The governor of the Bank of England, Andrew Bailey, has warned that Britons are facing a “historic shock to real incomes”, with energy price rises this year larger than any single year in the 1970s. The disastrous impact this crisis will have on people’s livelihoods is clear: 600,000 could fall into poverty and millions will be unable to afford essentials. But so far the chancellor, Rishi Sunak, has only introduced halfhearted half measures.
Carsten Jung, senior economist at the Institute for Public Policy Research www.theguardian.com
As we face an epochal challenge to living standards and energy supply, there are policies already in place elsewhere that Sunak could learn from: countries such as Germany and Ireland are doing more to protect the most vulnerable, doing more to switch to energy-saving measures and doing more to wean themselves off fossil fuels.
This year, the German government has provided a €200 boost for people on benefits, as well as a €100 topping up of child support and at least €270 for people on housing assistance, next to a €300 lump sum payment (pre-tax) to all employees. A low-income family with two children could receive at least €657, plus a possible heating subsidy of €490. With other measures this could fill more than two-thirds of the cash shortfall caused by increased energy prices. By comparison, the average low-earning UK family would receive less than half of that amount (£270, or about €325) plus bills support that will have to be paid back.
Elsewhere, France and Italy have moved much more decisively than the UK to limit energy price increases facing households. This has been done through measures including requiring the state energy company to sell electricity at well below market price and tax cuts on electricity.
Equally eye-catching are examples of innovative policies to encourage lower energy use. As petrol prices surge, public transport is one of the most effective ways of keeping costs for the economy down. For three months, Germany is offering all citizens the use of regional transport for only €9 a month. Some US cities have also shown that reduced or free public transport fares can increase use. And New Zealand is halving public transport fares for three months in response to high fuel prices. France has been experimenting with free public transport since 2018 and Paris just slashed its ticket prices.
This comes on top of European countries’ support schemes for home insulation. Ireland, for example, has just passed a grant policy that provides up to 50% of the costs of a deep retrofit. In contrast, the UK has nowhere near the same ambition.
All these international examples contrast with Sunak’s spring statement in which he announced almost no targeted support for lower earners. Analysis by the Institute for Public Policy Research thinktank, where I work, shows that low-income households still face an average cash shortfall of £320 this year, with some facing up to a £700 hit. This would leave many of the UK’s poorest in poverty with no option but to miss out on essentials, such as food or home heating. As millions of households are having to cut back on spending, this will also drag down economic growth.
Staggeringly, what the chancellor did announce was heavily skewed towards higher earners. We estimate that, on average, high-income households received four times the support of lower-income households.
These were Sunak’s policy choices, but it’s not too late to change tack. His first priority should be to establish a livelihood guarantee for low earners. This means ensuring that their living standards do not fall below what they were last year.
The government could have achieved this by increasing benefits in line with inflation, to ensure people’s income stays in line with the price of products and services they need. This could be combined with an increase in child benefits and additional measures to alleviate pressure from household bills. With this, the chancellor would virtually fully maintain living standards for low and medium earners at a cost of £9bn – just £1.5bn more than what he spent on his poorly targeted policy package.
He could also learn from other countries’ energy saving measures. IPPR has proposed large-scale investment in home insulation, allocated via an easy-to-use “GreenGo” system. This would provide a one-stop shop for people to transition to cleaner transport, housing and consumption, with an initial focus on energy-poor homes, which require support the most.
All of this is eminently feasible and affordable. For instance, our proposed package to almost fully protect low and middle earners could largely be paid for by a windfall tax on energy companies – a type of tax that the EU is set to endorse soon.
So don’t let the government convince you that its hands are tied, because this is a crisis with global dimensions. In fact, it is precisely by looking overseas that we can see that better policy choices are possible.