Helping the poor is easy, chancellor, everyone else may just have to suffer

Treasury civil servants have been spending the past few weeks analysing all manner of possible policies for responding to the cost-of-living crisis. Here is what they might be advising Rishi Sunak . . .

You asked us to provide recommendations on how you might ameliorate the squeeze on living standards faced by families on out-of-work benefits, the working poor and middle earners. We consider each in turn.

The out-of-work group is the most in need of help and the most straightforward to help: you could simply increase their benefits. Doing so by 6 per cent in April, the likely inflation rate, rather than the planned 3.1 per cent would largely protect their living standards on average and would cost about £2 billion in the coming year. Future uprating could be adjusted so that it does not increase spending in the medium term. Note that a similar change to increase the state pension by 6 per cent would cost more than an additional £3 billion.

The opposition has suggested instead extending the warm homes discount. This is a small scheme administered by energy companies and paid for by increasing energy bills for the population at large. A payment of £140 a year is made automatically only to the poorest pensioners. In addition, working-age families with children under five, or a disability and who receive means-tested out-of-work benefits have a right to apply, though many don’t. Companies have additional discretion to pay to other customers.

The scheme does not work well. We have recently consulted on a modest set of improvements and an expansion of its scope. To have a noticeable effect, though, you would need to increase its scale dramatically and to transfer the cost to the taxpayer. We see no credible argument for asking energy suppliers to take on responsibility of the welfare state when you could simply pay through the existing benefit system.

The second group you asked us to consider is the working poor. The government already has a good story to tell here. The national living wage is due to rise by 6.6 per cent in April. In addition, you announced a substantial increase in universal credit for people in work in your October budget, an increase that was implemented in November. At the time the Institute for Fiscal Studies calculated that a full-time worker earning the national living wage and in receipt of universal credit would be better off in the coming year to the tune of over £1,000.

We recommend that rather than doing anything more specifically targeted at this group, you do more to communicate to them, and more broadly, the measures you have already taken.

The third group, those on average sorts of earnings, is much the trickiest to support without spending very large amounts of money. Cutting VAT on domestic energy to zero, as many have suggested, would be poorly targeted — benefiting the rich the most in cash terms. It would cost more than £2 billion and would reduce bills by only 5 per cent in the face of far higher price increases. It would constitute a perverse signal from a government committed to “net zero”. And it would be hard to reverse. We do not recommend pursuing this further.

Many commentators are also suggesting delaying or abandoning the rise in national insurance contributions due in April. Since this will raise about £13 billion, even delay for a single year would be expensive. As a policy designed to stabilise the public finances in the medium term, though, a one-year delay would be fiscally manageable. That said, delay would risk credibility: it might be as hard to raise taxes next year as it is this. More importantly, such a policy would not be well targeted at the problem. Most of the benefit would accrue to higher earners. Someone on average earnings of about £30,000 would benefit by about £250 — much less even than the increase in their typical energy bills — while someone earning £60,000 would benefit to the tune of about £625.

There are ways to make this cheaper. If the delay were applied only to employee national insurance contributions, the cost would come down by about half. We would worry, though, about the signal sent to business by increasing only employer contributions, especially after the big announced increases in corporation tax. We would caution against any delay, given our concerns over credibility and long-term fiscal sustainability. You could cushion the impact on lower earners, though, by raising the threshold at which NICs become payable. Raising it by £1,000 would cost about £5 billion and would provide a flat rate boost of £120 a year to anyone earning more than about £10,000 a year.

In similar vein, you instead could raise the income tax personal allowance by 6 per cent, in line with inflation, rather than freezing it as planned. Again, that would be expensive relative to present policy, costing about £6 billion, while being worth just £150 to most basic-rate taxpayers. You could reduce the cost if you reduced the higher-rate threshold at the same time. That could ensure that higher-rate taxpayers — those with incomes above £50,000 — would not gain. However, it would further increase the number of people subject to higher-rate tax further beyond expected record levels.

In conclusion, while there are straightforward and affordable ways to help the poorest — an obvious priority in our view — it is difficult to use the tax system to provide significant help to middle earners without spending substantial sums. While these costs would be manageable in the short run, we would caution against their use, given our concerns about credibility and fiscal sustainability. The inescapable truth is that Covid and the huge rise in world energy prices have made us worse off. While government can help to protect the poorest, it cannot indefinitely insulate the whole population from this reality.

This article was first published in The Times and is reproduced here with kind permission.