Rishi Sunak – 2022 Commons Statement on the Economy

The statement made by Rishi Sunak, the Chancellor of the Exchequer, in the House of Commons on 26 May 2022.

The high inflation that we are experiencing now is causing acute distress to the people of this country. I know that they are worried. I know that people are struggling. I want to explain what is happening, why it is happening, and what we propose to do about it.

I trust the British people, and I know they understand that no Government can solve every problem, particularly the complex and global challenge of inflation, but this Government will never stop trying to help people, to fix problems where we can and to do what is right, as we did throughout the pandemic. We need to make sure that those for whom the struggle is too hard, and for whom the risks are too great, are supported. This Government will not sit idly by while there is a risk that some in our country might be set so far back that they might never recover. That is simply unacceptable, and we will never allow it to happen.

I want to reassure everybody that we will get through this. We have the tools and the determination we need to combat and reduce inflation. We will make sure that the most vulnerable and least well off get the support they need at this time of difficulty, and we will also turn this moment of difficulty into a springboard for economic renewal and growth, with more jobs, higher skills and greater investment: our plan for a stronger economy.

Before I turn to the details of our plan, let me put into context for the House the challenge we face. This country is now experiencing the highest rate of inflation we have seen for 40 years. The Bank of England expects inflation to average around 9% this year. Our exposure to global shocks continues to explain most of the inflation above the 2% target. Supply chain disruption as the world reopened from covid, combined with Russia’s invasion of Ukraine and potentially exacerbated by recent lockdowns in China, are all contributing to significant price increases for goods and energy.

However, over the course of the year, the situation has evolved and become more serious. There are areas of particular concern. Even excluding energy and food, core inflation has become broader-based and elevated. Of the basket of goods and services we use to measure inflation, a record proportion is seeing above-average price increases. Also, we are acutely exposed to the European energy price shock and, like the US, we have a tight labour market. Make no mistake, the lowest unemployment in almost 50 years, just months after averting a jobs crisis during the pandemic, is good news, but combined with the shock to European energy prices, it does contribute to the UK’s relatively high rate of inflation.

Lastly, as the Bank has noted, longer-term inflation expectations have risen above their historical averages by more than they are doing in the US and Europe. We cannot and must not allow short-term inflationary pressures to lead people to expect that high inflation will continue over the long term. We can get inflation under control. It is not some abstract force outside our grasp. It may take time, but we have the tools we need and the resolve it will take to reduce inflation. We have three specific tools available to combat and reduce inflation, and we are using them all: independent monetary policy, fiscal responsibility and supply-side activism.

First, our primary tool is a strong independent monetary policy. Since control of monetary policy was taken out of the hands of politicians 25 years ago, inflation has averaged precisely 2%. It is right that the Bank of England is independent, and I know that the Governor and his team will take decisive action to get inflation back on target and ensure that inflation expectations remain firmly anchored.

Secondly, we need responsible fiscal policy. That means providing fiscal support where required but not making the situation unnecessarily worse, causing inflation, interest and mortgage rates to go up further than they otherwise would. Excessively adding fiscal stimulus into a supply-constrained economy, especially one in which households and businesses have built up over £300 billion of excess savings, risks being counterproductive and increasing inflationary pressures. In other words, fiscal support should be timely, temporary and targeted. Timely because we need to help people when the shock is at its worst, targeted because unconstrained stimulus will make the problem worse, and temporary because if we do not meet our fiscal rules and ensure the public finances are resilient in the longer run, we create even greater risks on inflation, interest rates and the trend rate of economic growth.

Thirdly, we are taking an activist approach to supply-side reforms. This will increase our productive capacity, ease inflationary pressures and raise our long-term growth potential. The Prime Minister’s energy security strategy will reduce bills over time by increasing energy supply and improving energy efficiency. The Work and Pensions Secretary is moving half a million jobseekers off welfare and into work and doing more to support older people back into the jobs market. The Home Secretary is making our visa regime for high-skilled migrants one of the most competitive in the world, and in the autumn we will bring forward tax cuts and reforms to encourage businesses to invest more, train more and innovate more—the path to higher growth. Independent monetary policy, fiscal response ability and supply-side reform—the country should have confidence that using these three tools, we will combat inflation and reduce it over time.

But of course, we know that households are being hit hard right now, so today we will provide significant support to the British people. As I have said, a critical part of how we are dealing with inflation is responsible fiscal policy. What this means in practical terms is that as we support people more, we need to think about the fairest way to fund as much of that cost as possible. The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk taking or innovation or efficiency, but as the result of surging global commodity prices, driven in part by Russia’s war. For that reason, I am sympathetic to the argument to tax those profits fairly, but—[Interruption.]

Madam Deputy Speaker (Dame Eleanor Laing)

Order. A bit of gentle banter is fine, but when it gets to the stage that nobody can hear what the Chancellor is saying, it is counterproductive. Quieter banter, please.

Rishi Sunak

But, as ever, there is a sensible middle ground. We should not be ideological about this; we should be pragmatic. It is possible to both tax extraordinary profits fairly and incentivise investment. So, like previous Governments, including Conservative ones, we will introduce a temporary targeted energy profits levy— [Interruption.] But we have built into the new levy— [Interruption.] We have built into the new levy a new investment allowance similar to the super deduction, which means that companies will have a new and significant incentive to reinvest their profits.

The new levy will be charged on the profits of oil and gas companies at a rate of 25%. It will be temporary, and when oil and gas prices return to historically more normal levels, the levy will be phased out, with a sunset clause written into the legislation. And crucially, with our new investment allowance, we are nearly doubling the overall investment relief for oil and gas companies. That means that for every pound a company invests, it will get back 90% in tax relief. So the more a company invests, the less tax it will pay.

We understand that certain parts of the electricity generation sector are also making extraordinary profits. The reason for this is the way our market works. The price our electricity generators are paid is linked not to the costs they incur in providing that electricity but rather to the price of natural gas, which is extraordinarily high right now. Other countries such as France, Italy, Spain and Greece have already taken measures to correct this. As set out in the energy security strategy, we are consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production.

These reforms will take time to implement, so in the meantime, we are urgently evaluating the scale of these extraordinary profits and the appropriate steps to take. So our energy profits levy will encourage investment, not deter it. It will raise around £5 billion of revenue over the next year so that we can help families with the cost of living, and it avoids having to increase our debt burden further. There is nothing noble in burdening future generations with ever more debt today because the politicians of the day were too weak to make the tough decisions.

I know the whole House will agree that we have a responsibility to help those who, through no fault of their own, are paying the highest price for the inflation we face. To help with the cost of living, we are going to provide significant targeted support to millions of the most vulnerable people in our society: those on the lowest incomes, pensioners and disabled people.

First, on people on the lowest incomes, over 8 million households already have incomes low enough for the state to be supporting their cost of living through the welfare system. They could be temporarily unemployed and looking for work; they could be unable to work because of long-term sickness or disability; or they could be on low pay and using benefits to top up their wages. Right now, they face incredibly difficult choices. I can announce today that we will send directly to around 8 million of the lowest-income households a one-off cost of living payment of £650. That support is worth over £5 billion and will give vulnerable people certainty that we are standing by them at this challenging time. The Department for Work and Pensions will make the payment in two lump sums, the first from July and the second in the autumn, with payments from Her Majesty’s Revenue and Customs for those on tax credits following shortly after. There is no need for people to fill out complicated forms or bureaucracy, as we will send the payments straight to their bank account.

Our policy will benefit over 8 million households in receipt of means-tested benefits from July. Uprating in that timeframe could only be done for those on universal credit, and our policy will provide a larger average payment this year of £650, whereas uprating the same benefits by 9% would be worth only £530 on average.

There are two further groups who will need extra targeted support. Many pensioners are disproportionately impacted by higher energy costs. They cannot always increase their income through work and, because they spend more time at home and are more vulnerable, they often need to keep the heating on for longer. We estimate that many people who are eligible for pension credit are not currently claiming it, which means many vulnerable pensioners will not be receiving means-tested benefits. I can announce today that, from the autumn, we will send over 8 million pensioner households that receive the winter fuel payment an extra one-off pensioner cost of living payment of £300.

Disabled people also face extra costs in their day-to-day lives; for example, they may have energy-intensive equipment around their home or workplace. To help the 6 million people who receive non-means-tested disability benefits, we will send them, from September, an extra one-off disability cost of living payment worth £150. Many disabled people will also receive the payment of £650 I have already announced, taking their total cost of living payment to £800.

I can reassure the House that next year, subject to the review by the Secretary of State for Work and Pensions, benefits will be uprated by this September’s consumer prices index, which on the current forecast is likely to be significantly higher than the forecast inflation rate for next year. Similarly, the triple lock will apply to the state pension.

Of course we recognise the risk that, with any policy, there may be small numbers of people who fall between the cracks. For example, it is not possible right now for the DWP or HMRC to identify people on housing benefit who are not also claiming other benefits. To support them and others, we will extend the household support fund delivered by local authorities by £0.5 billion from October.

This is a significant set of interventions to support the most vulnerable in our country. We will legislate to deliver this support on the same terms in every part of the United Kingdom, including Northern Ireland. Taken together, our direct cash payments will help one third of all UK households with cost of living support worth £9 billion.

We are meeting our responsibility to provide the most help to those on the lowest incomes. I believe that is fair, and I am confident that the House will agree, but many other families who do not require state support in normal times are also facing challenging times. Is it fair to leave them unsupported? The answer must surely be no.

Although it is impossible for the Government to solve every problem, we can and will ease the burden as we help the entire country through the worst of this crisis. We will provide more support with the rising cost of energy, and that support will be universal. Earlier this year, we announced £9 billion to help with the cost of energy, including a council tax rebate of £150 for tens of millions of households.

We planned to provide all households with £200 off their energy bills from October, with the cost repaid over the following five years. Since then, the outlook for energy prices has changed. I have heard people’s concerns about the impact of these repayments on future bills, so I have decided that the repayments will be cancelled. For the avoidance of doubt, this support is now unambiguously a grant. Furthermore, we have decided that the £200 of support for household energy bills will be doubled to £400 for everyone. We are on the side of hard-working families with £6 billion of financial support.

To summarise, our strategy is to combat and reduce inflation over time through independent monetary policy, fiscal responsibility and supply-side activism. We are raising emergency funds to help millions of the most vulnerable families who are struggling right now, and all households will benefit from £400 of universal support for energy bills, with not a penny to repay.

In total, the measures I have announced today provide support worth £15 billion. Combined with the plans we have already announced, we are supporting families with the cost of living through £37 billion or 1.5% of GDP. That is more than or similar to the support in countries such as France, Germany, Japan and Italy. I am proud to say that around three quarters of that total support will go to vulnerable households.

As a result of the measures announced today and the action we have already taken this year, the vast majority of households will receive £550, pensioners will receive £850 and almost all of the 8 million most vulnerable households in the country will, in total, receive support of £1,200.

Let me put that in context. The House will have noted the news from Ofgem earlier this week that it expects the energy price cap to rise to £2,800 in October. That implies an average increase in people’s bills this year of just under £1,200, which is the same amount as our policies will provide for the most vulnerable people this year.

I know there are other pressures. I am not trying to claim that we have solved the entire problem for everyone—no Government could—but I hope that when people hear of the significant steps we are taking, and the millions we are helping, they will feel some of the burden eased and some of the pressures lifted. They will know that this Government are standing by them.

Supporting people with the cost of living is only one part of our plan for a stronger economy—a plan that is: creating more jobs; cutting taxes on working people; reducing our borrowing and debt; driving businesses to invest and innovate more; unleashing a skills revolution; seizing the benefits of Brexit; and levelling-up growth in all parts of the United Kingdom. The British people can trust this Government because we have a plan for a stronger economy, and I commend it to this House.