UK Cost of Living Increases: Who Should The New Chancellor Support…and How ?

 

The new occupant of No 11 (whoever he or she may turn out to be!) has a thorny problem on their hands…it's a significant one, and not one they can ignore....

We’re all starting to feel the pinch as a result of the most recent economic shock – Trump’s ill-advised Iran War. 

We all knew the economic pain the hostilities would cause; even before they started, a large slice of our population, on low wages but not entitled to benefits were really not able to make ends meet without taking out additional high-interest loans or cutting their outgoings to the bone. For some of them, yet another economic shock may well bring them to the brink of bankruptcy.

The excessive electricity and gas price rises imposed by the supplier ‘cartel’ to maintain their profit margins, and sanctioned by a compliant OFGEM, have been particularly injurious. This trend was apparent well before the start of the Iran war, so cannot be blamed on higher world prices as the suppliers claim. Many consumers have been left with large personal debts in the form of unpaid utility bills, just because they opted to keep themselves and their kids warm and fed this winter.  Industry, reeling after the shocks of 2 adverse budgets, is being starngled by rocketing power costs. With a large hike in the domestic cap certain in July, and more to come in October, next winter looks to be even worse for them, with the likelihood of further steep rises in oil and gas products if the Iran stalemate continues into the winter. Even Government themselves admit that electricity prices are too hig and are stifling our economic growth.

We have also allowed our water companies to 'fleece' consumers royally in recent years, despite their appalling sewage pollution record, with a particularly onerous 20% increases in water bills imposed in some areas in the last year, with another 10% to come this year, despite this, and their continued laqmentable performance on leaks and pollution incidents. 

The only real chink of light apparent is that suppliers themselves are finally beginning to realise the hard truth.....that all they achieve by maximising their profit margins at the consumer's expense is that they build up an ever-increasing customer debt mountain. Their financial position then worsens as a result and they (or indeed their adminstrators when they go bust!) may never be able to recover the debts. Time for a more sensible approach to running our utilities...and some resolute government action to stop it happening again. Interestingly, an imminent change of Labour leadership to one favouring re-nationalisation may start to bring the suppliers to heel at last...we shall see what Burnham manages to achieve there.

The worst-off undoubtedly need and deserve help, and the benefits system does provide them with this to some extent. So far, though,  the Labour government has done absolutely nothing to support the ‘challenged middle’ as some call them, and has also sought to punish them through the tax system by freezing allowances. This is a dangerous omission, and will likely cost them dear at the next General election. Burnham's recent hints at a land tax grab, and a possible additional wealth tax on top will only serve to worsen his party's position with their electorate if he becomes PM. This is of course conditional on his being foolish enough to implement his threat if he does actually take power - hopefully he will realise that punishing the wealth creators by 'robbing Peter to pay Paul' won't cut it when it comes to re-election. A lot of 'Ifs' there, certainly, but it could happen, if he turns out to be naive enough. 

Having already lost the support of the pensioner group over WFP, can Labour really afford to alienate another 40% or so of the remaining electorate in the name of misplaced ideological vanity ? 'Middle Britain' is a large group, and now includes those at the bottom end of the wages scale who earn just above the benefit qualification level, but really struggle to make ends meet. They get nothing extra, and pay 'through the nose' in taxes on their meagre wages, while the government continues to heap yet more largesse on those who do qualify for state benefits, to the exclusion of the rest of the population. A politically and sociologically dangerous ideological division, to say the least....

Even Starmer's precious and dwindling band of 'working people', who he still seems to regard as a protected species, have lately begun to wonder whose side he and his party are really on. Reeves has been allowed to continue piling on the tax increases budget on budget, emasculating our private industry sector in order to bolster a bloated public sector and their excessive wage demands, resulting in widespread job losses. And the government has done nothing to reassure this group that their jobs are not also at risk from AI - if anything the reverse, given their current obsessive campaign for UK to be at the forefront of AI development.

I’ve discussed the pernicious effect of this policy at some length in a previous blog, and won’t therefore bore the reader by re-hashing the arguments here. Suffice it to say that, not only does this stoke resentment against benefit claimants, but it discourages any incentive for hard-working 'aspirants' (i.e. hopefully most us!) to better themselves and their families. 

Even more damaging from a mental health point of view is that it discourages benefit claimants themselves from bothering to take on the responsibility of work when it's offered, and thereby forfeiting their more lucrative benefits income. 

If it is allowed to continue, this particular trend will effectively exclude a large slice of the working age population permanently from the jobs market and condemn them to a life on handouts. Getting people back to work after years on the dole is virtually impossible, since employers doubt their ability to do a day's work.

It's important for these 'professional' claimants to remember that their benefits may still be relatively generous now, but they could well dry up pretty quickly if things get even tougher economically, and back-bench opposition to planned benefit cuts declines under a Burnham premiership. They will certainly do so when we elect a new government in 2029;  both the Conservatives and Reform UK have made Benefit Reform a key part of their manifestos, and the chances of a second Labour term with a majority government are virtually zero.

A shift in the balance between work and benefits makes eminent sense economically as well as socially. We have now got ourselves into the ridiculous position where our welfare system allows someone sitting on state benefits to be significantly better off than their counterpart in a low paid job, despite recent rises in the minimum wage. And who's to blame the claimants themselves for 'looking after number one' ? Why work at all if you can 'earn' more  by sitting doing nothing ? The long-term toxic effects of a life 'on the dole' aren't immediately obvious when you start claiming...less money in your pocket at the end of the week because you've taken on a low paid job to get off benefits certainly is.

When Trump attacked Iran in February and we began to see the economic consequences of the Iranian blockage of Hormuz to shipping to come, many of us actually hoped that Labour would finally 'see sense' and provide some help to those not on benefits, but struggling with the cost of living.

After experiencing nearly two years of mistaken policies, we should perhaps have known better…..

Starmer, in one of his infrequent appearances in the House recently, made a great show of promising to offer help ‘when the time was right’, but stressed that any support would have to be targeted ‘so we could afford it as a nation’. No details were given on how this was to be done, or who would benefit, but strong hints were dropped that any such handouts would be heavily means-tested. In a desperate attempt to revive her popularity, and to avoid challenge on the much more expensive universal fuel subsidy many were expecting, Reeves herself has made much of a 'Summer Goodies' campaign including free bus travel for kids in August and 5% VAT on admission to entertainment venues...great - now we can all take the kids to Alton Towers and cry into our ice creams over how we're going to pay this winter's energy bills !

But this bout of 'summer largesse' won't solve the new chancellor's problem…who does he select for preferential treatment on cost-of-living relief…and how ? It's all very well Reeves recently taking the position at IMF meetings of an angry and aggrieved victim of US warmongering, thereby alienating Trump even further, but the new incumbent must find a way of making life easier for the electorate...or else pay the price (Reeves is not likely to survive the Starmer downfall, given the likelihood that Burnham is more left-leaning and will probably want to break her fiscal rules on borrowing from Day 1, despite his protestations to the contrary.)

We have, of course, been here quite recently with Labour’s specific miserliness - towards their 'burdensome' elderly population, as they see us – over Winter Fuel Payments (WFP). 

His own back benchers (bless 'em!) forced Starmer to relent on his much-trumpeted 2024 policy of confining WFP to pension credit claimants only, sprung upon us by Reeves only 5 days into his tenure. Amongst other things, this re-think (or should I call it his first enforced handbrake u-turn?) has resulted in a huge extra administrative burden for HMRC, who are from this April faced with the task of clawing back £200 from each of the ca 5 million pensioners who will be paid the benefit by DWP each November, but whose income has exceeded the £36k threshold and therefore don’t qualify for the money they've already received.  And all because Starmer couldn't bear the loss of face involved in fully restoring WFP as a universal benefit.

Presumably this onerous task will be attempted by recourse to Self Assessment return filings….the problem there is that there are ca 11 million pensioners, only a relatively small proportion of whom are currently required to submit self assessment filings. So what about all those pensioners who don’t currently participate in SA ? Will they now be required to complete SA online, when many don't have a computer, access to broadband to do it with and the willingness to 'retrain' in the digital age ?

More to the point, perhaps, who are they, and how will HMRC check whether all these new potential 'victims' of the new rules have actually already registered for SA?

We shall see what chaos this actually causes shortly, no doubt – April 6^th is now well past and the 'fun' at HMRC will be well underway.

Will the new incumbent of No.11 be ill-advised enough to try to confine cost-of-living help to Universal-credit and Pension-credit claimants only again this time, to avoid a similar administrative headache ? I doubt it, given the back-bench backlash last time Reeves tried it on. The divisions in society at large this would undoubtedly cause when almost all of us are now suffering some economic pain would be too injurious to Labour's election prospects, which are already poor to say the least. It’s more likely that they’ll try to adopt the same strategy as Reeves used for the WFP means-test, using the £35k income threshold ‘trap’ to withold the payments from all but the lowest earners to help minimise the loss of revenue to the treasury.

However, if they do this, there will be an added burden for the hard-pressed tax authorities. This is because every year the policy is maintained, HMRC will be forced  to screen not just pensioner incomes, but those of the whole adult population to find out who has earned more than the earnings limit that year. To do this, it will have to require self-assessment (SA) documentation from everyone – it won’t be sufficient just to screen existing PAYE returns or DWP benefit payments since this won’t capture other qualifying income which may be being earned by those who don’t currently participate in SA – i.e. most of the working population who are not actually self-employed and don't have qualifying savings, rental or capital gains income. 

If they thought that the WFP qualification assessment burden would be large, this one will be horrendous, and will tie up HMRC assessors for years - with or without the help of AI. Just setting up a suitable scheme would take months - to say nothing of the costs in the extra staff salaries and expensive bought-in locum and consultancy fees. And so much for the key task HMRC were assigned last year by Reeves of filling the 'Tax Gap' (currently ca 46Bn - they'll all be too busy trying to extract a few hundred extra quid from any pensioners they can find to catch out !

As for applying a wealth tax, as suggested by both Burnham and Streeting, the implications are horrendous for both our privacy and HMRC's workload. Everyone in the UK would have to declare their total wealth, both in liquid and fixed assets (i.e. cash and property), and this would have to be verifed by HMRC. A nightmare in the making, to be sure.

Will the chancellor relent and do the decent thing, by providing everyone with some help – at least with their fuel bills ? The Lib Dems have recently come up with one of their few sensible suggestions of recent years - a universal basic fuel allowance, with extras for those most in need. Funding for this would be clawed back from suppliers' profits, and would certainly go down well - with everyone, and not just the 'chosen few'. It's doubtful, I’m afraid, whether the treasury would even contemplate this option, given Labour's obsession with wealth redistribution, and their own obsession with filling ‘Tory Black Holes’ and sticking to Reeves' ‘iron clad’ fiscal rules - no matter what. I suspect the new incumbent may well temper this obsession, given the impossibility of boosting public spending and Defence without some extra borrowing.

Roll on 2029....we'll be well ready for a change of government by then !

First Published 2.4.26; Revised 25.6.26