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On 9 June 2022, the House of Lords is scheduled to debate the following motion:

Lord Eatwell (Labour) to move that this House takes note of (1) the increasing cost of living, (2) the level of economic resilience in the social capital of the United Kingdom, and (3) the case for Her Majesty’s Government to take further steps to address these issues.

1.   Increases in the cost of living

The cost of living, or the amount of money people need for necessities such as food, shelter and energy, has been increasing across the UK since early 2021. Price increases in a broad range of areas are the result of several factors, but strong consumer demand for goods, supply chain issues and Russia’s ongoing invasion of Ukraine have all played a role in exacerbating price pressures. On the domestic front, tax and benefit changes and higher interest rates have further affected incomes and the capacity within household budgets to absorb rising living costs, although recent government support packages have contained measures aimed at alleviating rising costs to some extent.

1.1 Impact on household incomes

The Institute for Government has characterised the fall in household disposable incomes, predominantly resulting from high inflation caused by global factors outstripping wage and benefit increases but also exacerbated by recent tax increases, as a ‘cost of living crisis’. Rising prices for living essentials have disproportionately affected poorer households, which spend more of their disposable income on food and energy and have less flexibility than richer households to absorb price increases.

Price pressures have increased further since the beginning of the year. In late April 2022, the Office for National Statistics (ONS) released the findings of an opinions and lifestyle survey conducted between 16 and 27 March 2022. This found:

  • Around 9 in 10 (87%) adults reported an increase in their cost of living over the previous month. This compared with around 6 in 10 (62%) adults in November 2021.
  • Nearly a quarter (23%) of adults reported that it was very difficult or difficult to pay their usual household bills in the last month compared with a year ago, an increase from 17% in November 2021.
  • Among those who paid energy bills, around 4 in 10 (43%) reported that it was very or somewhat difficult to afford their energy bills.
  • Of adults paying off a mortgage and/or loan, or rent, or shared ownership, 30% reported that it was very or somewhat difficult to afford housing costs, and 3% claimed to be behind on rent or mortgage payments.
  • Among all adults, 17% reported borrowing more money or using more credit than they did a year ago.
  • Among all adults, 43% reported that they would not be able to save money in the next 12 months, the highest reported figure since the question was first asked in March 2020.

On 23 March 2022, on the day of the chancellor of the exchequer’s spring statement, the Office for Budget Responsibility (OBR) forecast that real household disposable incomes per person would fall by 2.2% in 2022/23. This would be the largest fall in a single financial year since ONS records began in 1956/57. However, the forecast was based on a projection that inflation would reach a high of 8.7% in the fourth quarter of 2022 that has since been revised upwards.

The following day, the Resolution Foundation think tank said it expected the poorest quarter of households to see their incomes fall by 6%. It argued this would result in a “further 1.3 million people fall[ing] into absolute poverty next year, including 500,000 children—the first time Britain has seen such a rise in poverty outside of recessions”. It added that incomes were on course to be “lower at the next election (2024/25) than they were at the last (2019/20), with typical non-pensioner income projected to be 2% lower”. It said that such an outcome would make the current parliament the “worst” on record for living standards growth. The foundation also argued that although the chancellor had announced some measures to “offer households some protection from higher-than-expected inflation, he chose not to do so for public services”.

On 30 May 2022, the ONS released an experimental analysis of price data for 30 everyday grocery items. This suggested that the lowest-priced everyday grocery items had “seen a notable variation in price change, with some items showing increases of over 15%, while other items fell in price”. It noted the items “where the lowest prices rose at the fastest rate were pasta (up 50% between April 2021 and April 2022), crisps (17%), bread (16%), minced beef (16%) and rice (15%)”.

1.2 Inflation measures and forecasts

On 18 May 2022, the ONS recorded that the consumer prices index (CPI) measure of inflation had reached 9% in April 2022. This is a measure of the average change in the price of typical goods and services purchased by UK households over 12 months, excluding the cost of housing, and was up from 7% in March. The consumer prices index including owner-occupiers’ housing costs (CPIH), a different measure of inflation that includes the cost of housing, reached 7.8% in the 12 months to April 2022, up 1.6 percentage points from 6.2% in March. Around half the increase was driven by electricity, gas and motor fuel price rises.

On 5 May 2022, the Bank of England’s monetary policy committee (MPC) forecast that CPI inflation would “rise further to a peak of slightly above 10%, on average, in 2022 Q4”. This is considerably more than the bank’s CPI inflation target of 2%. Explaining that such a figure would be the highest rate since 1982, the MPC attributed most of the expected increase to:

[…] the rise of 54% in household energy prices in April [2022] and the projected increase of around 40% when the Ofgem price is next reset in October; and, to a lesser extent, higher food and goods prices, given the sharp rises in global agricultural commodity and energy prices and renewed supply chain disruption following the invasion of Ukraine.

The MPC noted there was “considerable uncertainty” around its projections, based on a financial markets-implied rise in the bank interest rate to over 2.5% by mid-2023 before a fall back to 2% in 2025. However, based on these projections the committee said it expected real household disposable income to “fall in 2022 by the second largest amount since records began in 1964, before picking up thereafter”. On the outlook for CPI inflation, it offered a cautious suggestion that pressure was set to ease from next year onwards:

After the peak in 2022 Q4, the upward pressure on CPI inflation is expected to dissipate rapidly, as global commodity prices are assumed to rise no further, global bottlenecks ease, and domestic inflationary pressures subside in response to weaker growth of demand and a rising degree of excess supply. CPI inflation is projected to fall to just above the [bank’s] 2% target in two years’ time, largely reflecting the waning influence of external factors, and to 1.3% in three years, well below the target, reflecting weaker domestic pressures. The risks to the inflation projection are judged to be skewed to the upside at these points, given the risks of more persistent strength in wage growth and domestic price-setting than assumed.

2.   Social capital and economic resilience

2.1 What is social capital?

‘Social capital’ is defined as the “network of social connections that exist between people, and their shared values and norms of behaviour, which enable and encourage mutually advantageous social cooperation”. It is also a concept in social science that involves the “potential of individuals to secure benefits and invent solutions to problems through membership in social networks”. In this sense, it revolves around three dimensions:

  • interconnected networks of relationships between individuals and groups (social ties or social participation)
  • levels of trust that characterise these ties
  • resources or benefits that are both gained and transferred by virtue of social ties and social participation

In a series of statistical bulletins on social capital in the UK, the ONS has listed the concept as having ‘four domains’. These are given as: personal relationships; social network support; civic engagement; and trust and cooperative norms.

Andy Haldane, a former chief economist at the Bank of England, has argued that social capital is the “secret source of economic as well as personal growth”.

2.2 Economic resilience

Economic resilience can be broadly defined as the ability of a system to withstand or overcome a shock.

Lord Eatwell is emeritus professor of financial policy at the University of Cambridge and a former Labour Party spokesperson on Treasury and economic affairs in the House of Lords. He has argued that the Covid-19 pandemic was a shock that “laid bare the economic and social consequences” of the austerity-based fiscal consolidation policies pursued by successive administrations from 2010 onwards.

During a debate on the budget statement in November 2021, Lord Eatwell argued that such policies represented a “decade-long destruction of the nation’s social capital in care, education, local authority services and the National Health Service”. He argued that Chancellor of the Exchequer Rishi Sunak’s spending announcements on that occasion would not restore public spending to 2010 levels in social care, education or health. Instead, Lord Eatwell argued that the “use to which money is put in the context of overarching economic goals” should be a more important consideration than prioritising a reduction in overall government borrowing in isolation. He continued:

The composition of the funding of government expenditure, whether by taxation or borrowing, should be part of overall economic management of current levels of demand, as in the pandemic; the attainment of medium-term growth objectives, as in the transition to net zero; the investment in social capital, as in health and education; and policy on the distribution of income. Mr Sunak has a plan: it is to cut taxes and cut borrowing. The result, as the OBR makes clear, is that, once output has returned to pre-pandemic levels, the rate of growth falls to around 1.5% a year, which is totally inadequate to meet the needs of demography and climate change.

In an earlier speech on the May 2021 Queen’s Speech, Lord Eatwell had called for a return to “economics for the common good”. Such an economic strategy would build on the example of the 1945 Labour government. Elaborating on remarks he had made earlier that year, he explained:

In 1945, Clement Attlee, in far worse circumstances than we find ourselves today, presented a vision for post-war recovery based on three pillars: education, health and culture. The economic framework was simple yet profound; it was economics for the common good […]

Economics for the common good recognises the need for collective provision of the foundations of production that individual companies cannot or will not provide—hence the need for investment in infrastructure, where infrastructure, properly understood, is not just railways and internet connections but protection for the environment, education and cultural industries and affordable childcare. All require collective investment to attain national productive efficiency.

Concluding his remarks, Lord Eatwell argued that such an example suggested that the country:

[…] should fund the recovery from the pandemic and the reconstruction of our economy as it reels from the blows of Brexit by the same method as we funded the war and the post-war recovery: by eschewing the nonsense of Treasury fiscal orthodoxy and instead pursuing a balanced management of the public debt that funds recovery, maintains demand and secures full employment.

3.   Government policy and support for households

The government has made several announcements since the beginning of the year aimed at supporting households facing a rise in living costs. Ministers have also set out their vision for the UK economy over the same period.

3.1 Recent speeches

In a lecture delivered at Bayes Business School on 24 February 2022, Chancellor of the Exchequer Rishi Sunak set out his vision for an economy “built on a new culture of enterprise”. He disagreed with those who argued for further government intervention in the economy after the Covid-19 pandemic as the “foundation of a new economic model, where government is a permanently bigger presence in the market and our lives”. But he contended there was still a role for government working in partnership with free markets. He explained:

[…] it is incumbent on government to support people, especially those unable to support themselves, and through the welfare state, public services and education. It’s why we raised the national living wage, cut the tax rate in universal credit, and are so focused on reducing regional inequality and levelling up.

Second, the free market creates the wealth that allows us to support our families and our communities. But we need to guard against the market reaching too far into these realms, eroding the bonds between us, and turning a market economy into a market society.

And third, the market has limits in dealing with externalities like climate change, and periods of profound disruption like wars, financial crises, or pandemics. Having been part of a government that had to actively shut down the economy, and introduced interventions like the furlough, I know this as well as anyone.

Mr Sunak also said the government was “dealing with high inflation by helping people with those extra costs”. But over the longer term, he argued the “most important thing we can do is rejuvenate our productivity”. Mr Sunak then set out three priorities for supporting economic growth, later summarised as “Capital. People. Ideas”. He explained the priorities as follows:

The first is to encourage greater levels of capital investment by our businesses. Second, we need to improve the technical skills of the tens of millions of people already in work. And third, we want to make this the most innovative economy in the world by driving up business investment in research and development.

In a speech delivered at the Confederation of British Industry annual dinner in May 2022, Mr Sunak elaborated on this approach. He said that tackling high inflation was “not just an economic necessity”, but a “social and moral necessity”. Before calling on business to increase investment, he continued:

[…] at a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse. By pushing up prices still further. Embedding high inflation expectations. And creating a vicious cycle of even higher interest rates and more pain for tens of millions of mortgage holders and small businesses. So even as we protect people from the worst of the crisis, we must continue to be responsible with the public finances and get borrowing sustainably under control and debt falling. So our plan will deal with the immediate impacts of inflation. Cutting costs for families. Cutting the deficit. And we are also growing the economy. Over the long-term, higher productivity is the only way to raise living standards.

3.2 Government support measures

On 3 February 2022, the chancellor announced a support package for households prompted by rising energy costs. This included:

  • A £150 non-repayable council tax rebate for households in bands A to D in England, covering 80% of homes.
  • An increase in the warm homes discount (for vulnerable households) from £140 to £150, together with expanded eligibility.
  • A £200 ‘energy bills rebate’ for all energy customers, to be paid back by over a five-year period. The rebate was later replaced by a more generous grant (see below).

On 23 March 2022, the chancellor included measures aimed at supporting household budgets in the spring statement. These included:

  • Increasing the primary threshold above which national insurance contributions start to be paid, from £9,880 to £12,570 from July 2022.
  • Reducing the basic rate of income tax from 20% to 19% from April 2024.
  • A temporary cut in fuel duty of 5p per litre for 2022/23.
  • An increase in the household support fund of £500m for 2022/23.

On 26 May 2022, the chancellor announced a further package of measures intended to help with the cost of living. This included:

  • An upfront discount on bills of £400 for all households with no requirement for the sum to be repaid.
  • A one-off £650 cost of living payment to around 8 million households on certain means tested benefits.
  • A one-off £300 payment for over 8 million pensioner households.
  • A one-off £150 disability cost of living payment for people receiving certain disability benefits.
  • An additional £500 million of local support through the household support fund in England.

The government estimates that support measures announced so far in support of households total £37bn. According to the Institute for Fiscal Studies, once recent income tax threshold freezes, increases in national insurance rates and proceeds from the new energy profits levy are considered, the net level of government support for households falls to around £14bn in the current financial year.

Following the latest package of measures, the Resolution Foundation said the “effect of all tax and benefit policies coming into play this year is highly progressive”. It explained: “households in the bottom quintile will gain on average £1,195, compared to £799 for households in the middle quintile, while the top quintile on average loses £456”.

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Cover image by Image by Greg Montani from Pixabay.