The Treasury has withheld financial support during the cost-of-living crisis in the belief that households will be able to use their savings to weather the storm, Whitehall insiders said. the independent.
The money that people did not spend while they were cooped up at home during the pandemic was cited in discussions between Foreign Minister Rishi Sunak and his team as a key reason for limiting further government funding, the sources said.
But the move was condemned by senior officials involved in the talks for ignoring the poorest households with no savings and those who had spent all 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,” a Whitehall source said. “They have nothing in the bank.”
Another informant said the approach had underestimated the scale of the cost-of-living crisis, which has produced the worst decline in real incomes since 1945, and had failed to address stark inequalities between wealthy households and their poorer, income-dependent counterparts. income.
This was “particularly evident for those households that are out of work and on benefits,” they said, adding: “The impact in real terms on these households is, and will prove, quite devastating.”
The government had hoped consumers would be emboldened by the prospect of abandoning pandemic restrictions, even as they face cost pressures, the source added.
“It’s been riding on this idea that consumer confidence would pick up and people would start spending again; it is the same logic as Eat Out to Help Out,” they said.
News of the Treasury’s fiscal dithering comes after Sunak was widely criticized for shirking the needs of the poorest in his March mini-budget.
A source close to the chancellor rejected claims that he and his team had relied on people to spend their savings and suggested more aid could arrive later in the year for struggling households.
“Power bills are capped until the fall. We still won’t know what the size of the increase will be, given the price volatility we’re seeing now, and it’s only right that we wait until we know how big the increase will be before deciding what the solution should be.” they said.
Inflation has hit new 30-year highs in recent months and is expected to rise further with a peak energy price hike this fall. The cocktail of rising prices pushed an index of consumer confidence 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 pandemic shutdowns informed Treasury thinking, the sources said. Those with higher incomes were able to accumulate savings as they saw their spending on social activities, transportation and clothing fall.
In 2020, this effect boosted household savings to levels not seen since records began in 1963.
The state of household balance sheets has changed rapidly in recent months
(AFP via Getty Images)
Households saved £72bn in 2019, compared with £211bn and £163.7bn respectively in 2020 and 2021 before taking inflation into account, according to quarterly accounts from the Office for National Statistics, which represent the most recent data. At the end of last year, household savings were equal to about 11 percent of GDP, according to estimates by Swiss bank UBS.
However, while high- and middle-income households built up a cushion, those with lower incomes, who in normal times would rarely manage to set aside funds and who faced reduced income on leave, or continued to travel for work, did not. they made. .
The state of household balance sheets has also changed rapidly in recent months, as savings have moved out of cash and into less liquid assets, such as housing or investments, or simply spent to meet rapidly rising costs of living. .
“Not all of these savings are available for immediate use. That means there is less protection than the immediate headline numbers might suggest,” said Anna Titareva, a senior economist at UBS, highlighting research by the European Central Bank into the behavior of savers in the eurozone. There is no comparable research from the Bank of England.
“Lower-income households will be less secure,” he added, noting that this was significant as “the propensity to spend is greater from income than from wealth.”
Economists have gone from being hopeful of a sustained strong rally, following an easing in fears over the Omicron variant, to being concerned about a troubled outlook.
“We went from being relatively optimistic on the savings story to being pessimistic,” said Andrew Goodwin, chief UK economist at Oxford Economics. Goodwin does not predict a technical recession (two consecutive quarters of economic contraction) in the coming year, but he believes the risk of one has increased.
“We expect a 2 percent drop in real revenue this year,” he said. “That’s enough to put the consumer sector in recession this year, even if it doesn’t affect the entire economy.”
Starmer calls Johnson an ‘ostrich with its head in the sand’ over cost-of-living crisis
Conservative commentators have joined economists in criticizing the Treasury’s decision not to raise profits in line with inflation. A lag in the way inflation is accounted for means there has been a sharp cut in real terms in support for welfare-dependent households, the biggest in 50 years, according to the Joseph Rowntree Foundation.
A Treasury spokesman said: “We recognize that individual households have had very different experiences during the pandemic and many will have saved less than usual, and we are monitoring this situation closely.
“These are anxious times: we have been honest with the British public that we cannot fully protect people from the global challenges we face, but our £22bn package to ease the pressures is aimed at those who care the most. they need”.