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August 19, 2022

Anadolu Agency – UK’s energy and cost-of-living crises dominate national debate

Britain is currently going through a punishing cost-of-living crisis that has dominated debate among both politicians and the public.

The root cause is inflation, which according to the UK’s Office for National Statistics has hit 10.1%. The last time inflation entered double digits was in 1982. In a bid to tame inflation, the Bank of England, the UK’s central bank, is increasing interest rates.

The backdrop is an economic environment that follows a decade of stagnant wages, which are currently not even close to keeping up with the rate of inflation.

This inflation has many causes, including disruptions to global supply chains caused by the coronavirus pandemic.

Kay Daniel Neufeld, director and head of forecasting and thought leadership at the Centre for Economics and Business Research, an economics consultancy, told Anadolu Agency that the initial £15 billion ($18 billion) package announced in May and that was aimed at the least well off was “reasonably sized” at the time and was “roughly adequate in size and how it was targeted.”

“In total, two thirds of the £15 billion package will go to the bottom half of the income distribution, which is welcomed,” he said.

Still, energy prices have continued to soar, so more needs to be done over the coming months, he noted.

“The poorest are those hardest hit. They spend higher shares of their incomes on essentials such as rent, bills and food. As these go up in price, their budget for any discretionary spending gets squeezed more and more. For some of the poorest, this means taking on debt or borrowing money from friends and family. Others are having to cut down on meals or heating,” Neufeld said.

“Having said that, the higher energy prices make us all poorer. Even households which used to be able to get by may feel that the increase in the cost of living is too much and that they will have to tighten their belt. A recent YouGov poll found that 32% of Brits will need to make small cuts to afford coming energy bills while 30% will need to make large cuts. Therefore, this crisis is by no means confined to lower-income households,” he added.

Much has been made in the British press of the contrast between the UK’s policy choice to give financial support straight to consumers and the approach of many European countries for the state to absorb the rising costs itself.

Neufeld was not keen on the European approach.

“The risk that emerges if you absorb higher costs in its entirety — especially in EU countries such as Germany — is that there is no price signal encouraging energy saving measures. Germany, for example, faces a potential gas shortage unless households, government and businesses can reduce their gas consumption,” he said.

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