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IFS - £12 billion needed if government wants to maintain value of household support package

The government would need to find £12 billion simply to achieve what it was aiming to do with the £24 billion package announced in May. That’s largely because in May energy prices were expected to rise by 95% in 2022/23, and are now expected to rise by 141%.

This is a new finding from analysis by the Institute for Fiscal Studies, funded by the Nuffield Foundation as part of the forthcoming IFS Green Budget.

Given expectations in May, out-of-work benefit recipients looked set to be broadly protected from rising prices. But under the latest inflation forecasts, out of work working-age benefit claimants are now on course to see a fall in their real income of £620 over the course of the year. Doubling the current £650 grant to those on benefits would protect them on average, as well as helping low income pensioners and families in work, at a cost of roughly £5½ billion.

Similarly, back in May it looked like the £400 energy discount and £150 council tax rebate would cover around half of the increase in energy costs for a typical family over the year. If the government wants to continue to cover half the cost of increased bills support would need to be increased by a further £260 at a cost of around another £7bn.

There is a difficult judgment here. Extra spending of this magnitude, funded by further borrowing, could add to the inflationary pressures in the economy. With energy prices and inflation set to remain high next year it seems almost inevitable that at least some of the extra spending will be maintained beyond this fiscal year.

Other findings include:

  • Because poorer households tend to spend more of their budgets on energy, the inflation rates they are experiencing are accelerating even faster than those faced by other households. The poorest fifth will face an eye-watering 18% inflation rate in October, compared to 11% for the richest fifth.
  • The new energy price cap takes effect in October. Because benefits are increased each April in line with inflation the previous September, benefits are set once again to fail to keep up with actual increases in the cost of living. The government should permanently change the way that it compensates benefit recipients for inflation such that benefits rise by the expected April rate rather than rate from previous September that is used at present. Otherwise in April, the real value of benefits will be 7% lower than they were pre-pandemic.

Paul Johnson, IFS Director, said:  

“The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12 billion, and a package on that scale will still leave many households much worse off. Given the costs there are genuine and difficult trade-offs here. For both households managing their budgets and the government managing the economy’s finances some clarity on strategy is urgently needed.”

Alex Beer, Welfare Programme Head at the Nuffield Foundation said:

“As prices of essentials including food, heating and fuel continue to rise, families on low-incomes are facing more uncertainty and pressures. Many of these families were struggling to get by even before the current crisis and are not helped by the rollercoaster real value of Universal Credit payments, and short-term fixes to help benefit claimants. The government needs to make clear the actions it will take to help these families, by providing them not only with more security now, but greater certainty in the medium term.”

Original article link: https://ifs.org.uk/publications/16149

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