Economy Update

Baroness Kramer Excerpts

Thursday 26th May 2022 Lords Chamber

[Lord Collins of Highbury (Lab)]

My Lords, I am grateful to the noble Baroness for giving us the opportunity to respond to the Statement. These are incredibly difficult times for people across our nation. That much has been clear for several months, so the obvious question is: why is action being taken only now? Many will see this as an attempt to spare the Prime Minister’s blushes after the publication of the Gray report, which we debated last night, rather than a sign that this Government are on their side.

Inflation is running at a 40-year high and is yet to peak. According to recent analysis, the inflation gap between the richest and poorest is growing, meaning that low-income households are bearing the brunt of the cost of living crisis. As the Chancellor acknowledged in his Statement, we expect the energy price cap to rise by a further £800 in October, and this will take energy bills to their highest level since records began. This crisis is hurting everybody, but it will hit those at the bottom of the income distribution the hardest. The Institute for Fiscal Studies predicts that by October the poorest 10% of households will experience an inflation rate of 14%. By contrast, it will be 8% for the richest 10%. That situation is neither fair nor sustainable.

The various initiatives announced in the Statement are welcome—but of course we would say that as we have been calling for an energy windfall tax for nearly five months. Energy bosses themselves have admitted that they do not know what to do with the unexpected surge in their profits. They have been clear that a windfall tax would not be a disincentive to invest in their operations, and they are already ramping up their investment plans and have money to spare. They can comfortably do both. Despite growing cross-party consensus and the sector’s invitation to act, the Government whipped against a Commons vote on a windfall tax just nine days ago. Of course, the announcement of this temporary targeted energy profit levy is better late than never, but each day of dither and delay has caused unnecessary stress for households and their finances.

We welcome the targeted support for millions of the most vulnerable households across the UK; a significant weight will be lifted when these cost of living payments arrive over the coming months. But this too could have been announced long ago, providing quicker help with April’s cost-cap increase. In the light of Ofgem’s recent announcement, we are also glad that the Government have gone further on universal support. Crucially, the Chancellor has finally dropped the ill-conceived loan element of that scheme. It was wrong to adopt that option and the public immediately saw through his spin. The reduction will no longer be recouped through other increases to bills over the next few years—another Labour policy in action.

One decision ducked by Mr Sunak was on cutting VAT on energy bills. This could have been delivered overnight had the VAT cut been adopted when Labour proposed it last October. It is not the case that many would have had a more comfortable winter? We know that there is growing support for that policy on the Conservative Back Benches, in another place at least. It was even previously touted by the Prime Minister—but I suppose we should not be surprised that he did not keep his word. So can the Minister tell us whether the Treasury will at least be keeping the VAT card up its sleeve should the economic conditions driving increased bills not improve? Can she also confirm whether the Treasury will publish details of how this package is being funded beyond the new windfall tax? Finally, can she give an indication of when enabling legislation for the windfall tax will be brought forward?

In conclusion, we welcome the Government’s U-turns, but there is much more work to be done if people are to be protected from similar price shocks in the future. Given the Government’s willingness to listen to Labour’s ideas, I hope we will soon see aspects of our wider energy plan—for example, rapid action on home insulation and the doubling of onshore wind capacity—put into action.

[Baroness Kramer (LD)]

My Lords, I honestly do not think anybody in this House is seriously fooled. The announcements by the Chancellor today, including the U-turns on a windfall tax and increasing benefits, are basically covering fire for Boris Johnson and his disgraceful role in partygate. The timing gives it away. People have been suffering from a cost of living crunch through much of this winter, making an appalling personal decision on eating or heating. They have needed that help.

The Chancellor says today that he did not know until yesterday that the energy cap would go up by £800 in October. He must be the most out-of-touch person in the country. He could have talked to anybody, on any street, and they would have told him not only that the cap would go up but the amount.

I do welcome today’s package. Anything is needed when a crisis is this urgent and desperate, but one of my concerns is that it covers only the increase in energy costs. The Chancellor’s own speech explains that the average increase in people’s energy bills this year will be just under £1,200. He goes on to say that this is

“the same amount as our policies will provide for the most vulnerable people this year.”

There are other serious pressures, notably the increase in food prices, which are falling most on people on the lowest incomes. I wonder whether the Minister will tell us what experience ordinary people will have and how much more per week it will cost them to deal with those higher food bills. That problem is desperately acute.

There is nothing in here for businesses. I took a quick look at the response from the response from the British Chambers of Commerce, which is usually a very modest group that is always likely to welcome—and does welcome—the actions of the Government. It states:

“For business, the toxic mix of inflation, raw material costs and supply chain disruption”,


largely from Brexit,

“is the flip-side of the coin to the problems facing consumers. Unless steps are also taken to ease business costs, they will likely feed into the inflationary pressure on the economy and quickly eat into the financial support announced today.”

We must not forget that individuals are also facing significant increases in taxes. National insurance contributions are going up 1.25% and, because thresholds have been frozen, many people will find that their income tax bill is shockingly higher than they ever anticipated.

I would like to understand more about why the Chancellor has chosen not to go further. He is going to see £7 billion coming in today from the tax on oil and gas. I agree with others that the oil and gas companies can very much afford to do that. I note that they still plan share buybacks and saw nothing in the market to suggest that that has changed. BP is not cancelling its planned £8 billion in share buybacks this year, nor Shell its £6 billion in announced plans. The Chancellor also now has £8.6 billion in extra VAT due to inflation this year, rising to £40 billion by the end of the Parliament. With that kind of windfall coming into the Treasury itself, there is scope to do a great deal more.

I join others in my party who have called for a cut in VAT, because that would stimulate business, particularly small businesses; take pressure off companies that thought they were going into clear waters coming out of Covid but are now wondering if they are going to survive; and help those on the lowest incomes deal with this severe increase in food prices. Essentially, it is largely paid for by the extra revenues that flow into the Treasury thanks to inflation. Can the Minister explain why that has not happened and why, under those circumstances, the Government are absolutely determined to go ahead with their increase in national insurance contributions, which is going to diminish the pay packet of virtually every working person in the country?

[Baroness Penn (Con)]

My Lords, I thank the noble Lord, Lord Collins, and the noble Baroness, Lady Kramer, for their questions and for their welcome, I think, for the announcement made today. It is an important announcement, of significant scale, and it will mean a lot to people up and down the country who have been worrying about their energy bills in particular, as well as wider inflation, which I will come to.

Both noble Lords asked why now and what has changed. I say to them that three things have changed since the Spring Statement. First, the war in Ukraine has developed; we were at an early stage in the conflict then. Secondly, inflation expectations have unfortunately worsened since that time. Thirdly, we now have a much clearer idea of the likely level of the price cap in October. The noble Baroness said that anyone could predict what that would be, but there have actually been quite significant levels of volatility and I think it is right to have the best available information so that we can scale and target our support in the best possible way. That is exactly what we have done.

We have designed a windfall tax that will have significant allowances in it to encourage investment, while still, rightly, raising money that will go to households to support them with the cost of living. In waiting, we have been able to design that investment incentive in it and we also have a tax that will raise more money than the tax proposed by the opposite side, which they estimated to be about £3 billion—our estimates are about £5 billion. It has also allowed us to match the level of support that we intend to provide for the needs that people will have over the coming months. The lowest-income households, which the noble Lord, Lord Collins, rightly referred to in his questions, will receive around double the amount under the Government’s plans than in the plans set out by Labour.

Both noble Lords opposite asked about a VAT cut. A VAT cut on energy would provide, on average, support of around £120 per household. The basic support of a grant to every household of £400 is obviously much more substantial than that, but also, using a VAT cut would mean that more relief would go to those households which are, for the most part, the wealthiest, so I do not think it would be necessarily a well-targeted approach to the problems that we face.

The noble Lord asked when we will legislate for this new levy. The usual channels will, of course, discuss that, and we will bring forward legislation as soon as parliamentary time allows. However, we are clear that the levy starts from today, so there will not be an opportunity to avoid it from that perspective. He also asked about the gap in support for families while we look at what support can be put in place for the October increase in the price cap. Of course, when we knew the April figures and other estimates for the economy, we put more support in place: the national living wage has gone up, and most families have, I think, received their council tax rebate of £150 per household. We had previous cuts in the universal taper rate and an increase in the work allowance, and of course we announced the increase in national insurance thresholds.

I really have to correct the noble Baroness when it comes to national insurance. Yes, we have introduced the health and social care levy that will raise billions of pounds to pay for health and social care spending in years to come, but the increase in the NICs thresholds that will come in in July means that 70% of people will pay less in NICs next year than they would otherwise pay. I do not think it is right for people to get the impression that their pay packets are going to go down in July when they will go up. Also, in increasing thresholds while retaining that levy, we have had to take some difficult decisions that reflect our approach to fiscal responsibility, but we have done it in a targeted and quite redistributive way. I thought that was something that the Liberal Democrats might welcome, and I am disappointed that they still do not feel able to do so.

The noble Baroness talked about pressures beyond the increase in the cost of energy, and she is absolutely right. I have mentioned some of the action we have taken. We have introduced the fuel duty cut to help people with the cost of living. She talked about businesses needing support. We have introduced business rates relief and increased the investment allowance for businesses. We have NICs relief for small businesses employing low numbers of people, which is worth millions of pounds to many small businesses.

I think I have covered most of the points raised by noble Lords. I am glad they have welcomed the action. We have designed it very carefully to recognise that households across the country will be feeling the squeeze in months to come. There is some universal support, but those on the lowest incomes will struggle the most to meet those costs, so we have put in place extra support to help them where we can.

It is important that I close with one thing. The Government cannot meet the cost of living crisis and alleviate all the pain that people will feel over the coming months; I will never pretend that we can. We can put in place targeted interventions to help those least able to meet those rising costs, and that is exactly what we have done with our announcement today.