The Treasury has suspended 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 have said. The Independent.
The money people failed to spend while cooped up at home during the pandemic was cited in discussions between Chancellor Rishi Sunak and his team as a key reason for limiting additional government funding, it said. sources.
But the move was condemned by senior officials involved in the talks for ignoring poorer households with no savings and those who had spent whatever they could have saved.
“There is a lack of understanding within his team as to how serious the situation is for those on the lowest incomes,” a Whitehall source said. “They have nothing in the bank.”
Another insider said the approach had underestimated the scale of the cost-of-living crisis – which produced the worst squeeze in real income since 1945 – and had failed to address the steep inequalities between people. rich households and their poorer, income-dependent counterparts.
This was “particularly evident for jobless and benefit-receiving households”, they said, adding: “The impact in real terms on these households is, and will prove, quite devastating”.
The government had hoped consumers would feel emboldened by the prospect of dropping pandemic restrictions, even if they face cost pressures, the source added.
“He built on this idea that consumer confidence would rebound and people would start spending again; it’s the same logic as Eat Out to Help Out,” they said.
News of the Treasury’s fiscal hesitation comes after Mr Sunak was widely criticized for skirting the needs of the poorest in his mini-budget in March.
A source close to the Chancellor pushed back on claims he and his team had been banking on people spending their savings and suggested more help could come later in the year for struggling households.
“Energy bills are capped until the fall. We won’t know yet how big the upside will be, given the price volatility we’re seeing right now, and it’s only fair that we wait to find out how big the upside will be before deciding what the fix should be. they said.
Inflation has hit new 30-year highs in recent months and is expected to rise further with an increase in the energy price cap this fall. The cocktail of rising prices pushed a closely watched consumer confidence index compiled by market research firm GfK to -38 in April – the lowest level since 2008, during the Great Financial Crisis.
Unusual savings habits during pandemic shutdowns have informed Treasury thinking, sources said. Those with higher incomes were able to accumulate savings as their spending on social activities, travel and clothing decreased.
In 2020, this effect has pushed household savings to levels not seen since records began in 1963.
Households saved £72bn in 2019, compared to £211bn and £163.7bn in 2020 and 2021 respectively before adjusting for inflation, 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 equivalent to around 11% of GDP, according to estimates by Swiss bank UBS.
However, while high- and middle-income households have built up a cushion, those with low incomes, who in normal times would rarely be able to set aside funds and who faced reduced income on leave or continued to travel for the work, have not .
The state of household balance sheets has also changed rapidly in recent months, with savings either shifted from cash to less liquid assets, such as housing or investments, or simply spent to meet the rapidly rising cost of life.
“Not all of these savings are available for immediate use. That means there’s less of a buffer than the immediate numbers would suggest,” said Anna Titareva, senior economist at UBS, noting a European Central Bank study of savers’ behaviors in the eurozone. There is no comparable research from the Bank of England.
“Lower-income households will be less secure,” she added, noting that this was important because “the propensity to spend is higher from income than from wealth.”
Economists shifted from hope for a sharp and sustained rebound, after fears over the Omicron variant eased, to worry about a troubled outlook.
“We have gone from relative optimists on the savings story to pessimists,” said Andrew Goodwin, chief UK economist at Oxford Economics. Mr Goodwin does not predict a technical recession – two consecutive quarters of economic contraction – in the year ahead, but does think the risk of a recession has increased.
“We expect a 2% drop in real incomes this year,” he said. “That’s enough to put…
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This notice was published: 2022-04-30 19:55:55