Extend the cash payments scheme, introduce business loans and cut taxes to help households and businesses through the cost of living crisis, says think-tank

• Since the publication of the Adam Smith Institute’s previous report on the cost of living crisis, households and businesses’ economic woes have been exacerbated by rising inflation and energy costs. 

• The Government will need to help mitigate the impacts to reduce economic scarring. However, policy proposals such as freezing energy prices will have long-term negative consequences. 

• A combined approach of immediate, targeted support through cash transfers and the benefits system, combined with tax cuts designed to allow people to keep more of their own money, is the preferable option. 

A new report from the Adam Smith Institute (ASI), called In the Bleak Midwinter: How (and How Not to) Tackle the Energy Crisis, argues that a combined approach of immediate, targeted support through cash transfers and the benefits system, combined with tax cuts designed to allow people to keep more of their own money, is the best way to ensure households get the help they need over the coming months.

Our report authors highlight that some of the policies that have been touted over the course of the leadership campaign, including ‘nuclear’ VAT cuts, and an energy bill freeze, are distortionary, not properly targeted and increase the risk of winter blackouts through failing to incentivise cutting down on energy consumption. 

It further makes the case for support for households and businesses based on their previous energy use. For households, this means the Government would transfer cash based on the difference in bill payments relative to 2021. For businesses, similar criteria would be used in an extensive Government backed loan scheme, to help spread the increased cost of energy bills over a longer period. 

The report makes the following suggestions:

1. Extend the cash transfer scheme to include quarterly cash transfers of £350 over the next year under the same targeting scheme. 

2. Tie further relief to households to their levels of energy consumption in the previous year. We propose a 75% coverage of rises for those eligible for the £350 cash transfer, 50% for households with a higher income taxpayer. 

3. Provide 100% backed loans to businesses struggling to meet monthly energy payments. 

4. Implement an emergency uprating of benefits in line with current inflation figures, rather than waiting until April 2023.

5. Index the personal allowance rate of income tax to inflation in order to eliminate fiscal drag.

6. Bolster national energy supply through securing emergency electricity from Norway and opening discussions with the Dutch to reopen Groningen gas field.

John Macdonald, Director of Strategy at the Adam Smith Institute, said:

“The stakes for Liz Truss and her new Cabinet are incredibly high; pursue the wrong policy, and the country could drive itself further into debt, fail to avoid energy rationing this winter or push thousands of businesses into bankruptcy. Rather than pursuing un-targeted and expensive policy options, such as an energy price freeze, the Government should instead consider direct cash transfers, indexing benefits and income tax thresholds with inflation, energy relief based on previous consumption and loans for struggling businesses.”

-ENDS- 

Notes to editors:  

For further comments or to arrange an interview, contact Emily Fielder, emily@adamsmith.org | 0758 477 8207.

John Macdonald is Director of Strategy at the Adam Smith Institute.

Emily Fielder is Head of Communications at the Adam Smith Institute.

Alex Hughes is a Research Associate at the Adam Smith Institute.

The report is now live and available here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.