Cost-of-living crisis: How does the Government’s response compare to our proposal?

A few weeks back, our chief economist Aveek Bhattacharya suggested that the Government should respond to rising household costs – in particular higher energy prices – with a ‘cost-of living-bonus’. The scheme the Treasury decided to go with is decidedly different. Drawing on modelling by Policy Engine UK, Bhattacharya compares the two plans, finding that the SMF's proposal is better targeted and reduces poverty more than the Government's scheme.

A few weeks back, I suggested that the Government should respond to rising household costs – in particular higher energy prices – with a ‘cost-of living-bonus’. I proposed a one-off cash payment of £300 for middle-earners (excluding households with higher rate income taxpayers) and £500 for households on Universal Credit or legacy benefits. According to some media reports, a scheme of that nature was considered by the Treasury.

It was, not, however, what the Government chose to announce. Their scheme involves a £150 rebate on council tax for households in council tax bands A-D (which is to say, living in a property that would have been valued below £88,000 in 1991). It also requires energy companies to reduce each household’s bills by £200 this autumn, but to make this up by charging an extra £40 in each of the next five years.

So how do these two plans compare? The team at PolicyEngine UK, who have constructed a model specifically to analyse these sorts of tax and benefit changes, have crunched some of the numbers. In some ways, the outcomes are comparable. PolicyEngine estimates the initial cost to be £8.7bn for the Government’s initiatives, compared to £8.4bn for the SMF’s. As Figure 1 shows, there isn’t a huge difference in the average payment across most deciles.

The SMF proposal is better targeted, though. In general, poorer households get slightly more under the SMF plan. By contrast, the richest households do a lot better from the Government’s £200 energy discount, whereas they wouldn’t receive support from the SMF. As a result, the SMF proposal would reduce poverty by 6%, whereas the Government’s measures would reduce it by 5%.

Moreover, the SMF payments are permanent, while the Government’s energy price discounts have to be repaid. If we look only at the money households get to keep, the Government’s plans are a lot less generous, though obviously this also reduces the cost to the public purse, which falls to £3.1bn. Taken on its own, the council tax rebate will only reduce poverty by 2% and provide the lowest income households with just £128 of relief on average, compared to £328 under the SMF plan.

How far will this extra money cover the hit to living standards coming in the months ahead? Figure 2 examines that question by combining PolicyEngine’s estimates of impact of the SMF and Government schemes with the Tony Blair Institute’s estimates of the overnight impact on incomes expected in April (the forecast was made before the new energy price cap was announced, but shouldn’t change dramatically). These figures should be treated with caution, as they jam together two distinct models, but they can be indicatively useful.

Figure 2 shows that for households at the lower end of the income spectrum, both the SMF and the Government’s schemes, when combined with increases to the minimum wage and benefits, are on average sufficient to offset the impact of energy price and tax increase. However, it is important to note that this does not account for rising prices of other goods, and the possibility of further energy price rises.

The glaring exception is the bottom 10%. The story here is a little complicated, and not entirely clear. To some extent this may reflect a longstanding issue in survey data: systematic under-reporting of the lowest incomes (though PolicyEngine have taken painstaking steps to try and address this issue). It may also be a consequence of the fact that income isn’t always the best guide to how well-off a household is: think of retired households running down their savings. However, it also demonstrates the limits of targeting: not all poor families claim the benefits they are entitled to, and spreading the net wider may be necessary to reach all those that need help. For example, PolicyEngine has modelled cash payments only going to people that pay tax or receive benefits – expanding eligibility to include other households (eg retirees) could improve effectiveness.

Which is to say, designing effective and efficient relief is difficult. I think the SMF’s effort comes out better than the Government’s (not least because of its simplicity and visibility, which the model doesn’t evaluate). However, if you want to play virtual Chancellor, PolicyEngine has put its model online, allowing you to design your own scheme – let us know if you think you’ve done better.


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