Cost of living increase

The cost of living is expected to rise significantly for many households in 2022 due to factors such as tax rises, benefit freezes, increased energy costs and rising inflation. The Resolution Foundation (RF) think tank has described this as a cost of living “catastrophe” that could make the average household £1,200 a year worse off from April 2022. The impact will be particularly felt among lower-income households, which spend proportionally more of their income on utilities and other essentials. The RF has estimated that if, as projected, energy bills increased by up to 50% in April, it could push over six million households in England into “fuel stress” (defined as spending over 10% of their income on fuel costs).

In April 2022, benefits are due to be uprated by about 3%. However, the Bank of England has estimated that inflation could be 6% by then. This comes on top of the removal of the £20 a week universal credit uplift and a previous energy price increase averaging 12% in October 2021.

The Government has said that it is supporting families to meet increased energy costs through policies such as the warm homes discount, winter fuel payments and cold weather payments. The Labour Party has proposed a windfall tax on North Sea oil and gas producers and the cutting of VAT on fuel bills.

The Resolution Foundation has said that, as significant parts of the cost of living increase will result from government policy, it was “almost impossible” that policies would “go ahead without some form of [Government] mitigation”. The RF has recommended a range of short-term relief measures, including increasing the “basic generosity” of universal credit; temporarily removing VAT on electricity bills; and moving environmental levies currently added to electricity bills into general taxation.

The Institute for Fiscal Studies (IFS) has recommended that the Government could target support to lower-income households by uprating benefits by a higher rate this April, followed by a lower rate in April 2023. This would leave the “long-run size of the benefit system unchanged”. However, the IFS has also said the Government should take the opportunity to reform the way benefits are uprated. An alternative would be to use “near-term forecasts for inflation”, as is “already done with the uprating of excise duties”.

Health and social care levy

In addition to other cost of living pressures, tax rises are set to also take effect from April 2022. The freezing of tax thresholds announced in 2021—both for the personal allowance and the higher rate of income tax—would see more people drawn into those tax bands. The Government’s health and social care levy will also be implemented, raising national insurance contributions by 1.25% for both employees and employers. It is expected to raise about £12 billion a year. The IFS has estimated that for someone on a salary of £30,000 the health levy will mean a tax rise of about £250 a year.

There have been reports, including in the Financial Times (£), of members of the Cabinet calling for the social care levy to be scrapped.

The Policy Exchange think tank has criticised the levy as a payroll tax with a significant distortionary “deadweight cost”. Policy Exchange has instead argued, as set out in a 2019 report, that social care should be fully integrated into the NHS to make it free at the point of use and financed through general taxation.

Siva Anandaciva, chief policy analyst at the King’s Fund think tank, has argued that there could be two problems with a “front-loaded fund of this magnitude”. First, using it to tackle NHS backlogs may be difficult in the short term due to burnout of NHS staff and Covid-19 absences and isolation. Therefore it was not clear what “all of this extra money could buy”. Second, he was concerned that the levy would never “break free of the NHS’s gravitational pull” and it could “squeeze out future levy funding for social care”.

Andy Summers, professor of law at the London School of Economics, has argued that the levy is not the right way to pay for social care because increasing national insurance is “arbitrary, regressive, and unequal”. He said that fairer ways to raise revenue would be to raise capital gains tax rates to match income tax rates, remove inheritance tax exemptions, or introduce a “new one-off wealth tax”.

Helen Miller, deputy director of the IFS, has said she believes it is unlikely the Government would fully scrap the social care levy as there would be significant spending pressures on health and social care in the coming years. She said if the Government wanted to alleviate short-term cost of living pressures it could defer the introduction of the levy until April 2023. Alternatively, the Government could pursue a “half-way house” option by proceeding with the increase to employer national insurance but deferring or scrapping the increase for employees.

Cover image by Super Straho on Unsplash.