Budget 2025: Cost of Living Measures

London, November 2025 Budget 2025 promises the "biggest poverty reduction in decades" through a combination of energy bill relief, welfare reforms, and wage increases. But while the government celebrates immediate measures like energy levy removals and Universal Credit uplifts, a deeper analysis reveals significant gaps between short-term relief and the structural changes needed to prevent future cost-of-living crises.

This alternative explainer examines why the green transition's cost savings aren't reaching household energy bills, why minimum wage increases may backfire on small businesses, and what structural reforms could deliver lasting affordability instead of temporary relief.

The Energy Bills Disconnect: Where Are the Green Savings?

The government’s energy relief focuses on removing levies and freezing prices, but ignores the deeper disconnect, falling renewable generation costs aren’t reaching households. This is arguably Budget 2025’s most significant missed opportunity

The Green Transition

UK renewable energy generation has expanded dramatically, yet households see little benefit:

• Wholesale Costs Falling: Wind and solar now generate electricity at record-low prices
• Retail Prices Stable: Consumer tariffs remain linked to gas prices despite renewable growth
• Margin Expansion: Energy suppliers capture the savings through increased profit margins
• Dividend Growth: Shareholders benefit while households continue paying inflated bills
• Business Competitiveness: High energy costs handicap UK manufacturers despite cheap renewable electricity

Households and SMEs are locked out of the green dividend. Without reform, the cost of living crisis persists, not because energy is expensive, but because pricing is misaligned.

Why Gas-Pegged Pricing Persists

Despite the rise of renewables, UK electricity pricing remains tethered to gas, a design that benefits suppliers more than consumers.

• Price Cap Design: Ofgem's price cap still tracks gas prices even when renewables dominate supply
• Marginal Pricing: Expensive gas generation sets the price for all electricity, including cheap renewables
• Supplier Windfall: Companies buy renewable electricity cheap but sell at gas-linked prices
• Market Power: Limited competition allows price coordination among major suppliers
• Regulatory Capture: Ofgem's methodology benefits industry over consumers

Two-Child Limit Removal: Good Policy, Bad Timing

The government’s commitment to remove the two child benefit limit marks real progress on child poverty but the delay exposes Budget 2025’s broader failure to address urgent needs.

The Policy Details

The two child limit removal will provide substantial support when implemented:

• Coverage: Approximately 1.6 million children affected by the current limit
• Value: Around £3,000 per year for each additional child in larger families
• Scope: Applies to both Universal Credit and legacy benefits
• Implementation: Full removal scheduled for April 2026
• Cost: Estimated £2.5 billion annual cost to the Exchequer

The Timing Problem

While the policy direction is positive, the delay creates immediate hardship:

• Current Crisis: Families struggling now won't see relief for 17 months
• School Costs: Spring term 2025 expenses hit families before support arrives
• Debt Accumulation: Households may fall into unrecoverable debt before help arrives
• Health Impact: Delayed nutrition and healthcare access affecting child development
• Housing Stress: Rent arrears and potential evictions before income support increases

The policy is right but the delay is wrong. Budget 2025 offers future relief while families face present hardship.

Structural Limitations

Even when implemented in April 2026, the removal of the two child benefit cap won’t resolve the broader affordability pressures families face. Rising costs in essential areas absorb or erode the gains:

• Housing Costs: Rent increases often absorb benefit increases
• Childcare Expenses: Limited provision and high costs reduce effective income gains
• Food Inflation: Rising grocery costs erode purchasing power
• Transport Costs: School run and family mobility expenses
• Energy Bills: Larger families face disproportionate energy cost pressures

Policy reform lifts headline poverty statistics, but without tackling housing, childcare, food, transport, and energy, families remain exposed to recurring crises.

Minimum Wage Increases: Unintended Consequences

The government's National Living Wage increase aims to boost household incomes, but the policy may backfire through cost pass-through effects and small business closures.

The Official Strategy

The National Living Wage increase forms a central part of the cost-of-living response:

• Rate Increase: 6.7% rise to £12.21 per hour from April 2025
• Youth Rates: Apprentice and under 21 rates also increased
• Coverage: Affects approximately 3 million workers directly
• Income Boost: £1,400 annual increase for full time minimum wage workers
• Low Pay Commission: Continues path toward two thirds median earnings target

The Cost Pass-Through Risk

Higher wage costs often translate into higher consumer prices, reducing the real benefit of wage rises:

• Retail Price Increases: Shops and restaurants raise prices to cover higher labor costs
• Service Cost Inflation: Personal care, hospitality, and local services become more expensive
• Housing Cost Pressure: Property maintenance and letting agent costs increase
• Transport Price Rises: Bus fares and taxi charges adjust upward
• Net Impact Reduction: Real income gains smaller than headline wage increases

Small Business Vulnerability

Smaller enterprises face disproportionate stress:

• Margin Compression: Small retailers and cafes struggle to absorb wage increases
• Limited Pricing Power: Competition from larger chains prevents price increases
• Job Reduction Pressure: Hours cuts and redundancies to manage costs
• Closure Risk: Marginal businesses may become unviable
• Market Concentration: Large corporations gain market share as small competitors exit

Budget 2025’s wage rise promises household relief, but risks triggering inflationary pass through and small business closures. Without paired support for SMEs, the policy may concentrate market power in large corporations while eroding the very gains it claims to deliver.

Hidden Fiscal Burdens: What the Budget Doesn't Highlight

While Budget 2025 celebrates cost of living relief, several measures will increase financial pressure on households and savers over the medium term.

Tax Threshold Freezes: Stealth Tax Increases

Frozen tax thresholds create automatic tax increases as wages rise:

• Personal Allowance: Frozen at £12,570 until 2031, pulling more workers into tax
• Higher Rate Threshold: Frozen at £50,270, creating bracket creep
• Additional Rate Threshold: Frozen at £125,140, affecting high earners
• Fiscal Drag Effect: Inflation and wage growth automatically increase tax burdens
• Revenue Generation: Expected to raise £30 billion annually by 2031

Savings and Investment Penalties

Changes to savings incentives reduce returns for prudent households:

• ISA Allowance Reduction: Cash ISA limit cut from £20,000 to £15,000 from 2027
• Dividend Tax Increases: Higher rates on share dividends from April 2026
• Capital Gains Threshold: Annual allowance reduced from £6,000 to £3,000
• Pension Restriction: Salary sacrifice limits tightened for higher earners
• Savings Deterrent: Reduced incentives for financial prudence and emergency funds

Future Cost Pressures

Several budget measures create delayed cost increases:

• Fuel Duty Return: Temporary 5p cut expires in 2026, adding £150/year for typical driver
• Council Tax Rises: Local authority funding gaps likely to drive property tax increases
• NHS Charges: Prescription and dental costs may rise despite current freezes
• Education Costs: University fees and maintenance support under review
• Green Transition Costs: Heat pump installation and electric vehicle transition expenses

Budget 2025’s relief headlines mask hidden fiscal burdens. Stealth taxes, savings penalties, and delayed cost rises will squeeze households over the medium term. The government celebrates short term gains while embedding long term pressures.

Structural Alternatives: Preventing Future Crises

Rather than relying on temporary relief that requires renewal, the government could implement systemic reforms to permanently improve household affordability.

Energy Market Transformation

Fundamental reform of energy pricing could deliver lasting bill reductions:

• Renewable Pricing Separation: Create distinct markets for renewable and fossil fuel electricity
• Time of Use Tariffs: Lower prices when renewable generation is high
• Local Energy Systems: Community energy schemes with local price benefits
• Grid Modernization: Smart systems that optimize renewable energy use
• Storage Integration: Battery systems that smooth price volatility

Housing Affordability Solutions

Addressing housing costs would provide more effective relief than income top-ups:

• Build to Rent Expansion: Large scale rental housing development to increase supply
• Rent Stabilization: Limits on annual rent increases to provide predictability
• Energy Efficiency Requirements: Mandatory insulation and heat pumps in rental properties
• Social Housing Investment: Expanded public housing provision
• Planning Reform: Streamlined processes for affordable housing development

Food System Reform

Addressing food costs requires supply chain and market competition reforms:

• Supermarket Regulation: Limits on buyer power and unfair trading practices
• Producer Payment Terms: Shorter payment windows for farmers and suppliers
• Local Food Systems: Support for regional food distribution networks
• Competition Policy: Breaking up concentrated food retail markets
• Import Diversification: Reducing reliance on volatile international markets

Automatic Economic Stabilizers

Building automatic adjustments into the system would prevent future crises:

• Indexed Tax Thresholds: Automatic adjustment for inflation to prevent fiscal drag
• Benefit Uprating: Automatic increases linked to cost of living measures
• Minimum Wage Formula: Clear, predictable increases based on living cost calculations
• Energy Price Regulation: Automatic profit margin limits during price spikes
• Regional Adjustment: Location based benefit and tax threshold variations

🗣️ The Profit Margin Alternative

Budget 2025 focuses on temporary relief and income boosts, but it ignores the fundamental driver of high living costs: excessive profit margins in essential sectors.

UKPoliticsDecoded.uk has developed comprehensive proposals for limiting profit margins on essential goods and services, offering more substantial and permanent relief than the Budget’s measures.

International Comparison: Alternative Approaches

Other countries have implemented more comprehensive cost of living responses that address structural issues rather than providing temporary relief.

European Energy Market Reforms

Several EU countries have decoupled electricity prices from gas costs:

• Spain and Portugal: Implemented temporary caps on gas prices used in electricity generation
• France: Regulated electricity tariffs that reflect nuclear generation costs
• Denmark: District heating systems that optimize renewable energy use
• Germany: Feed-in tariffs that provide long-term price certainty for renewables
• Norway: Hydroelectric pricing that benefits from abundant renewable resources

Housing Affordability Models

International examples demonstrate alternative approaches to housing costs:

• Vienna: Large-scale social housing providing affordable alternatives to private rental
• Singapore: Public housing development ensuring homeownership opportunities
• Germany: Rent control systems that provide tenancy security
• Netherlands: Housing associations providing affordable rental housing
• Switzerland: Cooperative housing models reducing housing costs

Food Security Approaches

Other countries have implemented food affordability measures:

• France: Competition policy limiting supermarket concentration
• Italy: Support for local food networks and short supply chains
• Canada: Supply management systems ensuring fair producer prices
• Australia: Competition policy addressing supermarket duopoly power
• New Zealand: Fair trading legislation protecting farmers from buyer power abuse

While Budget 2025 offers piecemeal relief, international models show that structural reform is possible. From energy decoupling in Spain and France to Vienna’s social housing and Canada’s food supply management, other nations embed affordability into the system. The UK risks falling behind by treating crises as temporary rather than permanent challenges.

The Budget's Political Economy

Budget 2025 reflects political constraints more than economic optimization, prioritizing measures that appear generous while avoiding fundamental challenges to corporate power.

Political Logic of Current Approach

The government's strategy serves political rather than economic optimization:

• Headline Appeal: Large percentage increases and cash amounts generate positive media coverage
• Blame Avoidance: Temporary measures avoid responsibility for long-term structural problems
• Interest Group Management: Avoids confrontation with energy companies and major retailers
• Implementation Ease: Adjusting existing systems easier than creating new regulatory frameworks
• Electoral Timing: Relief timed to coincide with election cycles rather than genuine need

Corporate Interest Alignment

Current measures often align with rather than challenge corporate interests:

• Energy Sector: Levy removal reduces costs while preserving pricing power
• Retail Sector: Increased consumer spending power without margin pressure
• Financial Services: No challenges to high-cost credit or banking practices
• Housing Sector: No rent controls or competition challenges
• Food Industry: Increased purchasing power without market structure reform

Democratic Accountability Gap

The budget process limits democratic input on fundamental economic structures:

• Limited Consultation: Alternative approaches receive minimal public debate
• Technical Complexity: Energy market and competition policy excluded from mainstream discussion
• Corporate Lobbying: Industry voices dominate policy development processes
• Media Focus: Coverage emphasizes immediate measures rather than structural alternatives
• Parliamentary Time: Limited debate on fundamental economic reform options

Budget 2025 is politically clever but economically timid. Relief is designed for headlines and electoral timing, while corporate power remains untouched. The democratic gap is clear: structural reform is excluded from debate, leaving households with temporary fixes instead of lasting solutions.

Conclusion: Short-Term Relief vs Long-Term Solutions

Budget 2025 delivers immediate relief but avoids structural reform.

• Energy: Falling renewable costs aren’t passed to households; profit caps and pass through rules could deliver far greater savings than levy removal.
• Wages: Minimum wage rises risk inflation and SME closures; competition, housing, and energy reform would raise living standards more sustainably.
• Timing: Delayed measures like the two child limit removal show politics outweighing urgent need.
• Profit Margin: Excessive margins in essentials drive the crisis; reform could save households £3,600 annually and strengthen public finances

The UK faces a choice: continue crisis management through temporary fixes, or embrace structural reform that tackles root causes. Budget 2025 opts for the former, leaving households with short term relief but no lasting solution. The green transition offers a historic chance to deliver cheaper energy yet this opportunity has been missed, ensuring the cost of living crisis will return.

Budget 2025 offers relief today but guarantees crisis tomorrow.