War-fueled cost-of-living crisis shapes Sunak’s spring statement – Forbes Advisor UK
Chancellor Rishi Sunak will deliver his spring statement on March 23. Traditionally an update on the economy and its outlook rather than a full budget, this month’s speech will inevitably focus on the financial impact of the war in Ukraine.
Given the worsening cost of living crisis in the UK, the Chancellor is expected to announce measures to ease pressure on household budgets.
Amid a flurry of dire predictions about the economy, the Resolution Foundation has said average household income could fall by £1,000 a year due to inflation rising from the current 5.5% north of 8% , giving a real boost to the current cost of living crisis. .
The Bank of England – which will announce its final interest rate decision on March 17 – acknowledged before the Russian invasion of Ukraine that inflation would exceed 7% in the coming months. All eyes will be on his latest analysis to see just how badly he expects things to go.
But what is fueling the crisis in household finances? And what options does Mr. Sunak have as he drafts the next statement?
The price of gas in wholesale markets has been at extremely high levels for more than a year, leading to increases in the UK energy price cap (which takes effect April 1) and increasing costs in the manufacturing and distribution sectors, which feed into boutique prices.
With Russia a major supplier to international markets, the dispute has seen gas prices triple since the start of the year, reaching 600 pence per therm and beyond.
It’s a similar story with oil. As recently as last year, it was trading below $50 a barrel, while it is now more than double that amount. Petrol and diesel prices at the pump have reached record highs approaching or exceeding £1.60 a litre, meaning the cost of filling the tank of a typical family car is approaching £100.
UK households are receiving notifications from their energy suppliers with grim news about the effect of the 54% rise in the price cap on their bills from April. Inevitably, many will be pushed into energy poverty, which is when paying for a reasonable amount of energy leaves a household with insufficient funds for other necessary expenses.
And it will only get worse. Even if, by some miracle, the war ended immediately, energy prices are unlikely to return to the levels seen before Putin launched his invasion. And even if they did, those prices were already high enough to signal a further increase in the price cap when it next revised in August, to take effect in October.
Commentators are now eyeing a rise later this year of at least 25% from April’s level of £1,971 a year for an average household to £2,500. Some analysts have even suggested that £3,000 isn’t unrealistic.
Mr Sunak has no shortage of suggestions as to what steps he could take to help beleaguered households.
He has already announced a financial support package worth up to £350 to help tackle spiraling energy bills, but it has drawn criticism from multiple quarters – particularly the element of “ loan” of £200 which will see each energy bill reduced by this amount in October, with the “debt” being repaid over five years.
Other potential courses of action include:
Elimination of VAT on domestic energy bills: VAT is levied at 5% on household energy, so a saving of £200 on typical bills might sound attractive – although such a move would of course hit government coffers. The reduction could be targeted at low-income people to avoid criticism that savings were offered to those who could afford higher bills.
Suspension of green and social levies: Again, bill savings of around £200 per year could typically be achieved. But the government will want to tread carefully if it risks being seen backtracking on its pursuit of the green agenda leading to net zero emissions by 2050.
Imposing an exceptional tax on energy companies: Here we are talking about the companies that extract gas and oil rather than domestic suppliers, 30 of which have gone bankrupt in recent months due to high wholesale prices. The money raised could be used to increase the Warm Home Discount and subsidize work to improve the energy efficiency of UK housing stock. This decision, suggested among others by the Labor Party, would remain stuck in the throat of a Conservative Chancellor.
Extended Warm Home Discount: As well as increasing the rebate beyond the £150 it will reach next winter (it is currently £140), the government could also extend eligibility beyond the current three million target, again using the proceeds of an exceptional tax.
Introduce a subsidized social energy tariff: This would mean creating a relatively cheap energy deal using government money and limiting availability by reference to household income or eligibility for state benefits.
Improve the provision of information on energy savings: According to Energy Saving Trust, a household could save £60 a year or more by turning down their thermostat by just 1 degree. If the government were to support a wide-ranging campaign promoting this and other constructive advice, significant savings could be realized both for households and in terms of national consumption levels.
Aborting the rise of network adapters: National Insurance contributions are due to rise in April by 1.25 percentage points on earnings between £9,568 and £50,268, taking the rate for a typical employee from 12% to 13.25%. The rate on income over £50,268 will increase from 2% to 3.5%.
Someone earning around £30,000 a year will pay just over £250 a year more in NICs. At £40,000 a year the figure is £380.
The rates for the self-employed and for employers are also expected to increase, which will also put upward pressure on prices.
The problem for the Chancellor here is that the hike is intended to increase health and social care spending in the wake of the pandemic, and ahead of further structural reform of this element of taxation in April 2023. If the hike is postponed , the government could be accused of starving vital services of needed funding.
It remains to be seen, of course, how the Chancellor will rise to the challenges he faces. But it seems fair to say that doing nothing is not a serious option.
How you can help Ukrainians
If, like many in the UK, you want to help Ukrainians who have been forced to flee their homes due to war, there are a number of ways you can do so.
One of the most effective, according to the UK government, is to donate cash through the Disasters Emergencies Committee (DEC) appeal. The DEC comprises 15 charities, including the British Red Cross, Save the Children and Oxfam, and aims to provide food, water, shelter and healthcare to displaced families and refugees.
More than £100million has already been donated on appeal by the British public, while the government has pledged to match donations pound for pound to the first £25million.
If you decide to donate through one of the many other UK and international organizations that have appeals to help Ukraine, first check that it is legit by searching the Donor Registry Tool. Non-profit organizations. Unfortunately, some online scammers are willing to stoop low enough to seek to profit from humanitarian disasters like this.
It is also possible to donate essential supplies, such as medicine, toiletries, diapers and sleeping bags through various local groups which can usually be found on Facebook. However, some are already reporting full stock, so check before you go.