Tackling the Cost-of-Living Crisis: A Key Challenge for the Labour Government
The ongoing cost-of-living crisis is poised to be a critical determinant of the success or failure of the first Labour government in over a decade. Chancellor Rachel Reeves, who is tasked with navigating the complexities of the UK economy over the next four and a half years, faces a formidable challenge. She must manage rising energy bills, persistent inflation, sluggish economic growth, and escalating mortgage costs—all of which are significantly impacting the financial well-being of British households.
Leading the economy is no easy feat; Reeves must strike a careful balance between adhering to strict fiscal rules, appeasing cautious financial markets, and finding ways to alleviate the financial pressure felt by citizens. Unfortunately, the current economic landscape offers her few options for major tax reforms, and the tight fiscal situation severely limits her room for maneuver. Nevertheless, there are several potential strategies she can explore to address the cost-of-living crisis without imposing severe repercussions on the Treasury.
Rising Energy Bills
The Problem
The repercussions of Russia’s invasion of Ukraine, despite occurring over a thousand miles away, have had a profound impact on energy prices in the UK. Since 2022, the volatility in energy costs has been exacerbated by the energy crisis that ensued, as countries across Europe scrambled to replace lost Russian gas supplies. The previous Conservative government introduced an energy price guarantee in 2022, capping household energy bills at £2,500. However, this scheme concluded in 2024 as market rates began to stabilize.
The energy price cap, set by the energy regulator Ofgem since 2019, serves to protect millions of households from price fluctuations but offers little solace when the cap is raised. According to Cornwall Insight, the energy price cap is projected to increase to around £1,823 per year for a typical household starting in April, up from £1,738. Consumer advocacy groups have raised alarms that this increase could push even more households into fuel poverty, with over 6.5 million UK households already struggling to pay their energy bills.
Potential Solutions
To mitigate the impact of rising energy bills while fostering economic growth, the government is reportedly considering a “zonal” pricing approach, which would allow for lower energy rates in certain regions of the UK. The i Paper recently revealed that this proposal is under exploration to stimulate growth in the advanced manufacturing sector and attract businesses to areas with abundant, affordable energy, such as Scotland and northern England, which benefit from higher levels of offshore wind generation.
This system would result in lower energy costs for regions with less demand and more renewable energy resources, while the south of England might face higher prices due to its dense population and limited renewable generation. However, the feasibility of implementing this idea before the anticipated price rise in April remains uncertain.
In the interim, the government could enhance awareness of existing programs, such as the Warm Home Discount scheme, which provides a £150 discount to qualifying low-income households. While 2.5 million households utilized this scheme in the 2022-2023 financial year—an increase of 400,000 from the previous year—many eligible households may still be unaware of its benefits.
Concerns regarding rising energy prices are unlikely to dissipate soon, with warnings that insufficient gas reserves combined with a transition to renewable energy and the ongoing decommissioning of nuclear power plants may lead to higher costs for consumers in the long run.
Mortgage Costs
The Problem
After a series of aggressive interest rate hikes, the Bank of England has recently commenced a gradual reduction of rates to bolster economic growth. Last week, the base interest rate was lowered from 4.75% to 4.5%, marking the lowest level in 18 months. This was the third reduction since August 2024, but Governor Andrew Bailey emphasized a cautious approach moving forward. These rate changes are crucial as they influence the rates lenders set for mortgages and loans.
Experts forecast a continued decline in mortgage rates, with some brokers indicating that rates could fall to as low as 3.5% by December 2025. However, many mortgage holders are still grappling with high costs as lenders have been slow to adjust rates downward, resulting in a crisis of affordability for first-time buyers and existing homeowners facing increased monthly payments. Additionally, rental prices have surged, intensifying financial pressures on households.
According to the Office for National Statistics (ONS), private rents rose by 8.7% in the 12 months leading to January 2025, just slightly lower than the 9.0% increase seen in December 2024. Despite this marginal decline, renters are still confronted with historically high costs, exacerbating affordability challenges in many urban areas.
Possible Solutions
The primary way Reeves can assist mortgage holders is by maintaining low inflation, which would facilitate further interest rate cuts. Her efforts are also focused on aiding first-time buyers who have been sidelined by soaring property prices and stringent mortgage requirements. In January, the Chancellor met with mortgage lenders to discuss potential revisions to the affordability criteria that currently restrict the options available to first-time buyers.
Among the proposals discussed were increasing the salary multiplier used to assess borrowing capacity, allowing banks to consider rental payment histories in mortgage applications, and reducing the capital reserves banks must maintain for high loan-to-value mortgages. Additionally, ministers have pledged to establish a “new, permanent, comprehensive mortgage guarantee scheme” to provide essential support to first-time buyers facing affordability issues.
Another potential reform involves modifying the lifetime ISA (LISA) withdrawal penalty, which currently permits penalty-free withdrawals only after the age of 60 or for property purchases up to £450,000. There are calls to increase this threshold to align with rising house prices and to lessen the penalties for early withdrawals, thereby providing savers with greater flexibility in their pursuit of homeownership.
Reviving the Help to Buy scheme, which operated from 2013 to 2023 and offered equity loans for new-build properties, has also been suggested. Proponents argue that the program stimulated housebuilding, while critics contend it contributed to inflated property prices, complicating future sales.
To assist renters, the government aims to implement its Renters’ Rights Bill, which seeks to enhance tenant protections by abolishing no-fault evictions and capping upfront rent demands. However, organizations like the homelessness charity Shelter have advocated for additional measures, such as rent controls and a comprehensive landlord registration system.
Rising Inflation
The Problem
Inflation remains a pressing concern, particularly as food prices continue their upward trajectory. The latest data from the ONS reveals that overall inflation was at 3% in January 2025, with food price inflation rising from 1.9% to 3.1% in the same timeframe. Essential grocery items, including bread, dairy products, and fresh produce, have seen some of the sharpest increases, further straining low-income families.
Forecasts from the British Retail Consortium indicate that food prices may rise by an average of 4.2% in the latter half of the year, driven by factors such as increased employer national insurance contributions, a higher national living wage, and new packaging levies. This leaves retailers with little leeway to absorb these cost pressures, potentially impacting public health as well.
Analysis from The Food Foundation highlights a concerning trend: the cost of 1,000 calories of healthy food, including fruits and vegetables, is approximately £8.80, compared to just £4.30 for equivalent amounts of less nutritious options, such as processed meals. This disparity is effectively pricing low-income families out of the ability to maintain healthy diets, as evidenced by the 30% increase in emergency food parcel distributions reported by the Trussell Trust compared to the previous year.
Possible Solutions
Reeves has articulated a commitment to fostering growth and job creation as her primary strategy for addressing the long-term impacts of persistently high inflation. However, she faces significant constraints in terms of options for directly addressing food affordability in the short term. A potential lifeline for struggling families lies in the anticipated rise of the National Living Wage to £12.21 per hour in April 2025, which, although projected to contribute to inflation, could alleviate pressures on low-income households.
To combat food inflation, the government is developing a new food strategy, set to be released in 2025, aimed at improving food security, tackling obesity, and fostering innovation within the UK’s food sector. Moreover, rules enacted by the Conservatives in 2018 have excluded 800,000 children living in poverty from accessing Free School Meals. An additional 200,000 eligible children are also missing out due to lack of registration. A potential solution could involve eliminating the income threshold and automatically enrolling all eligible children.
In terms of broader long-term inflation control, Reeves has introduced plans supporting the expansion of Heathrow Airport, which has faced delays due to environmental concerns, arguing that it would enhance the UK’s position as a global business hub and improve connectivity. Furthermore, she has proposed a “growth corridor” between Oxford and Cambridge, envisioned as a potential “Silicon Valley of Europe,” which includes the development of new reservoirs to mitigate water shortages and investments in high-tech industries, projected to contribute £78 billion to the UK economy by 2035.
Benefit System Pressures
The Problem
The cost-of-living crisis has disproportionately impacted lower-income families, many of whom depend on benefits or are being compelled to claim them. The number of individuals receiving Universal Credit has surged since March 2022, reaching a record high of 7.5 million in January 2025—marking the highest level since the program’s inception in 2013. Concerns are also rising regarding the number of individuals claiming disability and sickness benefits, and the financial implications this trend poses.
As of August, approximately 4.8 million people were receiving welfare for disability support in England and Wales, reflecting an increase of 450,000. When factoring in Scotland, where disability benefits are transitioning to devolved powers, the total approaches five million. This rise in benefit claimants could impose significant financial burdens in the long run, with the Institute for Fiscal Studies projecting an increase in spending on working-age health-related benefits from £36 billion in 2019-20 to £48 billion in 2023-24, with expectations of exceeding £60 billion by 2029.
Possible Solutions
Reeves has acknowledged that the current state of public finances constrains her ability to implement sweeping reforms aimed at assisting struggling households. Her focus has shifted toward reducing the number of individuals reliant on benefits by reforming the welfare system, including more frequent reassessments of long-term sickness and disability claims, as well as instituting a youth guarantee that mandates individuals aged 21 and under to engage in work or training to retain their benefits.
Moreover, plans to modernize Job Centres and integrate support from the NHS, skills training, and employment services are in the works to address the growing number of individuals unable to work due to long-term health issues. Changes to the disability and sickness benefits system could yield savings of up to £5 billion for the Treasury, although there is ongoing debate about how these savings should be allocated.
Work and Pensions Secretary Liz Kendall is reportedly advocating for reinvestment of these savings into expanding back-to-work programs for the long-term sick. However, the Treasury is inclined to use the funds to fill gaps in government spending, potentially avoiding the need for cuts or tax increases in the future. Advocacy groups are pushing for more direct assistance to benefit claimants, including a review of the controversial two-child benefit cap, which experts link to increased child poverty rates in families with more than two children. Eliminating this cap could cost up to £3.5 billion, which Reeves has previously argued is not feasible given the current fiscal constraints.
Instead, the government has initiated a task force to shape its long-promised child poverty strategy, leaving the door open for reconsideration of the cap and other welfare measures aimed at alleviating poverty. While the government’s strategy has focused on growth to aid those on benefits, a recent report from the Joseph Rowntree Foundation (JRF) cautioned that growth alone may not suffice. The JRF’s analysis of forecasts from the Office for Budget Responsibility and the Bank of England indicated that poverty levels—including deep poverty—are likely to remain “broadly flat” over the next four years without additional government intervention.
