Rishi, Isn’t Inflation the Problem?

The Chancellor could have subsidised energy prices directly, which would not only have reduced inflation (depending how the ONS deals with the direct bill subsidies), but also targeted those needing to use more energy. Did the Treasury even consider this?

To divert attention from Partygate, the UK’s Chancellor of the Exchequer (that’s the Finance Minister to anyone reading from somewhere less quaint), Rishi Sunak, has announced several types of direct payment to households to help with the cost of living crisis. This was sparked by an announcement from Ofgem about new price caps implying that the average household energy bill will rise by another £800/year from October 2022. The caps already rose in April by the equivalent of £693 on the average bill.

Payments to all households made or planned so far in 2022 amount to £550 (£150 already paid via Council Tax bills and £400 to be paid via electricity bills). There are additional amounts for those on benefits, pensioners and the disabled.

The energy price rises are a major driver of inflation in the UK. So why didn’t the Chancellor reduce the energy price increases by paying energy suppliers directly to reduce their prices, at least to domestic consumers?

By discounting energy unit prices over one year he could have reduced headline inflation by over 1%, by a back of a fag-packet calculation given average household disposable income in the UK is under £40K. That would have meant everything that is uprated by inflation – the state pension, student loan payments and so on – would have to increase by more than 1% less, that is (say) 9% rather than 10%.

Importantly, with CPI and RPI 1% less than otherwise, pay demands would also have been less, reducing the dreaded wage-price spiral. Instead, the Chancellor is giving everyone extra income temporarily while allowing prices to rise. Note the word temporarily, here. Wage demands will be legitimised because everyone will know the energy subsidies are only temporary.

Health warning: the ONS may conceivably take account of the £400 payment via energy bills (£150 has already been paid via Council Tax bills) and reduce the energy cost element in their inflation calculation. Or they may not! At the very least, targeting unit costs would have avoided a headache for the ONS.

Another major advantage (IMO) of using the funds to reduce energy unit prices instead of giving every household £550 is that those using more energy – perhaps because there are more people in the household – would have received a greater subsidy. Under the present scheme a much larger proportion of the energy price increase is being paid by the government to users of less energy, such as single people living in well-insulated flats, than to those using more, such as large multi-generational families in poorly insulated houses.

In addition, those owning multiple homes would not have benefited so much. They are only heating one home at a time, but under the present scheme are being paid £550 per home. Much public anger could have been avoided.

Note the other payments, to universal credit recipients, the disabled and pensioners are unaffected by my proposal.