Rishi Sunak insists £15bn cost-of-living package will have ‘minimal’ impact on inflation

Rishi Sunak has insisted his £15bn cost-of-living support package will have only a “minimal” impact on inflation, raising prices by less than 1 per cent.

The chancellor denied backbench Tory complaints that his measures – which also included a £5bn windfall tax on energy companies – were un-Conservative.

Leading economic thinktank the Institute for Fiscal Studies today said that the package set out on Thursday was “something that Gordon Brown could be proud of”.

And economists warned that the massive handout, designed to relieve the burden on households of fast-rising energy costs, will inevitably force inflation up and result in increases in mortgage interest rates.

Tory backbencher Richard Drax spoke out in the Commons over the chancellor “throwing red meat to socialists”, while cabinet colleagues Kwasi Kwarteng and Jacob Rees-Mogg were reported to have raised concerns in private.

Speaking to Beth Rigby Interviews on Sky News, Mr Rees-Mogg raised concerns over a tax hike at a time of rising prices.

"You have to get the balance right to ensure that the deficit doesn’t explode, because deficit spending during an inflationary period is deeply inflationary,” said the Brexit minister.

"This is a balancing act. It would be foolish for me to pretend it’s easy to get right. People need to understand that there is not a tax that you can take that is economically cost-free.”

Challenged on Sky News over suggestions that his package was un-Conservative, Mr Sunak replied: “I think when we’re dealing as a country with the type of challenge that we now face, with inflation running where it is, I think the right response from a compassionate Conservative government is - as we have done over the past two years - to stand by people at a time of need.

“That’s why it’s particularly important that those most vulnerable get the most support. That’s what you saw yesterday.”

Speaking to BBC1’s Breakfast later, the chancellor said it was “categorically not” the case that he chose to unveil what was effectively an emergency budget on Thursday in order to knock the Sue Gray report on Partygate out of the headlines.

He insisted that the timing of the package was driven by energy regulator Ofgem’s announcement earlier in the week that the price cap on domestic bills was likely to rise by £800 to an average £2,800 in the autumn.

But shadow chancellor Rachel Reeves told LBC Radio: “The timing owed more to Sue Gray than it did to usual Treasury processes.

“ We see that from the fact that the chancellor’s deputy didn’t even know about this until the night before. There was no forecast or numbers accompanying the announcements yesterday.”

Asked whether the package would drive up inflation, Mr Sunak told Sky: “My view is that it will have a minimal impact on inflation.”

The likely impact would be “much, much, much less” than one per cent on prices, he said.

And he added: “The reason for that is twofold. One is because what we’re doing is very targeted at those most in need. And secondly, because we’re also raising money to help pay for it.

“The combination of those two things is the responsible approach, because even though we are supporting the economy, we want to make sure that we don’t make the inflation situation worse.

“Some people might say we should just spend even more or borrow even more. I think that would be irresponsible because that would risk driving up inflation, interest rates and people’s mortgages.”

Writing in The Times, IFS director Paul Johnson said that Thursday’s package was “strikingly redistributive”, with most support going to the poorest, while high earners were still going to be hit by rising taxes.

“Gordon Brown, once known as the ‘iron chancellor’, might have been proud,” said Mr Johnson.

But he warned that the measures were likely to be inflationary and cannot remain in place for the long term.

“I have to sound a note of caution, one very similar to that which Sunak has repeated on numerous occasions,” said Mr Johnson. “This can’t go on for ever.

“In the end the only things that will protect our living standards are getting inflation under control and the economy growing. Fail on that, and all of these measures will turn out to have been mere sticking plasters on a gaping wound.”

Shadow chancellor Rachel Reeves said that the support package was welcome, but said Mr Sunak had waiting too long to adopt a policy which Labour has been advocating for months.

“It is clear that Labour are winning the battle of ideas,” Ms Reeves told BBC1’s Breakfast. “But I have to ask what on earth took them so long when it was blindingly obvious to everybody else that this was absolutely necessary?”

Ms Reeves called on the government to take action now to insulate homes in order to ensure that families do not have to face the same crisis with energy bills in future years.

”The government could be starting a big programme of home insulation right now to take money off people’s bills – not just for one year, but for years to come,” she said. “That’d be a practical thing that could be happening at the moment.

“If you did 1.9 million of those homes a year, it will probably cost around £5 billion a year, but it would take £400 off people’s bills every single year. That would make a huge difference.”

Mr Sunak did not rule out returning next year with another emergency package.

He told BBC Breakfast: “We are sitting here in May, we don’t know what energy bills will be next April. I think people can judge me by my actions over the past couple of years.

“I’ve always tried to be responsive to the situation that the country and the economy is experiencing, we’ll always act like that.”