Since Boris Johnson resigned on 7th July, two candidates for leadership of the Conservative Party, and consequently for the post of Prime Minister, have emerged: former Chancellor Rishi Sunak and current Foreign Secretary Liz Truss.
Against the backdrop of the worsening cost-of-living crisis, their proposed economic policies, and in particular their plans to support households in times of surging prices, have become focal points of the debate. The most recent CPI reading showed 10.1% annual price growth – yet another 40-year high.1 Furthermore, Cebr is forecasting inflation to reach 12.0% in Q4 2022. Cebr’s income tracker, produced in collaboration with Asda, has shown falling discretionary incomes for five consecutive months between February and June, with the amount that the average UK family has left over at the end of the month after essentials falling to just £200 per week.
Possible cost-of-living support measures can be summarised along two categories: 1) direct government support to households in the form of bill rebates and cash transfers, and 2) tax cuts, which aim to lower consumers’ financial burden. Several measures have already been planned or implemented. These include the £400 energy bill rebate, announced earlier this year during Rishi Sunak’s time as Chancellor, which will be applicable to all households and be directly deducted from energy bills. The rebate will be implemented in six monthly instalments of £66 or £67 between October 2022 and March 2023. Furthermore, those on benefits will receive a cash transfer of £650, the first half of which was paid out in July, while the second instalment is to be delivered in the autumn. Additional payments will be made to pensioners that receive winter fuel payments and people on disability benefits, worth £300 and £150, respectively. Liz Truss has been sceptical of such direct payments and has not announced any similar measures, if she were to become Prime Minister. In fact, figures from her camp have hinted towards her not introducing similar policies.2 Meanwhile, Rishi Sunak has spoken of more direct support for households to help them through the crisis, while vowing not to borrow the money to do so.3
Instead, Liz Truss has been an adamant proponent of lowering the tax burden borne by British businesses and households. The Foreign Secretary’s proposed tax cuts include a reversal of the increase in National Insurance Contributions (NIC), which were raised by 1.25 percentage points in April. Furthermore, she has vowed to cancel the planned increase in the corporate tax rate, which is set to be raised from 19% to 25%, from April 2023. In addition, Truss wants to lift green levies paid on energy for two years. Currently, environmental charges amount to an estimated 8% of an average energy bill. Conversely, Rishi Sunak is keen to retain the NIC hike and the coming increase in corporate taxation. He has, however, announced plans for a temporary scrap of VAT paid on energy as well as a cut to income tax in the medium term once inflation is under control.
The policy proposals brought forward by the two candidates ought to be scrutinised with respect to three questions: 1) would they provide sufficient support to households during the cost-of-living crisis; 2) would they introduce further inflationary pressure; and 3) would they be within fiscal limits, or create a need for higher borrowing, adding to the already high level of public debt. As it stands, Liz Truss’ proposals are likely to be insufficient in supporting households over the coming autumn and winter months, when rising demand for energy will likely push energy prices even higher. Annual energy bills for those on variable tariffs are projected to exceed £3,600 following the review of the Ofgem energy price cap in October,4 such that even after deducting the energy bill rebate, monthly bills would stand at around £240 for a typical household. Given these already high prices and the fact that the energy price cap is expected to rise to over £4,200 in January,5 the end of the current energy rebate scheme in March 2023 appears to be premature. Additionally, an uplift to the rebate may be necessary to soften the blow that surging energy prices would otherwise deal to households.
However, one disadvantage of such bill rebates is that they distort signals from high prices, which would encourage households to reduce their energy consumption, where possible. Whilst rebates on prices may reduce bills, they would not address the underlying problem: demand for energy outstripping supply, caused primarily by Russia’s invasion of Ukraine and the reduction in gas shipments to Europe. Direct transfers, such as the £650 to benefit recipients, have the advantage that they would not distort the signals sent from high energy prices, such that households would still be incentivised to reduce their energy consumption. Potential future transfers would likely need to be of at least similar size as the support that is currently being provided, as prices have increased further since the announcement of the current measures.
For these potential transfers to fulfil the remaining two criteria, of not spurring inflation and not acting as a burden on public finances, they would need to be targeted at those households most in need of support. The Government may be able to benefit from some additional fiscal headroom to implement additional support measures, as the freezing of tax allowances and rising inflation will result in higher-than-expected tax receipts. Cebr expects these additional receipts to amount to up to £60 billion in 2024/25, as outlined in an earlier Forecasting Eye,6 potentially providing sufficient finances to cover these short-term support packages. This will of course depend on their scope.
Away from the specifics of the cost-of-living crisis, Cebr is forecasting just 0.5% growth for the UK in 2023. As such, it is clear that either candidate will inherit a tough economic environment. In the face of such challenges, their proposed economic policies will likely to be key to their success in the leadership race and, ultimately, in their future role as Prime Minister.
1 https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july2022
5 Ibid.
For more information please contact:
Jonas Keck, Economist Email jkeck@cebr.com Phone 07379 405891
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.