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The Cost of Living Crisis in the UK

Updated: May 23, 2022

Mary Jane Amato reports on the current cost of living crisis in the UK, what support the government is providing, and how the country can evade a poverty crisis altogether.

Photo by Timur Weber


In the last few months, the UK is seemingly heading towards one of the most catastrophic economic moments of recent history, and this is probably just the tip of the iceberg. The country is facing a heinous financial crisis that will most certainly lead to an increasingly severe recession, with the real risk of driving a vast section of the population into poverty. 


How did we get here?


The road to such a dire situation has been complex and lengthy. Starting with the country massively readjusting from the impacting effects of the Covid-19 pandemic to the rising inflation, made worse by the ongoing war in Ukraine, Britain's economy has taken some significant blows. What’s more, Brexit also has a role to play in the disruption of trade, further adding fuel to the fire.

Presently, inflation is at its highest rate in thirty years, with the consumer price index (CPI) projected to rise by 7% in April 2022 if spiralling heating costs are not capped. A brief explanation of why this has happened can be given by analysing the post-Covid economy reopening. According to some economists, such an increase will remain high for quite some time. This soaring rate is consequential to the renewed demand for goods and services post-lockdown and the global trades impacted by the supply chain disruption, caused by multiple national lockdowns. These slowed down or even temporarily interrupted the circulation of raw materials, stalling the manufacturing process.


Furthermore, the Russian invasion of Ukraine has raised the CPI expectation from 7.25% to 8%, and possibly higher later in the year. With Russia being one of the largest producers and exporters of oil and gas and a crucial gas supplier to the EU countries, the oil prices have peaked at $100 per barrel, which is the highest rate since 2014. The overall gas price increase has also affected the cost of UK natural gas, influencing a rise in petrol and energy fees and constituting a continuous restrain of global and UK activity growth.



What is the Current Situation Looking Like?


UK households currently face a 54% price cap on bills reflecting the soaring wholesale gas prices, and a new price cap increase is expected in October. The results of these increases mean that within the year, bills are going to be doubling, leaving the poorest households in a deplorable state, where they might be forced to choose between heating their homes or being able to put food on the table. Citizen Advice has warned that many people will be unable to pay their energy bills across the UK, and that figure stands at around a shocking 14 million.


The Bank of England expects the inflation to cool at the end of this month, but prices will stay high for much longer. This will determine a decrease in spending power from the lower-income households, resulting in a high risk of recession. In the latest report of the Deutsche Bank, the chief economist Sanjay Raja has stated that the “recession risks remain on the rise as Consumer confidence data are already consistent with recessionary levels.” This trend will most likely rebound after June, but it will eventually flatline by the end of the year due to an ulterior price rise in energy bills in October.


Another point to consider is last year's tax increase, which has been the greatest since 1993, with an increment of 1.25% in National Insurance contributions at the start of April. In addition to this, a health and social care levy will take place in 2023, and the income tax personal allowance will be frozen for four years from now. The above situation is likely to determine the impossibility of wages to mitigate the effect of such high-cost rises.





Moreover, rent costs are rising at the fastest rate known so far. With an increase of 8.6% as of February 2022, they mark a stark difference from the 2% increase of 2021. This makes private renting in England for the lowest-earning people and women on an average salary impossible. Mortgages base interest rates will also be subject to an increase, making repayments more expensive. The poorer households will be hit much harder than the higher-income ones, and this is also because those that receive benefits from the government in the form of working-age benefits or pensions will see the inflation rates soar. Another issue will be the changes to Universal Credit which have sustained a decrease of £20 a week due to the pandemic, with those who do not work at all losing their entire Covid advance.


On the other hand, changes are being operated to personal taxes in 2022/23, making it possible for those earning less than £25.000 a year to pay less income tax and NICs, while those earning above such threshold will pay more. This means the Treasury will raise about £14 billion and most of the cost will be concentrated at the top of the income distribution.


Government Support During Unprecedented Times


In the face of such impacting cost rises, Chancellor Rishi Sunak has put together a support package targeted primarily at those most in need. This package comprises an Energy Bill Rebate consisting of a £200 discount on bills from October, repayable over the next five years, starting in 2023. This is when it is predicted gas wholesale costs will start lowering. The package also provides a £150 rebate for households in Council Tax band A-D, which will not have to be repaid. This one-off payment is expected to benefit 80% of all homes in England. In addition to the above, there will be £144 million provided to vulnerable people and low-income households who either do not pay Council Tax or are in band E-H.


In his Spring Statement, Chancellor Rishi Sunak also announced three immediate measures to support people. He stated he would help motorists by cutting fuel duty by 5 pence per litre, with the cut lasting until March next year. Next, he announced that for the next five years, homeowners having materials like solar panels, heat pumps, or insulation installed would no longer pay 5% VAT, making tax savings of around £1.000. And finally, he communicated he wants to do more for vulnerable households by saving the abovementioned £300 on their energy bills. Therefore, he will be doubling the Household Support Fund to £1bn with £500m of new funding, with the Local Authorities receiving this funding from April.


Regardless of the above measures put in place to ease the population of the incredible burden this crisis has set upon them, as food campaigner Jack Monroe put it in a Twitter thread, the most vulnerable are the ones that seem to be at the bitter end of all of this. For too many lower-income households, children and disabled people, there is a risk of being trapped in a "never-ending loop of difficulties", which could take them through several issues that stem from the economic crisis but branch out into serious health and wellbeing issues. Monroe has highlighted the unstable situation of millions, stating that if the social security benefits are not levelled up with the increasing inflation, this will be fatal for many.


Many have heavily criticised the government for its minimal support package, which will likely have a minimal impact for those who need help the most.


What Needs to Happen to Avoid a Poverty Crisis


According to UNISON, the largest union of public sector employees in the UK, there must be an increase in the public sector pay and an introduction to emergency measures to support people at a time of enormous financial pressure and rising costs. Without such a plan, workers will not be able to access essential products and services, and subsequentially, the public sector may be starved of skilled staff, and services might be cut off, pushing many over the brink of poverty. UNISON's general secretary, Christina McAnea, has stated that the government seems to be unaware of the enormity of the problems ordinary people face in this dreadful crisis and that it is utterly shameful highly skilled employees do not get paid a decent salary.


But the public sector is not the only one that needs to be taken care of. According to the New Economic Foundation, more than 23.5 million people across the UK will be struggling to afford the cost of living this year. A benefit increase of 3.1% will not be able to counteract the inflation rate, which is predicted to hit 8% soon, and £300 total in electric bills and Council Tax rebate is still not enough to help the lower-income households resettle themselves.


A substantial rise in benefits will be necessary to mitigate the impact of the dangerously ascending living costs. Steffen Ball, the chief economist at Goldman Sachs, has brought forward this unique situation where the benefits increase of this year is nowhere near the inflation rate surge, and this has never been the case since 1980. The government must at least push the rise to a decent level, sufficient to cover the cost of the crisis for those most in need. Failure to do so will lay the ground for an overall rise in poverty that will affect the country, lowering the spending power and consequentially pushing the UK intoa full-blown recession. Similar: Universal Basic Income System to be Tested in Wales

 

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