The Treasury has withheld financial aid from the cost of living, believing that households can use their savings to weather the storm, Whitehall insiders said. the independent†
Money that people did not spend while locked up at home during the pandemic was cited in discussions between Chancellor Rishi Sunak and his team as a key reason to limit further government funding, sources said.
But the move was condemned by senior officials involved in the talks for ignoring the poorer households with no savings and those who had spent everything they could have saved.
“There is a lack of understanding among his team about how dire the situation is for those on the lowest incomes,” said a source from Whitehall. “They have nothing in the bank.”
Another insider said the approach had underestimated the magnitude of the cost of living crisis — which has caused the worst real income squeeze since 1945 — and failed to resolve the sharp disparities between wealthy households and their poorer, poorer households. means-tested counterparts.
This was “particularly evident for those households that are unemployed and on benefits,” they said, adding: “The real-world impact on these households has been and will prove to be quite devastating.”
The government had hoped consumers would feel encouraged by the prospect of abandoning pandemic restrictions even as they face cost pressures, the source added.
“He leaned on the idea that consumer confidence would recover and people would start spending again; it’s the same logic as Eat Out to Help Out,’ they said.
The news of the Treasury’s fiscal hesitation comes after Mr Sunak was widely criticized in March for ignoring the needs of the poorest in his mini-budget.
A source close to the chancellor resisted claims that he and his team had been saving on people who spend their savings, suggesting more help would come later in the year for struggling households.
“The energy bill will be capped until the autumn. We won’t know how big the gain will be yet, given the volatility of prices we’re seeing right now, and it’s good that we wait until we know how big the rise will be before deciding what the solution should be.” they said.
Inflation has reached new highs in 30 years in recent months and is set to rise further this fall with an increase in the energy price ceiling. The cocktail of rising prices pushed a closely monitored consumer confidence index compiled by market research firm GfK to a level of -38 in April, the lowest level since 2008 during the great financial crisis.
Unusual savings habits during the pandemic lockdowns have informed Treasury thinking, sources say. Higher earners were able to build savings as they saw their spending on social activities, commuting, and clothing decrease.
In 2020, this effect pushed household savings to levels not seen since the start of registration in 1963.
According to quarterly accounts from the Office for National Statistics, which represent the most recent data, households saved £72 billion in 2019, compared to £211 billion and £163.7 billion in 2020 and 2021 respectively without taking inflation into account. According to estimates by the Swiss bank UBS, household savings amounted to about 11 percent of GDP at the end of last year.
While high- and middle-income households built up a buffer, lower-income households, who in normal times would rarely put money aside and faced reduced leave income, or who continued to travel for work, did not. †
The state of household balance sheets has also changed rapidly in recent months, with savings either moving from cash to less liquid assets, such as housing or investments, or simply being spent to meet the rapidly rising cost of living.
“Not all of these savings are immediately available for use. That means there is less buffer than the direct headlines suggest,” said Anna Titareva, senior economist at UBS, pointing to research by the European Central Bank on saving behavior in the eurozone. There is no comparable study from the Bank of England.
“Lower-income households will be less confident,” she added, noting that this was significant because “the propensity to spend money is higher on income than on wealth.”
Economists have moved from hopes of a sharp and sustained rebound, after fears ease over the Omicron variant, to concerned about a troubling outlook.
“We have gone from being relative optimists on savings to pessimists,” said Andrew Goodwin, UK chief economist at Oxford Economics. Goodwin is not forecasting a technical recession — two consecutive quarters of economic contraction — in the coming year, but believes the risk has increased.
“We expect real incomes to fall by 2 percent this year,” he said. “That’s enough to push the consumer sector into recession this year, even if it doesn’t tip over to the entire economy.”
Starmer says Johnson is ‘an ostrich with his head in the sand’ over cost of living crisis
Conservative commentators have joined economists in criticizing the Treasury’s decision not to increase benefits in line with inflation. A slowdown in the calculation of inflation means that in real terms there has been a sharp cut in support for welfare dependent households – the largest in 50 years, according to the Joseph Rowntree Foundation.
A spokesman for the Treasury Department said: “We recognize that individual households have had very different experiences with the pandemic and many have saved less than usual, and we are closely monitoring this situation.
“These are anxious times – we’ve been honest with the UK public that we can’t fully protect people from the global challenges we face, but our £22bn package to ease the pressure is aimed at those who need it most. need.”