Johnson admits ‘big bazooka’ £15bn cost of living measures won’t ‘fix everything for everybody’ – as it happened

Time for a recap.

Boris Johnson has admitted that the government’s latest cost of living package won’t fully protect people from surging prices.

Speaking a day after Rishi Sunak unveiled £15bn of support, in response to the energy crisis, the PM said:

I’m not going to pretend that this is going to fix everything for everybody immediately. There are still going to be pressures.

But it’s a very, very substantial commitment by the government to getting us through what will be, I’m afraid, still a bumpy time with the increase in energy prices around the world.

Johnson also defended handing every household a £400 energy rebate, regardless of their circumstances, saying it was “massively, massively redistributive”.

In an interview with Bloomberg, Johnson took the upbeat view that the UK was not necessarily heading into recession.

But Johnson declined the chance to pledge to pay £400 to charity, as chancellor Rishi Sunak did, on the grounds that he lives in a government flat.

Sunak said that people who didn’t need the rebate should give the money to charity, as he will – insisting that a universal payment was the best way to ensure that those in need were protected.

He told Sky:

“You, like me, can also give that money to charity if you don’t need it.

Labour criticised the goverment for allowing second-home owners to get two £400 rebates, saying this showed the plan had been rushed out to distract from the Sue Gray report into Partygate.

Sunak also argued that his plan won’t have much impact on inflation, already at 40-year highs of 9%, and insisted he was still a “fiscal conservative” despite announcing plans that will require £10bn of extra borrowing.

The Institute for Fiscal Studies said Sunak was “engaging in some serious redistribution from rich to poor”:

The poorest households will now be approximately compensated for the rising cost of living. Many low earners will now be better off this year than last. High earners will still tend to be worse off.

But the Resolution Foundation pointed out that wealthy pensioners were the big winners, while families with several children might feel “rough justice” from the flat-rate rebate as their higher energy usage isn’t recognised.

The CEBR warned that yet more help will be needed next year, if energy prices - driven high by the Ukraine war - don’t come down.

Deutsche Bank said the package would only have a modest boost to growth, but probably enough to avoid recession.

The bad news for borrowers, though, is that it may spur the Bank of England on to raise interest rates faster, warned Capital Economics.

Shares in oil producers fell as the City digested the windfall tax, while electricity producers weakened after Sunak hinted they would face a levy too.

Shell criticised Rishi Sunak’s windfall tax, saying it was a threat to investment in North Sea oil and gas as Britain attempts to ramp up domestic energy supplies.

Our Politics Live blog has the latest action, including the resignation of Conservative MP Paul Holmes as a parliamentary private secretary in response to the revelations in the Sue Gray report.

27 May 202210.04 EDT

Shell: windfall tax is threat to investment

Alex Lawson

Shell has said Rishi Sunak’s windfall tax is a threat to investment in North Sea oil and gas as Britain attempts to ramp up domestic energy supplies.

A Shell spokesperson said:

We understand the worry for millions of people about how high energy costs are challenging their household budgets – and the need for support to help make ends meet.

But at the same time, we must sustain investment in securing supplies of oil and gas the UK needs today, while allocating future spend for the low carbon energies we want to build for the future.

However, in its current form the levy creates uncertainty about the investment climate for North Sea oil and gas for the coming years.

And, longer term, the proposed tax reliefs for investment don’t extend to the renewable energy system we want to drive forward in the UK and invest in very substantially. When making plans for the next decade and beyond, we need certainty.

Shell plans to make £20bn to £25bn of investments in the UK over the next decade, predominantly in renewable energy projects.

Industry insiders were surprised that the one-off levy will remain in place until “normal” conditions in the energy market return or until the end of December 2025.

Boris Johnson has said the UK is “not necessarily” heading for a recession after his chancellor announced a £15bn package to help people deal with rising energy bills and inflation.

Despite experts warning of trouble ahead for the economy and the government bringing in emergency measures to help out struggling households, the prime minister sounded an upbeat note about Britain’s financial prospects in an interview with Bloomberg TV.

“There are ways forward for the UK that are incredibly exciting,” he said.

“If we make sure that we have a proactive approach to talent from abroad – we want to control immigration but allow the talent that we need to come in – we fix our energy supply issues, we fix the issues in the UK labour market.

The government’s £15bn cost of living package may encourage the Bank of England to hike interest rates more quickly, says Paul Dales of Capital Economics.

The Bank could even vote for a larger-than-usual increase, from 1% to 1.5%, rather than a typical quarter-point move. That would put added pressure on borrowers

Dales explains:

The new fiscal stimulus announced by the Chancellor this week puts more pressure on the Bank of England to raise interest rates into restrictive territory.

As result of this and other recent developments, we’re becoming more confident in our view that interest rates will rise from 1.00% now to 3.00% next year.

What’s more, although we are forecasting a 25 basis point rate hike at the Bank’s next policy meeting on 16^th June, we think a 50 basis point hike is a bit more likely than the 10-20% chance priced into the markets.

Q: The chancellor is donating his £400 energy tax rebate to charity, will you do the same?

Boris Johnson says his arrangements are different as he lives in a government flat.

It’s important that people recognise that these payments will not necessarily cover the increased cost fully, the prime minister adds:

We can’t cover every single cost that people are going to face, we’ve got to be realistic about that.

However, they will go a long way towards helping people.

Q: How will temporary one-off payments help families long term?

Johnson agrees that the package is temporary, saying the “natural strength” of the economy should power it forward, but the government is helping people cope now with the energy price spike.

Q: Some families don’t need this help, and some will get the rebate more than once (because they own multiple homes). Won’t this benefit people who are already wealthy, at the expense of the taxpayer?

Johnson insist the package is “massively, massively redistributive” and “the right thing to do”, citing analysis from the Institute for Fiscal Studies (see 9.28am) and the Resolution Foundation (see 11.20am).

Boris Johnson is also asked what the difference is between the Labour Party and the Conservative Party on tax and spend, following yesterday’s announcement.

Johnson says the government’s package is ‘much more generous’, as it’s worth £1,200 for the eight million households.

[the £400 discount on energy bills, a £650 one-off payment to the 8m poorest households, plus the £150 council tax rebate announced earlier this year]

Johnson adds that the energy levy is designed to encourage investment - firms can offset 91p in every pound which they spend on investments in new energy supply or green technology.

It’s a solution that protects people and protects investment, he says.

Reminder: Under Rishi Sunak’s plan, the tax rate on North Sea oil and gas producers rises by 25 percentage points from 40% to 65%, raking in an estimated £5bn, while Labour had proposed a 10 percentage point increase that would raise £2bn.

But because firms can offset the goverment’s levy by investing more, it’s not yet clear quite how much it will raise.

Boris Johnson has described the measures announced by Rishi Sunak yesterday as a “big bazooka”, but he conceded that it would not “fix everything for everybody”.

In a pooled clip for broadcasters, shown on Sky News, he says:

I’m not going to pretend that this is going to fix everything for everybody immediately. There are still going to be pressures.

But it’s a very, very substantial commitment by the government to getting us through what will be, I’m afraid, still a bumpy time with the increase in energy prices around the world.

Johnson adds that the £15bn package will “get us through” until energy prices start to abate, when the UK will be in a “much, much” stronger position.

The reason we’re going to be in a strong position is because we have so many people in work, giving us the tax base we need to look after everybody else.

Q: Are you worried that spending £10bn more than you will raise from the windfall tax levy may be inflationary?

Johnson says the answer is no. He thinks the £400 rebate won’t necessarily lead to more discretionary spending because people’s outgoings will go up, and have already gone up, due to higher energy and food costs.

It’s intended to match the needs of people right now.

[However, the CEBR predicted this morning that wealthier households could spend the rebate, leading to higher inflation]

Johnson points out that unemployment is the lowest since 1974, which he says people wouldn’t have been predicted when the Covid-19 lockdowns began.

The UK is using its fiscal firepower to get through the economic aftershocks of Covid, such as higher energy costs, and will come out “much stronger” on the other side, he says.

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Boris Johnson has also suggested that wages shouldn’t simply rise in line with inflation, as a showdown with UK trade unions looms.

Speaking to Bloomberg on the train as he travelled to Stockton-on-Tees, in County Durham, the prime minister said:

What we want is a high-wage, high-skill economy. The increases in wages have got to be driven by productivity gains, and not simply by inflation.”

“What we don’t want to see is a return to the wage-price spiral that we saw in the 1970s,”.

The government angered unions this week when it suggested that public sector pay awards would need to assess the risk of stoking inflation when deciding this year’s pay awards.

UK consumer price inflation hit 9% last month, the fastest increase in the cost of living in 40 years.

But how much of a risk is it?

Gita Gopinath, first deputy managing director at the IMF, told the World Economic Forum in Davos this week that wages can rise without driving inflation higher, as company profits can decline instead.

As Gopinath pointed out, inflation is a measure of rising prices, not rising wages....

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Boris Johnson is optimistic that the UK can avoid falling into recession, but admitted that there is a ‘difficult period’ ahead.

He’s been interviewed by Bloomberg TV, and while the PM admits the UK faces a “difficult” period, he argues the UK an avoid a downturn.

Asked whether the UK was headed for a recession, Johnson said:

“Not necessarily at all.”

[as flagged earlier, Deutsche Bank think the UK may avoid one too]

Johnson also warned there are difficult times ahead:

“We’re going to have a difficult period, and we’ve got to be absolutely clear with people it’s going to be difficult, and the government cannot solve every problem.

“We can’t cover everybody’s extra cost. But what we can do is make sure that we deal with the underlying causes of inflation, but also keep our economy strong and open to investment.”

Here’s the full interview.

Companies tend to invest more when they are confident about the future, so the prime minister might note that business investment has been weak since the Brexit vote in 2016:

The Resolution Foundation have calculated that wealthy pensioners are the biggest winners from yesterday’s announcement.

But families with several children will feel ‘rough justice’ from the £400 lump sum rebate on energy bills -- which won’t cover their higher energy use.

Among working-age households receiving means-tested benefits, households with three or more children will see energy bills pushed up by £500-plus a year more than those without children, but will get the same one-off payment, Resolution says.

Mike Brewer, chief economist at the Resolution Foundation, explains:

“The Chancellor has delivered a bold and well targeted support package which, when combined with his previous support, will almost entirely offset the rise in energy bills for low-income families, as well as the majority of bill rises for everyone else. However, with the cost-of-living crisis extending well beyond fuel bills, households are still going to feel a tight squeeze over the coming year.

“The biggest winners from yesterday’s package are wealthy pensioners who may not need extra support, but still stand to gain £850, while large families on low incomes may feel rough justice as their higher energy usage isn’t reflected in flat-rate lump sum payments.

“Critically, as well as providing vital support to households this winter, the Chancellor confirmed that he will go ahead with what is set to be the biggest increase in benefits in over three decades when they are likely to rise by over 9 per cent next spring. This will offer lasting protection for poorer households from today’s high inflation.”