This week Rachel Reeves ruled out a blanket energy bailout to manage the fallout from the Iran war. That’s the right approach. But her targeting of a bailout – reportedly to those on benefits – risks solidifying Britain’s welfare trap.
When the Chancellor gave her economic update to the Commons on Tuesday following an emergency Cobra meeting, she took a potshot at Liz Truss. Not for the ex-prime minister’s mini-Budget but for her multi-billion-pound energy price guarantee that sent the gilt market into meltdown. ‘As we respond to this crisis, we must learn from the mistakes of the past,’ Reeves told MPs.
The previous government pushed up borrowing, interest rates, inflation and mortgage costs with an unfunded, untargeted package of support under Liz Truss. That gave the most support to the wealthiest households.
Can we really expect the state to bail us out of every single crisis?
On that, the Chancellor and I are aligned. Back in 2022, the unlimited energy bailout for all households merely piled on more and more debt; ‘helpful’ funding from the money-printers in Threadneedle Street merely stoked more inflation. Indeed, it is still a matter of debate within the Treasury whether forcing households to adjust their spending in other areas would have helped win the inflation battle.
Anyway, this week’s decision – to go for targeted support – left the government with a dilemma: how do you actually target it? Reeves had wanted a simple income-level means test, however this data exists only at an individual level rather than a household one. Creating the dataset needed to implement this would apparently take too long. As I explained on Coffee House Shots this week, that’s nonsense: linking government records is not a technically difficult task. The delays are caused by bureaucracy and legality (GDPR etc). A minister could waive all that with the stroke of a pen if they really wanted to.
But, with that option kiboshed by Whitehall, I understand there were two main options looked at. The first was to dish out cash to local councils who could then make payments through hardship funds. The theory was that local authorities know their residents better than Whitehall and would be best placed to dish it out. The second was to utilise the benefits system.
The Times reports that the benefits option is the one the Chancellor has gone for – with around six million people eligible for support. It could operate like the warm homes discount, which deducts £150 from electricity bills for those on means-tested benefits.
The problem is that this is just going to make Britain’s welfare trap and broken incentives structure even worse. While Universal Credit, for instance, is not actually that generous by international standards, it becomes a very attractive proposition once you tack on various health-related benefits and top-ups. It has already been calculated that a working family with three children would need a salary of at least £70,000 to earn the same income as one totally reliant on benefits. Add on energy bill discounts and that gap is going to get worse.
We’ve seen the negative fiscal effects of using the benefits system to target payments more recently too. When the government cut the winter fuel payment for all except those on pension tax credit, almost 60,000 more pension credit claims were awarded than normal. This uptick suggests that many who previously didn’t claim the benefit had been incentivised to do so purely to retain their winter fuel payment – suggesting that they didn’t even need it in the first place. We’ll undoubtedly see that happen this time too – perhaps on an even larger scale. That ain’t going to be cheap.
Plus let’s not kid ourselves that any of this will be temporary support. Let’s say a benefits bailout is introduced in July for a ‘time-limited period’. Picture the scene ahead of the next spring statement when the Treasury briefs that it will be removed. ‘Stop the cliff edge,’ Labour’s backbenchers will scream while Martin Lewis begins a hunger strike outside Downing Street. Poverty campaigners will take to the airwaves calling the removal of the energy support package an ‘austerity cut that could kill’. I’m being dramatic, perhaps, but it’s easy to see how temporary energy support becomes permanent.
Limiting energy support is the right thing to do. But using the benefits system to do so is fraught with risk. Fundamentally, the problem is a deeper one for all of us. Can we really expect the state to bail us out of every single crisis? What happens when the money really does run out?
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