It has become increasingly obvious that the cost of living crisis is going to get worse before it gets better. With energy bills to hit £3,549 in October and forecast to exceed £5,380 in January, we are now faced with the prospect of a devastating autumn and winter period for several million people.
In this paper we propose a new package of cost of living support, combining effective ‘tax cuts’ for the poorest working households with a highly targeted welfare boost for households on Universal Credit (UC), legacy benefits and pension credit.
The package would see low-income households receive an additional £262 between October and January 2023 on average, rising to £288 for lone parents and £462 for couples with children, to help protect the worst off from spiking inflation. On top of this, we recommend restoring UC Work Allowances to their pre-2016 levels, which would see 1.87 million of the poorest working households keep more of their earnings to battle the rising cost of living – boosting incomes annually by an average of £449.
The 13.3 per cent benefit uprating and effective ‘tax cut’ package can be implemented immediately this autumn following a special fiscal event. We estimate that this would cost £3.8 billion and help over 8.5 million household over an initial three-month period.
New analysis by Policy in Practice of granular income and expenditure data from over 114,000 low-income households suggests that this package would help to significantly counteract the fall in average real income levels among poorer households now expected this autumn (which sadly persist even when factoring in the welcome £15 billion support package that Government is already providing).
The Government should use more up to date data to inform a further tranche of support, which we recommend should be rolled out in January 2023 when prices are set to rise even more astronomically. If current inflationary forecasts are unchanged, the cost of the intervention would rise to around £8.2 billion if extended by another three months to April 2023.
We recognise it is not just the worst off facing extremely difficult choices this autumn/winter. Our targeted proposal leaves fiscal headroom for the new Prime Minister to direct additional support to middle-income households (for example through the tax system) and small businesses, many of whom will also struggle to absorb spiralling energy costs.
By using the welfare system, our recommendations avoid the issues associated with proposals made by others to distribute further ‘flat-rate’ payments or rebates universally, which do not account for varying bill sizes across household types, as well as attempts to ‘freeze’ the global energy market, which would see wealthier households receive the same support as those on the lowest incomes.
The Government must rise to face the unprecedented cost of living challenge before the leaves begin to fall this autumn. We believe this to be the most deliverable, cost-effective and targeted package available to the incoming Prime Minister, who we urge to put social justice at the heart of their cost of living policy response.