflation rate faced by the poorest 10% of households will be around a third higher than that faced by the richest 10%, due to the spiralling costs of food and energy forming a larger part of their Budget. All of this is before the further £800 increase in household energy bills expected in October.

Moreover, the UK Government’s disastrous Brexit policy has damaged the economy and worsened the cost of living crisis. A recent report from the London School of Economics provides evidence that it has led to a substantial increase in food prices, which will hit the poorest families hardest. This has contributed to the UK having one of the highest inflation rates in the G7.

Implementing a timely, targeted and cohesive economic support package that fully utilises your £30 billion of fiscal headroom would support households and businesses that are struggling now. Continuing to delay is prolonging the impact of the cost of living crisis on incomes, economic competitiveness and inequality and pushing households into debt and poverty, and risks pushing the UK into a recession.

I am proposing four principles that should guide a response from the UK Government:

Firstly, ensure that the fiscal support package is targeted at the households and businesses that most need support. The package should aim to offset the disproportionate burden of the cost of living crisis on the least well-off, and I would urge you to consider as a starting point of any package:

1. An emergency cost of living cash payment to all UK households with below median income, tapered to provide more support to those at the lower end of the income distribution. I would suggest this be up to £1,000 to those on the lowest incomes, to be delivered directly as cash support at periods across the financial year. Providing money directly, without a link to specific bills, would provide households with the means to manage the cost of living crisis however it is affecting them the most, whether it is on food, transport or energy bills, and offset the impact of the cost of living crisis for those on the lowest incomes. The Resolution Foundation has also called for a policy intervention of a similar design.
2. Permanently uprate all social security benefits as if they had been increased by 10% in April to match the current level of inflation, as proposed by the Centre for Social Justice. In April, we increased our eight Scottish social security benefits by 6%, reflecting the higher inflation expected at that time.
3. A further £25 uplift to Universal Credit, and for this to be extended to legacy benefits. 
4. Increase the National Living Wage rate of £9.50 to the Real Living Wage rate of £9.90 for all over 18.
5. A temporary suspension of VAT on household energy bills, which we estimate would save the average household around £100 a year at current prices.
6. Extend the £350 energy rebate scheme to small and medium enterprises, and remove the requirement to repay to the £200 energy bill reduction component.
7. Remove standing charges for anyone with a pre-payment meter. The energy price increases will be felt more severely for consumers using prepayment meters who are often subject to higher prices for energy than through other means such as direct debit, and as standing charges must still be paid even if there is no credit on the meter, and top ups can be swallowed up before energy can be bought. Removing standing charges would reduce the risk of self-disconnection if they cannot afford their energy costs.

Collectively, we estimate this package can be comfortably implemented within the £30 billion available fiscal headroom available to you, even before allowing for any additional revenue from a windfall tax.

Secondly, ensure the increased burden of rising energy prices is shared fairly, by imposing a windfall tax applied to all companies benefiting from significantly higher profits over the pandemic and energy crisis.  This is justified given the extraordinary rise in energy prices and the windfall in profits this has led to. However, oil and gas companies, who are disproportionately based in Scotland, are not the only businesses that have profited during the pandemic and current crisis. Any one-off windfall tax should be applied to all companies unfairly benefiting from significantly higher profits, to ensure that Scottish industry does not carry a disproportionate burden of funding a UK wide response.

Thirdly, use the £30 billion of fiscal headroom you have against your current fiscal rules, along with any additional proceeds from a windfall tax, to deliver a timely and targeted fiscal support package. The OBR’s forecasts published in March estimated that you are on course to meet your targets on public sector net debt and balancing the current budget in 2024-25 by around £28 billion and £32 billion respectively. Your headroom to respond would be increased further by the proceeds of any windfall tax. This provides ample space to support a significant fiscal response to the cost of living crisis.

In the midst of such a crisis it would be unconscionable to hold this funding in reserve to fund tax cuts in future years. You should also give urgent consideration to relaxing your fiscal rules for the duration of this crisis to allow you to go further in your response.

Finally, provide firm assurances about pay uplifts for our public sector workers, particularly the lowest paid, who, without support from your Government to bolster their pay packets in the face of inflation, face being pushed further into poverty. A firm commitment, if reflected in devolved Budgets, would give the Scottish Government the funding to provide better pay uplifts through upcoming pay settlements, helping the lowest paid public sector workers.

I propose these as prudent, targeted, initial measures to support households and businesses through the cost of living crisis, which would still remain consistent with your fiscal rules.

I would also reiterate the proposals that I outlined to you before the Spring Statement, many of which are just as essential to support households and businesses now as they were in March. In particular, I urge you to consider:

• reversing the National Insurance increase implemented in April
• rebalancing the policy costs element of energy bills to reduce the premium paid by households reliant on electric heating, and to help to unlock the deployment of low and zero emissions heating
• committing to provide a Cold Weather Payment in winter 2022-23 when we know energy bills will have risen again

The package I propose above, along with these measures, would begin to address some of the impacts of inflation and the cost of living crisis on households and businesses.  I would also recommend you consider ways you can to take additional steps to reduce the increased prices in construction to prevent it inhibiting the development of public infrastructure – for example, by lowering or removing VAT in this sector – especially in housing construction.

Energy bill increases could also be mitigated by changing the policy on the energy price cap, which I would urge you consider before the next scheduled increase. Furthermore, consumers who are not able to utilise gas or electricity for heating (for example those using heating oil and LPG, particularly prevalent in Scotland) face greater price increases without the protection of a regulated market.  Action should be taken to support them now.

I have focused my requests on those areas reserved to the UK Government, which still holds many of the levers best able to offer focused support.  As you know, what the Scottish Government can do is severely limited by the Budget we receive from Westminster. The limitations on our ability to borrow means our spending power is also being eroded by inflation. As a result of escalating inflationary pressure, the Scottish Budget for 2022-23 was already reduced in real terms by 5.2% relative to the previous year.

This is not sustainable, and represents a creeping return to austerity. I would also urge you provide additional support to the Scottish Budget to allow us to provide support to households through the levers we have access to – for example, through our policy on public sector pay. We intend to use whatever additional resources we receive from any cost of living spending to do all we can to meet the challenges Scottish households face on rising food prices, energy costs, and levels of pay.

Although both the UK and Scottish Governments are faced with the same crisis in the cost of living, we do not have the same fiscal or regulatory powers to respond to these challenges. We are doing as much as we can within our resources, but, without the powers to control these policy levers ourselves, the UK Government must do more.

Finally, I would welcome the opportunity to discuss further and set out in more detail the evidence and need for these interventions.  I trust that you will welcome this.