On October 20, the crisis-laden United Kingdom saw a major change of guard as Conservative Party’s Liz Truss resigned from the post of Prime Minister, a position she held onto for 45 days, the shortest reign any premier had in the country’s history.
She already lost her two most important ministers, Finance Secretary Kwasi Kwarteng and Home Secretary Suella Braverman, before putting down her papers.
When Liz Truss took over, the United Kingdom already went into a recession, as the key base rates (interest rates) were raised by 0.5 percentage points to 2.25%. The increase became the highest one in the country’s economy since the 2008 recession. The ongoing inflation has been dubbed the worst one since the 1980s.
The Bank of England has already predicted a second consecutive quarter of falling output for the crisis-hit country. United Kingdom GDP has already slumped by 0.1%, with another 0.1% decline being predicted in the upcoming third quarter.
After taking over the country’s reign, Liz Truss announced a two-year package from her government that would freeze annual household energy bills at an average of £2500, even as a study report from the Institute for Fiscal Studies predicted a 3% (£600) income fall for the Brits.
The budget sent shockwaves through the markets. Facing heat from foreign banking bodies and her own party MPs, Liz Truss abandoned almost all her policy programme. Kwasi Kwarteng got replaced with another Conservative Party MP Jeremy Hunt. Right now, UK’s inflation figure stands at 13.2%, with reports of the acute cost of living crisis emerging from all corners of the country.
Decoding the energy bill confusion
As per October 2021 data, the United Kingdom had an estimated 4 million households in fuel poverty (A phenomenon in which a household can’t manage their home temperature due to factors such as low income, high fuel prices, poor energy efficiency, etc). In 2022, a significant tally of 2.7 million homes got added to the list due to high fuel prices and the figure stands at 6.7 million right now.
As per the latest International Monetary Fund study, the United Kingdom has been the worst affected by this ongoing crisis. The sanctions imposed on Moscow amid the ongoing Ukraine war and a possible price capping of Russian gas supply to Europe have resulted in increased energy prices. Also, the study pointed out an unequal cost burden on the rich and poor in the country. There are also reports about households being forced to opt between food and energy bills.
Former United Kingdom Finance Secretary Rishi Sunak introduced a £400 ‘Energy Bills Support Scheme’, a discount plan which will kick-start in October. As per it, the next six months will see households getting discounts on their energy bills. Pensioners will get a £350 winter allowance. The disabled will get benefits of £150.
How Liz Truss complicated things
As per Liz Truss’ plans, October would have seen households using 12,000 kWh (kilowatt hours) of gas and 2,900 kWh (kilowatt hours) of electricity, paying not more than £2,500 for the next two years. The amount would have been £3,549 per year without government action.
For dual fuel clients paying their bills by direct debit, the average unit price would have been capped at 34.0 pence per kilowatt hour (kWh) for electricity and 10.3 pence per kWh for gas. The government had plans of using borrowed funds to tackle the energy crisis. However, the vulnerable section of UK society is already getting government help, with the households set to receive a £400 bill cut throughout the winter. For small businesses, the bill cap was supposed to remain only for six months from October.
However, after the Rishi Sunak-introduced discount runs out in April 2023, well over 60% of United Kingdom households will go into energy poverty. Residents will face an 80% increase in their annual bills. This hike will be 26% more than the record 54% rise, which was reported in April. They will have to pay £3,549 in a year. In January, it will reach the £4000 mark.
As per a Progressive Economy Forum (PEF) study, the poorest tenth of the UK families may get energy bills amounting to 47% of their disposable income this current winter. The report also stated that an average household will spend a third of its income on energy bills.
UK National Grid has already warned about possible three-hour power cuts daily if Russia completely cuts off gas supplies in the coming winter. While the Truss government put the plan of ‘encouraging’ the UK public to reduce their energy usage into the backburner, as per a Cornwall Insight analysis, the energy bills cap would have cost the country some £89 billion. In the worst-case scenario, Liz Truss’ plan to combat the cost of living crisis might have drained some £140 billion out of the nation’s exchequer.
However, Chancellor Hunt has now restricted this flagship energy price guarantee for just six months till April, after which a new price model will be introduced.
Rising property prices and ‘Zero Stump Duty’: Massive headache for first-time home buyers
Affording a house is also proving to be a herculean task as data from the property portal Rightmove shows that sellers have increased the prices.
The average price tag has increased by £2,587, or 0.7% month-on-month in September to £367,760. Prices for three-bedroom homes and non-detached four-bedroom properties have reached £340,513.
The threshold for zero stamp duty (taxes) on property purchases will be doubled to £250,000 under the ‘New Mini Budget’. For first-time buyers, the amount will be increased to £425,000 from £300,000.
It leads to a situation of potential property price rises in the next few months.
A survey by the Royal Institution of Chartered Surveyors has found that rents will keep on increasing as the supply of new properties dries up.
The average rental in London hit a record £553 a week in September alone, eclipsing the previous record of £549 set in June 2022, says estate agents’ firm Foxtons.
A rising mortgage rate, more and more loans, and subsequent pressure on credit card bills
Talking about the cost of living crisis, apart from the first-time home buyers feeling the pinch of rising property prices, the 2.2 million Brits having fixed and variable rate mortgages will feel the heat further as the BoE will raise the interest rates further to offset the depreciating pounds. As per market projections, the rate hike can reach as much as 6% by 2023.
The Bank of England is expected to raise interest rates further in response to the weakening pound, with financial markets on Monday forecasting that the base rate could almost treble to 6% next year.
While Virgin Money and Skipton Building Society withdrew mortgage deals, customers will have to shell out extra money from now on. Financial Conduct Authority data says some 6.3 million mortgages are on the fixed-rate slab, and for now, are protected from the latest rate rise. Those looking for new mortgages will have to opt for higher borrowing costs from now on.
If we go by the current base rate hike of 0.5 percentage points to 2.25%, a fixed interest rate of 3% will rise to 3.5%. With the price of the new mortgages in this category already shooting up, the new buyers will have no other option but to go for the ones valued at almost 4% to 4.5%. Industry players such as Santander and NatWest have increased their new fixed-rate deals by up to 0.8 percentage points and more will follow the suit.
Price growth of properties within the country soared to 15.5% by July, and this trend will continue, given the BoE rate hikes and the recently announced ‘Zero Stump Duty’. People will be forced to take more loans to pay their bills. As per the personal finance website Moneyfacts, the average credit card purchase fees rose to a record high of 29.6% APR (Annual Percentage Rate) between June and September 2022.
According to the Household and financial services provider Nationwide, the United Kingdom property price growth has flat-lined, while mortgage and inflation rates are rising. The lenders have already pulled out some 40% of available mortgages in the market. The Office for National Statistics (ONS) has said that the yearly house price rate has now increased to 15.5%, a 19-year high with the average property price reaching as much as £292,118. The five-year mortgage rate has already touched the 6% mark.
As per a study from the UK-based think tank Resolution Foundation, over five million families could see their annual mortgage payments rise by an average of £5,100 by the 2024 end, with a fifth of British households spending more on their housing costs. Even the Bank of England data is predicting a rise in the number of mortgage defaults, as the new loan count will continue to fall.
Will Christmas sales in the United Kingdom be affected? Yes, say stakeholders
Brits may prefer for saving their money to afford necessities such as food and clothes, rather than opting for Christmas retail shopping, studies suggest.
As per the forecast from retail data company Springboard, the visitor count in the shops during December will be 18% lower than the 2019 figures. The shoppers’ footfall will be down by more than a fifth of what it was in 2019. For retail parks, visitor numbers are expected to be 6% lower than the pre-COVID levels.
A KPMG study has also spoken about United Kingdom households opting for cheaper goods and going after discount offers. Retail Economics and Metapack report said that shoppers will spend £4.4 billion less on non-essentials, registering a fall of 22%.
The traders saw a sales slump in 2021 December due to COVID curbs. Back then, post-Christmas sales saw a 32% slump, as Springboard data cited a drop in popular shopping destinations. The visitors count in retail parks went down by 7.2% from pre-pandemic levels. High Streets and shopping centers saw visitor counts going down by 40.1% and 38.8% respectively in 2019.
The continued depreciation in the pound means grocery prices will be rising too, as per the British Retail Consortium’s estimates.
Chancellor Hunt invoked the “deeply held Conservative value” of people retaining most of the money they earn, while also warning about “more difficult decisions in the coming days”. Amid all the chaos, the only sufferer here will be the common Brits.