The government needs to spend another £12bn to maintain the scale of support pledged to help families cope with the cost of living crisis as the energy prices continue to soar, according to analysis by the Institute for Fiscal Studies (IFS).
The economics thinktank said that the additional funding will be needed to achieve the £24bn package of aid announced in May, largely because the forecast increase in energy prices over the next year has jumped from 95% to 141%.
This means that working age benefit claimants are now on course to see their real income fall by £620 over the year.
The IFS says that the government would need to double the current £650 grant to those on benefits to protect them, as well as help low income pensioners and families in work, at a cost of £5.5bn.
Similarly, the cost of maintaining the £150 council tax rebate and £400 energy discount will now cost the government another £7bn if it wants to continue to cover around half the increase in costs a typical family will be hit by over the year.
Paul Johnson, director of the IFS, said:
As prices of essentials including food, heating and fuel continues to rise, families on low-incomes are facing more uncertainty and pressures. The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12bn, and a package on that scale will still leave many households much worse off.
The FTSE 100 has gained 0.3% in the first minutes of trading in this mid-August week, hitting its highest point since early June.
The top gainer is RS Group, formerly known as Electrocomponents, amid speculation that it could be in line for a takeover bid.
Pharma group AstraZeneca has gained 2.5% after it said that its breast cancer drug Enhertu had shown positive trial results.
Elsewhere in Europe stocks are looking positive. Here are the snaps from Reuters:
EUROPE’S STOXX 600 UP 0.4%
FRANCE’S CAC 40 UP 0.4%
SPAIN’S IBEX UP 0.2%
EURO ZONE BLUE CHIPS UP 0.4%
GERMANY’S DAX UP 0.4%
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China’s economy is showing signs of slowing activity as a series of economic indicators suggested industrial output and retail sales growth were below economists’ expectations.
Oil prices dropped on Monday morning after the data were published; slower economic activity in the world’s second-largest economy would likely lead to less demand for oil. The price of a barrel of Brent crude for October delivery dropped by 0.8% to $97.36, while North American benchmark West Texas Intermediate dropped by 0.9% to $91.13.
Chinese industrial production still grew, but it was up by only 3.8% on a year-on-year basis (slower than the 4.3% growth expected), whilst retail sales were up 2.7% year-on-year, significantly slower than the 4.9% expected rate. The data suggest that both industry and consumers may be reining in spending, while there were also signs that China’s property market is also struggling. Property has long been a source of growth, but economists have been questioning its sustainability.
It was a “sharper loss of momentum than expected”, said Craig Botham, chief China+ economist at Pantheon Macroeconomics, a consultancy. He said:
The slowdown in Chinese industrial production supports the narrative that stronger performances in May and June were primarily the result of a reopening rebound, and that with order backlogs now cleared, China’s factories will increasingly run idle once more.
The People’s Bank of China, the country’s central bank, quickly responded by cutting borrowing costs over one week and one year, in a bid to get more money into the economy.
The cut was “a surprise move” to cut interest rates to support the economy following “weak” economic data, according to Mohit Kumar, a managing director for interest rate strategy at Jefferies, an investment bank.
Julian Evans-Pritchard, senior China economist at Capital Economics, a consultancy, said:
The July data suggest that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector. We think the outlook will remain challenging in the coming months as exports turn from tailwind to headwind, the property downturn deepens, and virus disruptions remain a recurring drag.
You can read more on the China data here:
In the UK the big news driving the day is Labour leader Keir Starmer, who has returned from holiday with a £29bn plan to freeze energy bills.
The Guardian’s Andrew Sparrow and Phillip Inman report:
Starmer said the plan would cost £29bn over the winter and that it could be funded by extending the scope of the windfall tax on energy companies (raising £8bn), halting the proposed £400 payments for all households offered by the government to compensate for the price cap rise scheduled for October (saving £14bn), and lowering government interest payments on debt (saving £7bn), which Labour said would be possible because its plan would reduce inflation.
Whether it would reduce inflation in the longer term is open to debate, but the move will certainly put clear water between Labour and the two Conservative leadership candidates, Rishi Sunak and Liz Truss. Sunak has pledged to spend about £10bn on the crisis, while Truss has not revealed costings of how she will support households. Truss is seen as the frontrunner in the race because of her poll lead among Conservative party members.
Remember, how the government responds is seen as the key variable in how the UK economy will perform in the coming months. The Bank of England’s forecasts of a long recession and 13% inflation are predicated on fiscal policy staying the same. That seems unlikely, given the huge scale of energy price increases expected in the winter if wholesale oil and gas prices remain high.