British households are facing an unprecedented cost-of-living crisis in 2022.
A harsh combination of factors have come together to make the business over everyday life more expensive for every household.
The Government, as a result, has come under considerable pressure to act to soften the blow of rising prices, energy bills and other areas of life which have become more costly.
But what has it done so far to alleviate the issue? And what could it still do to act?
The Chancellor Rishi Sunak has a Spring Statement coming on 23 March, which traditionally is fairly light on new policies, and generally contains updates on the UK’s economic performance, and the translating tax revenues for the Treasury.
But in recent days the Chancellor has been called upon to implement a full emergency Budget to tackle the cost-of-living crisis.
While he hasn’t at the time of writing gone so far, he has taken some measures to ease the pain for households.
What has the Government done so far?
- Energy bill help
On 3 February energy regulator Ofgem announced an unprecedented hike in the energy bill cap. The regulator rose the ceiling of what energy firms could charge customers on a Standard Variable Rate (SVR) by 54% – to £1,971 per year.
As a result, on the same day the Chancellor announced a package of measures to soften this hike for households.
The first of these measures is an energy bill rebate. This comes in the form of a £200 discount on energy bills, which households will get in October this year. This will then have to be paid back by paying an extra £40 a year on bills for the next five years.
The second measure the Chancellor Rishi Sunak has introduced is a £150 Council Tax Rebate for any households living in Band A or Band D properties. This will come through for those households in April, and will not need to be paid back.
The Government is also increasing the number of households which qualify for the Warm Homes Discount, which means some three million families will soon be eligible.
- Rate hikes
The second major step taken by the Government (albeit an independent arm of the State) is from the Bank of England, which is beginning the process of hiking interest rates.
The Bank Rate has been set at 0.1% since the onset of the coronavirus pandemic. Prior to this it was at 0.75%.
But the Bank of England surprised most analysts by hiking the rate to 0.25% in December, then again on 3 February – the first time it has done a back-to-back rate hike since 2004.
Although the absolute level of the Bank Rate is still low, it is a signal of intent from monetary policymakers to attempt to quell inflation.
By raising rates, the Bank of England makes it more expensive for households and businesses to borrow money, and more attractive to save. By doing this it hopes demand for goods and services will reduce, thereby slowing price rises.
In practical terms for households, this means debts such as mortgages and credit cards – unless fixed on a guaranteed rate – will get more expensive.
Investment markets now predict that the Bank of England could keep hiking rates for the rest of the year, at least four more times, with a rate of around 1.25% by 2023.
What could the Government still do?
- Energy bill VAT cut
Since leaving the European Union, the Government has been at pains to show off what it has been doing with its newfound post-Brexit powers.
One of the major policy levers that it has taken back from Brussels is the ability to set its own VAT rates – which were set centrally by the European Commission.
As a result, with the energy crisis, many MPs have called upon the Government to slash the VAT rate on energy bills.
The Government argues that doing so wouldn’t target savings in the right way, instead it would be giving a tax break to wealthier households.
But with the volatile political climate at the moment, it is still a lever that Sunak could reach for were it to become pressing to act again to help households.
- National Insurance climb down
The real elephant in the room during all the discussion around the cost-of-living crisis is the fact that the Government has already pushed through plans to hike National Insurance – dubbed a tax on working by critics.
The 1.25% hike was passed through Parliament last year, before the reality of the crisis took hold. But now the policy is gaining increasing criticism, considering the pressure households are under.
Many MPs in the Conservative Party, despite having voted the policy through, are now vocally calling for it to be reversed. While Rishi Sunak has so far resisted, a change in the political climate could soon make it untenable.
With the tax hike, earners on £30,000 a year will face an extra £255 to pay to HMRC, while someone earning £50,000 will pay an extra £505.
Dividend tax is also rising from April 2022. The basic rate dividend tax will be 8.75% up from of 7.5%. Higher rate dividend taxpayers will pay 33.75% up from 32.5%, and additional rate dividend taxpayers will pay 39.35%, up from 38.1%.