Today the Chancellor Rishi Sunak has set out how the government plans to help households with the cost of living.
IFS Director, Paul Johnson, said:
“The support package announced today will put about £9 billion in the pockets of households next year, with £5.5 billion of that to be recovered subsequently through higher energy bills in future years. The support is very broad based, with little direct targeting of resources on the poorest and those most in need. That said, it is better targeted than either a VAT or NI reduction would have been.
Government has not taken the opportunity to improve the way it increases benefits in line with the cost of living, which means that in April benefit rates are still set to rise by just 3.1% - being based on the rate of inflation to last September - even though by then inflation is now expected to have reached 7.25%. That said, most benefit recipients will get more extra cash next year as a result of the measures announced today than they would have got from such a change to benefit indexation alone.
Overall, of course, this package will not stop average incomes and living standards from falling over the coming year. An average earner on £30,000 a year will still be around £400 worse off next fiscal year than this. An out of work lone parent is likely to be over £300 worse off. The one group who should see their living standard rise are the lowest paid workers who will benefit from a rise in the national living wage and the increase in the generosity of Universal Credit which came in in November.
The withdrawal of the £200 support for energy costs in 12 months time, accompanied by a £40 a year repayment, will at best dampen any recovery in living standards going forward”
£200 temporary help for all households
All electricity customers will get a £200 discount on their energy bill from October this year. The government will meet the initial cost of this, at an outlay of around £5.5 billion. However, customers will pay this back subsequently – £40 will be added to energy bills each year for the next 5 years.
Helen Miller, a Deputy Director at the IFS, said: “This measure will provide some welcome short-term relief and reduce the pressure on household budgets this year. But it is only delaying the pain. Next year, when the £200 discount not only disappears but starts to be repaid, energy prices may still be high and there will likely still be many who struggle to pay their bills.”
Further £150 help for those in council tax bands A to D
The Chancellor has announced a further £150 support for households in council tax bands A to D in England, which will cover 80% of households in England at a cost of around £3.5 billion. (Equivalent funding will be provided for the devolved governments to use as they see fit.)
This support is only very loosely targeted at lower-income households.
- Of people living in band A to D properties, 38% are in the bottom third of the household income distribution (meaning a disposable income, after housing costs, of £18,700 for a childless couple), and 56% are in the bottom half (with a disposable income less than £24,800 for a childless couple). By implication more than 40% are in the top half of the distribution and some will be in the highest income group.
Because council tax is based not on income but on the 1991 value of people's homes, some lower-income households will not automatically receive the support.
- 11% of people in the bottom third of the income distribution live in higher band properties, as do 12% of those in the bottom half of the distribution.
The government is, however, providing £144m for local authorities to provide discretionary support to low-income households living in high-band properties (among others).
Given the differences in housing costs and 1991 property values across the country, a higher fraction of households in Northern regions will benefit than in London and the South, and the average incomes of beneficiaries will be higher in Northern than in Southern regions.
- For example, the median disposable income (after deducting housing costs) of a household living in a Band D property (and so benefiting from the policy) is £32,000 across England, but £38,300 in the North East, where the policy reaches furthest up the distribution, and only £27,400 in the South West, where it reaches least far up.
- Since council tax in England is still based on 1991 property values, properties in Bands A to D are not necessarily the lowest-value properties today. Some people will find themselves missing out on support that neighbours in similar-value properties receive, just because their home was worth more than their neighbours’ 30 years ago.
On average, properties in higher council tax bands are bigger and therefore face bigger rises in energy bills than those in lower bands. Using council tax bands to target poorer households therefore comes at the expense of targeting support at those facing the biggest rise in bills. The discretionary support available from councils for low-income households living in high-band properties will therefore be particularly important in ensuring help reaches those who need it most.
Tom Wernham, a Research Economist at the IFS, said: “The additional £150 for households in council tax bands A to D will provide some support to 80% of households in England. However, this support will not be well targeted to households with low incomes. With council tax bands based on property valuations in 1991, there will be more beneficiaries in northern regions, and they will on average have higher incomes. Over 10% of the lowest income households will be entitled to no automatic support through this scheme at all, and will instead rely on discretionary help.”
Modest expansion of the Warm Home Discount
The expansion of the Warm Home Discount (WHD) confirms plans the government consulted on last year.
It will increase the level of the payment from £140 to £150 and, more importantly, increase the number of recipients by 780,000, to about 3 million.
This is relatively modest additional help, taking aggregate support provided through the WHD from £350m to £475m. And it will continue to be funded by the bill-payer, so this expansion will add a further £5 a year to everyone else’s energy bills, on average. It is a far cry from the more radical expansion proposed by the Labour Party, which would provide £3.5bn of taxpayer funding to give discounts of £400 to over 9m households.
Relative to the existing scheme, the government’s reform targets support more closely on those low-income households who are likely to face high energy bills. It is also a welcome improvement to the way the scheme works: eligibility will no longer vary arbitrarily depending on the household’s energy supplier, and eligible households will now get the support automatically, without having to know to apply and without the risk that they miss out because the available funding has run out (as can happen at the moment).
The warm home discount is unnecessarily complicated, however. It would be much simpler to deliver this support through the benefit system.
Stuart Adam, a Senior Research Economist at the IFS, said: “These are sensible reforms to the Warm Home Discount. But they will provide only modest additional support to those that need it, and at the expense of further increasing bills slightly for everyone else. It would be simpler to support those in need through the benefit system.”
As well as today’s announcements, there are three key factors that will determine living standards over the coming year (2022-23). First, the Bank of England expects real earnings to fall by something in the order of 1.5% as inflation outstrips pay growth. Second, because benefits are by default uprated with a lagged measure of inflation, they will increase by just 3.1% in April – considerably less than the expected 7.25% in that month or the 6.25% expected over the whole year. Third, taxes will also rise in the coming fiscal year, both through higher National Insurance contribution rates and frozen income tax thresholds. Together this means that:
- A worker on £30,000 (roughly average earnings) will be about £400 worse off in real terms in 2022-23 than they were in 2021-22. That is a consequence of the £350 support announced today being offset by a £750 decline in real after tax earnings (coming from both pay not keeping up with prices and the planned tax rises).
- Benefit recipients out of work will also tend to see year-on-year income declines - even if they become newly entitled to the warm homes discount. The extra money announced today is approximately equal to the six months of £20-per-week uplift in universal credit that they got in 2021/22, which was removed from October. Meanwhile inflation will erode the real value of their remaining entitlement, which will go up by only 3.1% in April despite inflation expected to exceed 6% over the year as a whole. An out-of-work lone parent homeowner with two children, for example, will see a £325 real terms hit in 2022/23, even if they become entitled to the warm homes discount.
- Benefit recipients in work, however, will tend to do better. The cut in the universal credit taper rate introduced at the end of November boosts their receipt by about £1,000 per year on average - meaning that many will be better off in real terms in 2022-23 than they were in 2021-22.
- An alternative to the package of policies the government has announced today would have been to uprate benefit levels in April with expected inflation (6.25% over the year as a whole), rather than the lagged measure (3.1%).This would be a sensible change for the long term, though it is worth noting that a majority of benefit recipients will actually get more support next year as a result of the measures announced today than they would have got from an additional 3% or so on their benefits.
Tom Waters, a Senior Research Economist at the IFS, said: “Both rising prices and rising taxes mean that many workers will see their take-home pay fall in this coming year, and the policies announced today will, for most workers, only provide a partial offset to that. The trends for workers on universal credit and minimum wage workers will tend to be better, due to a cut in the benefits taper rate brought in a couple of months ago and a 6.6% rise in the minimum wage in April. Benefit recipients out of work will typically be better off in the coming year than they are right now, but worse off than they were six months ago, back when the £20 uplift in universal credit was in place.”