The UK economy ground to a halt in March under the weight of the cost of living crisis. The quarterly growth rate of 0.8 per cent over the first three months was better than the rest of Europe, but was flattered by the earlier lifting of Covid restrictions and the way in which the Ofgem energy cap protected UK households. Everything now points to a much tougher second quarter.
This is bound to encourage fears that the economy is heading into recession and strengthen calls for an emergency Budget. Even if the UK avoids a technical recession (usually defined as two successive quarters of falling output), it will certainly feel like one for many households struggling to pay their bills.
The Chancellor might still hope that he can wait until the autumn before taking any further action. After the April hike, domestic energy bills are at least now capped until October. In the meantime, there is already more help coming in July, when the threshold for paying National Insurance is increased.
However, the cost of living crisis has now spread to food prices and inflation is likely to remain higher for longer than anticipated in the Spring Statement. Consumer confidence is also so fragile that it may be too risky to delay the announcement of additional help until the autumn.
An effective package should include a mix of benefit increases, tax cuts and measures to lower energy prices, and mainly be targeted at low-income households. Options include bringing forward the next uprating of benefits, reinstating the temporary uplift to Universal Credit, eliminating VAT on domestic energy, and removing some of the policy levies from standing charges.
None of these measures would require an arbitrary ‘windfall tax’ on energy companies. If necessary, the government should simply be willing to borrow more to prevent a recession, which would be even worse for the public finances. But, in practice, the Treasury is already raking in more money than expected as higher nominal incomes, profits and prices all help to boost tax revenues.
It also makes little sense to argue that providing more support to low-income households would itself be inflationary. Even if this were true, it is the Bank of England’s job to worry about the overall level of inflation. If this means that looser fiscal policy has to be offset by tighter monetary policy, then so be it.
This article was first published on the Institute for Economic Affairs website.