Stung by criticism of his Spring Statement, Rishi Sunak has engaged in some “serious redistribution from rich to poor” in his latest package of measures to address the cost of living crisis, analysts say — imperilling his ability to brand himself a low-tax chancellor.
Here, the Financial Times examines how the new support will help different households.
How far will this fill the hole in household finances?
The £15bn package — a near-doubling of energy support announced earlier in the year — will undoubtedly make a big difference. Sunak said almost all the 8mn households on means-tested benefits would receive £1,200 — a £650 one-off payment, delivered in two instalments, in addition to the £400 discount on energy bills to be given to all households and the £150 council tax rebate many have already been given.
This means help for the poorest goes a lot further than many had expected in offsetting an expected increase of more than £1,500 in the average household energy bill over the year to October, and broader price rises.
Torsten Bell, director of the Resolution Foundation think-tank, said the package was “big and very welcome”, while Clare Moriarty, at the charity Citizens Advice, said it was a “life raft for the millions of people struggling to keep their heads above water”.
Helen Barnard, research and policy director at the charity Pro Bono Economics, said it was also well-structured, with the first one-off payment set to land in people’s bank accounts in July, and extra support being delivered automatically to pensioners and disabled people who might otherwise have fallen through the cracks.
The chancellor made it clear this year’s one-off support would be on top of next year’s uprating of benefits — when they will finally catch up with inflation. The Treasury also confirmed it would be tax free and would not count towards the cap on the total amount of benefits households can receive.
How targeted are the measures?
Overall, the measures announced on Thursday represent a big rebalancing of help towards low-income families. Sunak was stung by criticism that his Spring Statement in March, which targeted help at people in work, neglected the poorest in society.
The Resolution Foundation said two-thirds of the fresh cash would go to the poorest half of households, while the overall effect of tax changes and support coming into effect this year would be “much more progressive”, with an average gain of £1,195 for the poorest fifth of households, and an average loss of £456 for the top fifth.
“Mr Sunak is engaging in some serious redistribution from rich to poor — albeit against a backdrop of rising inequality,” said Paul Johnson, director of the Institute for Fiscal Studies think-tank.
After factoring in tax changes, and all government support, a worker on median earnings of around £29,000 could now expect their living standards to be broadly unchanged this year, the IFS said, while a full-time minimum wage worker would be around £340 better off in real terms.
However, the decision to channel support through flat rate payments, rather than a benefits uprating, will help some households more than others. Some on middle incomes, who just qualify for benefits, will receive the full £650 while others in very similar circumstances will not, the IFS noted. Single adults will also receive much more, and families much less, than they would have done if benefits had been uprated in April instead.
The doubling of the discount on energy bills, which is now a grant rather than a loan, means Sunak is handing significant amounts to some households who do not need it, in order to reach those on middle incomes who are in a more precarious position. The £300 payment to pensioners will also benefit around 3.7mn households in the top half of the income distribution.
Does this settle cost of living concerns?
Charities said that while the measures will reduce the immediate crunch on household finances, their one-off nature does little to address the holes in the UK’s welfare safety net for the longer term.
Barnard said that whatever the political calculations behind Sunak’s change of tack, “real people” would get “real help”. Once the immediate crisis passed, though, there was a need “to strengthen the underlying system . . . so that fewer people are on the verge of a crisis the whole time”.
Why did Sunak fund the package through a windfall tax?
Sunak and prime minister Boris Johnson concluded that a dramatic U-turn on a windfall tax was politically inevitable, according to senior Tory officials. Private polling by Downing Street found it was hugely popular with voters.
“Tory governments don’t do unpredictable tax raids like this,” said one ally of Johnson. “We set the bar really high on doing it — there was lots of internal opposition.” Many cabinet ministers wanted tax cuts, not rises.
Johnson was reluctant to proceed with the windfall tax U-turn if it would only raise £2bn, as Labour proposed. Sunak said he could raise £5bn from oil and gas companies this year, with perhaps £3-4bn more from electricity companies.
“That was a game changer,” the Johnson ally said. “If you’re going to take the pain, the gain has to be worth it.” Sunak also argued it was fiscally right to partly fund new spending, rather than fuelling inflation by borrowing more.
The prime minister was also dismayed by comments by Bernard Looney, BP chief executive, that his company’s investment plans would not be affected by a windfall tax, according to Johnson’s allies.
Sunak will now be under huge pressure to start cutting taxes in his autumn Budget. “One day the low tax chancellor will actually start cutting taxes rather than putting them up,” said one Tory official.