Inflation (as measured by the Consumer Price Index) has risen to 6.2 per cent over the past 12 months, and is predicted to average 7.4 per cent this year. According to a recent survey by Royal London, one in 20 people in the UK believe they may need to “borrow their way out of trouble” with payday loans — which are, to quote MoneySavingExpert, “a financial nightmare” to “avoid entirely”. There is one person in the UK, however, for whom short-term financial fixes seem to make sense: the Chancellor, Rishi Sunak.
In his Spring Statement today, Sunak announced just £500m in new spending to fight the most significant blow to the cost of living for at least 30 years; everything else was a tax cut, a loan, or a loan-type measure. The biggest announcements of the Spring Statement — a £3,000 raise in the threshold for National Insurance Contributions and a 1 per cent cut to the basic rate of income tax — are “shadow spending”: quick, short-term measures that are easily rescinded.
Throughout the pandemic and the subsequent cost-of-living crisis, Sunak’s policies have followed the economics of the payday loan rather than the long-term plan. Like every other country, the UK has had to spend heavily to keep its economy afloat, but unlike other countries the UK has favoured retractable aid — quick loans and tax adjustments, rather than benefits and grants. The £200 energy rebate is effectively a loan (one that households will have to pay back whether they benefit from it or not) and the urgent need to insulate and sustainably heat the UK’s homes is being addressed with new loans; the response to the housing affordability crisis has been to make it easier to borrow even more money; council tax, corporation tax and fuel duty have been temporarily adjusted.
Such measures are useful “when the person or the business that you want to help has a period of low income or low cash flow,” explains Tom Waters, senior research economist at the Institute for Fiscal Studies. The energy bills rebate, a £200 discount that households will pay back through their bills over the next five years, addresses that “costs are going to be really high this year, so this is a difficult period for households. But the fact that households, particularly middle income and slightly higher income households, might benefit from the scheme doesn’t mean that they’re indefinitely poorer,” says West.
Most economists, however — including the chairman of the US Federal Reserve — agree that this period of inflation can no longer be described as transitory. The analyst Cornwall Insight predicts that volatile energy prices will continue into the 2030s. The UK, however, is still taxing and spending as if all that’s needed is a quick tinker.
“Loans and tax cuts are the lever of choice when you’re reacting to events, rather than trying to get ahead of them,” observes Alfie Stirling, chief economist at the New Economics Foundation. “If you were trying to get ahead of the current price increase, you’d have spent two years on a mass home retrofit to prove everyone’s energy efficiency and reduce everyone’s bills for the long term — but that’s not something you can turn on overnight.”
However, successive chancellors have aimed to keep spending “off-book” — a loan or a temporary tax cut may be kept out of the capital spending reported by the Office of Budget Responsibility, which makes the government appear better at managing the economy. New Labour’s enthusiasm for PFI was driven by such incentives.
Stirling adds that for Sunak, such measures are also more disposable: “If you create something entirely new, which then has a sell-by date, that’s much easier to scrap than it is to reverse an increase in spending on an existing scheme. I think the £20 uplift in Universal Credit demonstrated that – it was actually harder to get rid of that than the entire furlough scheme, in terms of the political opposition that he received.”
The problem for the “hard-working families” whom Sunak claims today’s measures are designed to protect, especially those on low incomes, is that “targeted grants like benefits are far and away the most effective thing to do,” explains Tom West.
The wider economy will pay, too, for short-term thinking, as it has for the UK’s tight-fisted response to the pandemic. In March 2020, Sunak’s initial plan — as other countries guaranteed mortgages, furloughed workers and distributed helicopter money — was to extend sick pay eligibility. This plan had to be ripped up almost immediately when it became apparent that it wasn’t going to cover the response needed. Tom West says some of today’s policies could go the same way: if energy prices remain high, “it would not be the most surprising thing in the world if the [energy rebate] repayment got delayed by a year, or if it got cancelled, and it turned out to be a grant”.
The UK’s pandemic response remained small in comparison to other countries’, however. The US has spent £100bn a year more on fiscal stimulus that the UK after accounting for the different size of the two economies, and has recovered far more quickly as a result; as a result, the UK faces the deepest economic scarring of any G7 economy, according to the OECD.
Stirling points out that the same thing may be happening in the UK’s response to global inflation. “Many other countries are going much further,” he says. Sunak, however, is “caught between the need to respond to the crisis as the reality is playing out, which does require more spending of some kind, and the long term drive — whether that’s coming from his backbenchers or from his own ideological disposition — to have a smaller state.”
Politically, this is why the Treasury continues to act as if payday is around the corner and a quick fix will do: those on the right of the Conservative Party are already concerned at the high-tax, high-spend economy into which they have been forced by events. One Conservative MP called Sunak, a former hedge fund manager and avowed Thatcherite, a “socialist” in the Commons. If the UK’s response to the cost-of-living crisis is as inadequate as its response to Covid, it is this political position for which “hard-working families” will pay.