This week Rachel Reeves ruled out a blanket energy bailout to manage the fallout from the Iran war. That\u2019s the right approach. But her targeting of a bailout \u2013 reportedly to those on benefits \u2013 risks solidifying Britain\u2019s welfare trap.<\/p>\n
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\u2019s mini-Budget but for her multi-billion-pound energy price guarantee that sent the gilt market into meltdown. \u2018As we respond to this crisis, we must learn from the mistakes of the past,\u2019 Reeves told MPs. <\/p>\n
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.<\/p>\n
Can we really expect the state to bail us out of every single crisis?<\/p>\n
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; \u2018helpful\u2019 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.<\/p>\n
Anyway, this week\u2019s decision \u2013 to go for targeted support \u2013 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\u00a0explained<\/a>\u00a0on\u00a0Coffee House Shots\u00a0this week, that\u2019s 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.\u00a0<\/p>\n 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.\u00a0<\/p>\n The\u00a0Times\u00a0reports<\/a>\u00a0that the benefits option is the one the Chancellor has gone for \u2013 with around six million people eligible for support. It could operate like the warm homes discount, which deducts \u00a3150 from electricity bills for those on means-tested benefits.\u00a0<\/p>\n The problem is that this is just going to make Britain\u2019s 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\u00a0calculated<\/a>\u00a0that a working family with three children would need a salary of at least \u00a370,000 to earn the same income as one totally reliant on benefits. Add on energy bill discounts and that gap is going to get worse.<\/p>\n