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Self’s assessment: Tax and the cost of living crisis

In our continuing series, Heather Self examines the tax issues that make the headline news. This week, why tax changes might not be the best way of delivering targeted support for the cost of living crisis.

Energy prices have continued to rise, and inflation is now at around 9%, putting the budgets of many families under significant pressure. At his Spring Statement in March 2022, the Chancellor did spend significant sums of money on support, including a 5p cut in fuel duty and a rise in national insurance thresholds from July 2022. He also announced an energy support package in February 2022 which gave everyone £200 off their energy bills (clawed back over the following five years) and a £150 council tax rebate to 80% of households. The total cost of these measures was £18bn in 2022/23 alone (source: table 3.1: Spring Statement 2022 policy decisions) – a very large sum, particularly when you consider that a ‘typical’ chancellor’s Budget involves around £2bn of measures in a ‘normal’ year.

Labour have continued to call for a windfall tax, and there are signs that the government is beginning to soften its stance. Professor Judith Freedman posed a number of excellent questions on Twitter recently: How long will a windfall tax take to devise, enact, collect? How much will it raise? How will any one-off sum be used? What happens after it’s been spent? My own view is that a windfall tax is not great in tax policy terms but is politically attractive – it looks as if the Government is ‘doing something’ – but it will be too little, too late, for those most in need.

The Sunday Times last week put forward the view that Sunak is now ‘attracted to a windfall tax on the energy companies’ but on the basis that there would be different rates of tax based on what they would be prepared to invest (sounds complicated, and aren’t capital allowances the key way to reduce the effective tax rate on investment?). One commentator noted that ‘even a windfall tax would only generate £150 per household’, which is going to do little to help the worst off in the short term. A further article in the Financial Times on 24 May suggested that the scope of a windfall tax could be widened to include electricity generators, potentially raising more money but adding significantly to the complexity of any definition of ‘windfall’ profits.

Meanwhile, the Liberal Democrats have continued to press for a VAT cut, which would be relatively easy to implement and would – at least in theory – show through quickly to people’s pockets. However, one major flaw is that it assumes that any cut would be passed on to customers: the 5p cut in fuel duty (which cost £2.4bn) was quickly swamped by further rises, and rumours that the petrol retailers took the chance to increase their own margins. As I have said before (Tax Journal, 13 January 2022), and Professor Rita de la Feria has explained in more detail, a VAT cut is very expensive and is an inefficient way of delivering help to the poorest, as those who have more money to spend get more of the benefits of any cut.

So, what should the Chancellor do? David Gauke, a man more familiar than most with political realities, wrote recently in the New Statesman that ‘The government can only do so much, and it does have to prioritise’, but he went on to make a powerful argument that more could, and should, be done for the poorest who are most exposed to rising prices. Helen Barnard, of the Joseph Rowntree foundation, wrote in Prospect magazine that there are, in fact, two different but related problems. The first is the ‘genuine crisis’ facing those on low incomes, who are ‘facing a level of hardship that should be unimaginable in a civilised country’. The second challenge is the hit to living standards for those on middle incomes – which, as Helen Barnard points out, are a more diverse group. It is this latter group where most of the recent support has been focused, but the more urgent need is for those on the lowest incomes.

As I said in January, and as Helen Barnard lays out in more detail, the obvious thing to do is to improve benefit payments – either by uprating benefits now by the actual cost of inflation (9%, when benefits were only uprated in April by 3.1%) or at least by reinstating the ‘temporary’ uplift of £20 to universal credit. It was widely reported recently (for example, in The Guardian on 13 May) that the chancellor cannot raise benefits more than once a year because of outdated computer systems at the Department for Work and Pensions. While government computer systems may well be antiquated, I have to say that ‘computer says no’ is the worst excuse I have heard for failing to help those most in need. And it is beyond belief that a temporary increase to universal credit, which has already been done once, could not be done again. As I said at the conclusion of my January article, ‘instead of finding complicated ways to subsidise energy bills, why not just give more cash to those who need it most’?

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