3 February 2022

With bills soaring, the Government is left with only limited choices – and imperfect options

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Last month, well over a quarter of a million people sought advice from Citizens Advice, more than in any month since the pandemic began, and a new record. The number of people the charity supported with debts relating to their energy bills is also the highest on record – and the average amount people owe is rising too.

These numbers are sobering in themselves, but all the more striking when you consider that consumers have, until now, been shielded from much of the impact of rising energy prices by the energy price cap. 

The rise in the cap announced today will mean an extra £700 on the average household energy bill. In response, the Government has announced a package of support intended to protect a significant proportion of the population from the worst effects of the energy price crisis.

It is an incredibly difficult problem for policymakers to grapple with, since the basic issue is the cost of living outpacing people’s incomes. Whitehall does not set international gas prices, and the Chancellor is right to recognise that the state cannot and should not simply agree to pay those extra costs indefinitely, either through subsidies to suppliers or direct cash transfers to consumers.

The right approach is a mixture of one-off interventions and ‘smoothing’ measures to spread out price rises over a longer period, helping people with the sudden spike in prices but avoiding the risk of any permanent increase in spending or loss of revenue (as would have happened, for example, with the poorly targeted VAT cut backed by the Labour Party).

In this broad sense, the measures announced today are fairly sensible. There will be a £200 ‘discount’ on energy bills for all households, processed through suppliers but funded by the Exchequer, which will effectively operate as an interest-free loan clawed back in £40 yearly instalments over the subsequent five years. The details of how this is to be done are being consulted on, but in general the overall principle behind the move seems sound. I do question, however, why they are waiting until October to provide the support. Families are already struggling, and the price cap will rise well before the autumn.

There will also be a £150 council tax rebate for residents of properties in bands A to D. Again, as a one-off measure to simply get cash to a large number of people quickly, this makes some sense. That said, there were better ways the Treasury could have targeted support than this.

The council tax banding system is a notorious train wreck  which should have been swept away years ago. It’s particularly egregious because the property values on which council tax is based have not been updated since its inception way back in 1991. The method of valuing properties was questionable at the time; over 30 years of house price inflation later, it is little short of nonsensical.

The argument being made by the Government is that they did not want to use the obvious levers of the benefits system because they wanted a solution which would provide support to people on middle incomes as well as the poorest.

I don’t doubt that some people who are not in receipt of benefits are still struggling with the cost of living, but there is a question of degree here. The council tax rebate will give £150 to some very well-off people and the same amount to some very poor people. There is a cavernous difference between targeting support at those on benefits (roughly speaking, the bottom quarter or so of households by income), and providing it to 80% of all households, which this policy will do.

There are people on very high incomes who live in a Band D property – and some quite poor ones who will fall through the cracks because they’re in Band E. The result is that in addition to the rebate, the Government is also having to make discretionary funds available to local authorities for special cases. The rebate will also be messier to administer for the poorest, because they already receive council tax reductions.

The overall amounts of money the Government has chosen to spend are large, but given the level of the price rises we are talking about – and the fact that in some cases we are literally talking about families falling into crisis and destitution – a better targeted approach could have directed bigger payments at fewer people.

For example, payments could have simply been made to anyone in receipt of a means-tested benefit. There may be a perception that it is only the very poorest who are on benefits, but eligibility for Universal Credit can reach surprisingly high up the income scale, especially after the big cut in the taper rate a few months ago. According to the Institute for Fiscal Studies, 7 million families containing nearly 16 million people – 26% of all families – are now entitled to UC. That is nothing like the 80% who will receive the £150 rebate, but it is still a significant chunk of the population, and targeting support at those people would have allowed it to be more generous.

Ultimately, this is really a story about the limits on government’s ability to work out where money needs to go and get it there fast enough. This is a story we have seen time and again since Covid hit. As my boss Robert Colvile has written before, the state simply doesn’t have the data at its fingertips to know who is most in need, or the apparatus to provide that specific group with cash quickly. It’s why, for example, the support scheme for the self-employed ended up being open to any self-employed person, even if their income had not fallen, or had actually risen, yet also excluded many who did not have enough of a paper trail to prove they were really trading.

In the case of today’s announcements, the situation can probably be summed up as the Government having limited options for how to roll out support, and having to make imperfect choices from them. Meanwhile, for many families, the cost of living crunch is already biting.

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James Heywood is Head of Welfare and Opportunity at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.