Additional £12 billion needed to support families through cost of living crisis

New research from the IFS has found that the government will need to generate an additional £12 billion to implement the energy support strategy laid out earlier this year to help families manage the cost of living crisis. The analysis is part of a wider project funded by the Nuffield Foundation assessing the state of public finances.

When the government’s £24 billion support package was announced energy prices were expected to the rise by 95% in 2022/23. Energy prices are now expected to rise by 141% over the same period, meaning that the support package will need to be increased to provide the same level of protection to households.

The analysis shows that under the most recent inflation forecasts, working age benefit claimants are on track to face a £620 fall in their real income over the next year. To protect them from price rises, the government will need to double the existing £650 grant as well as help low-income pensioners and families in work at a cost of £5.5 billion.

The growing price of energy will also affect the government’s pledge to cover around half of the increase in energy costs for a typical family over the year. To achieve this partial subsidy, it will need to push the £400 energy discount and £150 council tax rebate up by a further £260 at a cost of around another £7 billion.

Further impacts of rising inflation

People on lower incomes will be the hardest hit by the cost of living crisis. The fifth of the population with the lowest incomes will face an 18% inflation rate in October, compared to 11% for the richest fifth. Despite the new energy price cap coming into effect in October, benefits increases in April 2023 are set to be based on the rate of inflation during September 2022. In April, the real value of benefits will be 7% lower than they were pre-pandemic. The government should change its approach so that benefits rise by the expected rate of inflation by April instead, the IFS suggests.

“As prices of essentials including food, heating and fuel continue to rise, families on low-incomes are facing more uncertainty and pressures. Many of these families were struggling to get by even before the current crisis and are not helped by the rollercoaster real value of Universal Credit payments, and short-term fixes to help benefit claimants. The government needs to make clear the actions it will take to help these families, by providing them not only with more security now, but greater certainty in the medium term.” Alex Beer, Welfare Programme Head at the Nuffield Foundation

The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12 billion, and a package on that scale will still leave many households much worse off. Given the costs there are genuine and difficult trade-offs here. For both households managing their budgets and the government managing the economy’s finances some clarity on strategy is urgently needed. Paul Johnson, IFS Director