The next prime minister must tackle the cost-of-living crisis or face dire electoral consequences
The two final candidates for the Conservative leadership have made promises on tax and borrowing. The new prime minister will, however, have to confront a rapidly deteriorating cost-of-living crisis that demands flexibility and decisive action.
The political pressure is to reverse tax increases which contravened the Conservatives 2019 manifesto. But the new prime minister will also have to shield low-to-middle income households from rising energy and food prices or face dire economic and electoral consequences.
In April of this year, in the Queens Speech debates, I demanded the government introduce a fiscally responsible cost-of-living package. Rishi Sunak introduced a variety of one-off payments, which, combined with the national insurance increase, were progressive: those on low incomes gained the most, while those on high income paid more. The Resolution Foundation, a left-wing think tank, estimated that policy measures announced between February and May would cover over 90 per cent of the cost increases for households in the bottom two deciles.
The situation has now got much worse. When the former chancellor announced the May package, the price cap was forecast to increase by 42 per cent in October. Now, the latest estimates are that the price cap will increase by 77 per cent. Households in the lowest two income deciles would need to spend £1,600 to £1,750 more on energy bills in 2022-23 to consume the same amount as in 2020-21. The increase for pensioner households is greater still, at around £2,130. The equivalent figures for spending on food are much smaller but would still mean extra spending on what are likely to be very tight family budgets.
The next prime minister will have to introduce a fiscally responsible package of support for low-income households or they will simply run out of cash
The [May] package is no longer adequate to fill the widening shortfall in low-income household finances. A low-income household where no one received a disability benefit will currently receive a maximum of £1,200, while a low-income pensioner household where no one received a disability benefit will receive a maximum of £1,500. Both low-income and pensioner households would now need £500-600 per year more to cover the costs of just energy at 2020-21 levels.
Further increases in home energy costs could arise in January when Ofgem decides on the next cap, given the ongoing geopolitical crisis and weaponisation of natural gas supplies to Europe.
Nor can the new prime minister ignore the overall economic context. The inflationary climate creates new short-term fiscal constraints. Last week, the Bank of England Monetary Policy Committee voted by a majority of 8–1 to increase the Bank Rate by 0.5 percentage points, to 1.75pct. They now expect inflation to peak at 13pct in Q4 2022, and to remain at very elevated levels throughout much of 2023. Energy prices have contributed to rising inflation, but also the labour market is tight, and the bank is, therefore, acting to reduce excess demand in the economy.
Understandably, neither of the two candidates have spelt out a comprehensive package for the autumn to ensure that households can afford the basics of food and heating. Reversing the national insurance rise does put money back into people's pockets, but the benefit would be spread well beyond the worst off households. Liz Truss has also announced her intention to suspend green levies, which is more progressive.
The next prime minister will have to introduce a fiscally responsible package of support for low-income households or they will simply run out of cash. The leadership election has enabled a fruitful debate about whether now is the right time to introduce tax cuts, but whoever is prime minister will have to prioritise the plight of low-income households during this difficult winter.
Sir Bernard Jenkin is the Conservative MP for Harwich and North Essex.
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