British households are about to face skyrocketing energy bills and the highest rate of inflation in 30 years while simultaneous increases to their income tax and national insurance contributions threaten to put many families in a financial chokehold.
The Resolution Foundation think-tank warns that we might experience the most serious squeeze on living standards in decades. And despite the introduction of a number of measures by the government to temporarily mitigate the burden of higher living costs, the Bank of England forecasts a drop in real incomes for this year and the next, with the two per cent drop for 2022 representing a substantial £1,000 decrease in average household income.
The heaviest impact for the British public will come April 1st when the energy price cap, the maximum price suppliers can charge households in Great Britain, drastically increases. The UK’s energy regulator Ofgem has announced a 54 per cent lift in the price cap, directly affecting the 22 million households previously protected by it. This means that the average British family will see their energy bills increase by around £700, with annual increases for those under default tariffs from £1,277 to £1,971 and from £1,309 to £2,017 for prepayment customers. Meanwhile, the pay-as-you-go users will be initially protected as they use less energy this spring yet exposed to the sharp price increases next winter.
Even though the price cap increased last autumn, it didn’t reflect the steep rise in global gas prices that happened over the last semester. From an initial 45-50p per therm in January 2021 gas prices multiplied by a factor of ten within a year.
Wholesale gas prices reached these sky-high levels as Europe experienced a long, cold winter in 2020/21 and the British gas storage was almost depleted, while weather conditions prevented other sources of energy from stepping up to meet growing demand. As a consequence, 29 domestic energy companies have gone bust so far since increased costs couldn’t be passed on to consumers under the current price cap. Therefore, the higher costs experienced will now be transferred to users when the new price cap is in place.
The aggressive increase is expected to hit low-income households the hardest as they tend to spend larger proportions of their income on essentials as well as those that need to consume more energy such as pensioners or the disabled. Accordingly, the number of households spending more than 10 per cent of their disposable income in energy is bound to double to 5 million. For this reason, the government plan has come under heavy criticism for not targeting the most vulnerable.
The £9 billion plan introduced by Rishi Sunak to deal with growing gas prices is nearly universal. It consists of a £200 discount on October’s electricity bills, a £150 council tax rebate for those living in the less expensive 80 per cent properties in England (and its equivalent for Wales, Scotland and Northern Ireland) and an expansion of the Warm House Discount. The Chancellor explained that efforts to mitigate growing living costs were not solely focused on poorer households because medium-income families are also struggling.
Yet, some vulnerable groups may miss out on the rebate since they are not automatically eligible, among them poor households that live in expensive properties and those exempt from council tax like students, benefit claimants and pensioners. Likewise, the discount’s effectiveness will be negligible considering that further price cap increases are expected next October and in April 2023. Sceptics, including the leader of the opposition Keir Starmer, point out this ‘discount’ is basically a loan, with billions in cash handed out to energy companies while families pay instalments over the next five years.
Additionally, the current inflation rate of 5.5 per cent is already the highest in three decades, yet it is expected to peak at 7.25 per cent in April, precisely when the higher energy price cap is made effective. However, the Bank of England anticipates inflation to reach said peak and then reduce, eventually returning to its 2 per cent target two years from now as the causes of high inflation aren’t expected to persist. Among these is the rapid surge in demand that easing Covid restrictions caused and left suppliers unable to meet (especially for imported goods), the aforementioned spiralling energy prices and a tight labour market. Hence, the central bank has increased interest rates to 0.5 per cent and is expected to increase them even further down the road.
Moreover, growing inflation has affected the price of crucial products such as food and household goods for which increases were 4 and 9 per cent respectively last month. Still, it is unclear how wages may respond now as working families will attempt to keep up with increasing living costs. Despite inflation being caused mostly by external shocks as he mentioned, the Bank of England’s governor Andrew Bailey suggested workers should not be asking for pay rises to avoid further increases in the inflation rate, something that caused outrage with critics, the idea that workers are expected to just embrace their plunging living standards.
On top of that, poorly timed significant rises to income tax and national insurance contributions are also meant to start in April. While it is expected to raise over £12 billion and mostly affect higher-income households, even Conservative MPs have criticised the move, as it puts further pressure on shrinking real incomes and employers that need to match higher contributions could be driven to increase prices even further.
Although decisions have already been made and policy seems unlikely to be changed, there is a chance that the situation could improve. However, such an improvement would rely predominantly on positive external factors such as a change in gas prices, to which the UK has up until now been particularly vulnerable. With April just around the corner, many families won’t be looking forward for the start of a tough spring unless the Conservative government eventually favours expanding the support provided.