Tax Burdens, Austerity, and Eroded Welfare Support
Government fiscal policy – taxes, benefits, and public spending – plays a significant role in households’ disposable incomes and their resilience to cost-of-living increases. Over the past decade (and more) in countries like the U.K. and to some extent the U.S. and EU, policies often trended toward austerity (reduced welfare spending) and shifts in tax burdens that have affected disposable income distribution. When inflation struck, these leaner safety nets and higher net burdens left many families more exposed.
In the U.K., the period 2010–2019 was defined by fiscal austerity under consecutive governments. To address budget deficits after 2008, deep cuts were made to welfare benefits and social services. Human Rights Watch documented that “the impact of deep cuts in the welfare system since 2010 has been disastrous for poor families’ living standards”, contributing to rising hunger and poverty. For example, the U.K.’s working-age benefits (like Jobseeker’s Allowance, child benefits, housing support) were first capped and then mostly frozen in nominal terms for four years (2016–2020). This meant even normal inflation was eroding their value, let alone the recent surge. Indeed, by 2019 the poorest 20% of U.K. households were significantly worse off than they would have been without these policy changes – analysis shows they lost around 6% of income due to benefit cuts and tax credit changes. A specific policy, the “benefit cap,” limits the total benefits a family can receive regardless of need, which HRW found left some families unable to pay rent or afford food, forcing them to food banks. The number of emergency food parcels distributed by the Trussell Trust food bank network exploded by over 5,000% between 2008 and 2018 – a stark indicator of how austerity affected living costs (in the sense of people unable to cover basics).
Moreover, key benefits like the child tax credit were limited (a controversial rule allows claims for only two children, penalizing larger low-income families). Unemployed people in the U.K. receive relatively low support – below the OECD average – which means when prices rise, those out of work have little cushion. Even those in work have been affected by austerity through stagnant public sector wages and reduced public services (for instance, if public transit or childcare support is cut, a family might have to incur private costs to substitute). The cumulative effect is that by the time the cost-of-living crisis hit in 2021, many households had very little slack. The Joseph Rowntree Foundation projected in 2025 that U.K. disposable incomes would continue to decline through the rest of the decade without policy change. Essentially, years of tight policy left a legacy of low income growth for the bottom half and minimal safety nets, so a price shock quickly translated into hardship.
Tax policy also matters. In the U.K. and some European countries, there has been a trend toward higher consumption taxes (like VAT) and payroll taxes, which can burden lower and middle earners more relative to income. For example, the U.K. raised its VAT to 20% in 2011 as part of austerity – a tax that affects the cost of nearly all goods and services. National Insurance (payroll tax) was increased in 2022 by 1.25 percentage points (temporarily) to fund health spending. That came at a terrible time – April 2022 – just as energy bills spiked 54%. The simultaneous tax rise further squeezed take-home pay. (The NI hike was later reversed by Liz Truss’s short-lived government.) Local taxes like council tax have also risen annually above inflation in many areas. So while headline inflation measured rising prices, people’s net incomes were also being pinched by higher tax deductions or out-of-pocket contributions for services.
In the U.S., austerity was less pronounced at the federal level (indeed, the U.S. ran large deficits and did significant stimulus during COVID, which actually boosted incomes temporarily). However, the U.S. has a notoriously thinner welfare state to begin with. There is no universal healthcare or child allowance, and programs like food stamps or housing assistance only reach a fraction of those in need. Thus, when inflation hit, American low-income families had limited automatic support – though one big exception was the enhanced Child Tax Credit in 2021, which briefly lifted many out of poverty but then expired in 2022. Once that expired, child poverty in the U.S. doubled in 2022, highlighting how quickly costs can outstrip resources when policy support vanishes. Additionally, some U.S. states manage key benefits and have kept them minimal (for instance, some states did not continue expanded unemployment benefits for long, and many have not adjusted their minimum wages for inflation recently, meaning the real value of the minimum wage has fallen).
One could also view the lack of progressive tax adjustment as an issue: if inflation pushes people into higher tax brackets (fiscal drag) without indexation, their net income growth lags behind inflation even more. The U.S. indexes federal tax brackets to inflation (and the U.K. does for some thresholds, but has frozen others), yet in this high inflation environment even small lags or freezes become noticeable. The U.K. for example froze the income tax personal allowance and higher-rate threshold through 2026, which, given high inflation, drags many more people into paying more tax in real terms.
Another aspect is fiscal responses during the crisis. To their credit, governments did take measures to buffer the blow. The U.K. government in 2022 and 2023 deployed several support packages: energy bill rebates (£400 per household), targeted cost-of-living payments to low-income, disabled, and pensioner households (~£650 or more to millions of vulnerable families), and a temporary energy price guarantee to cap a typical household’s annual bill. These undoubtedly helped prevent worse outcomes (JRF still found millions couldn’t afford heat or food in late 2022, but it would have been even more without support). The question is whether these were enough and well-targeted. Critics argue that one-off payments, while helpful, don’t address the underlying shortfall in incomes relative to costs – essentially a Band-Aid on a persistent wound.
In the EU, many countries slashed fuel taxes, provided utility rebates, or even controlled prices (France limited electricity price rises to 4% in 2022 by edict, for example). Such measures varied but collectively Europe spent hundreds of billions to shield consumers from the full force of energy prices. This was a fiscal policy choice to socialize some of the cost. However, those are temporary and have fiscal costs (higher public debt). Now, as those supports wind down, households may face “catch-up” increases in utility bills – another hit to cost of living.
Fiscally, another relevant issue is public services austerity: if government cuts lead to deteriorating public services (like public transit, education, social care), individuals often must pay privately to fill the gap. For instance, if bus routes are cut, one might need to use a car or taxi more often (adding cost). If public colleges raise tuition due to reduced funding, families pay more. These indirect effects of austerity increase private cost of living. The HRW report noted teachers seeing hungry children reliant on schools for food because their families couldn’t afford enough – a consequence of welfare cuts.
It’s also worth noting the role of Brexit in the U.K. as a localized factor. Brexit introduced new trade barriers with the EU, which have nudged up the cost of imports, especially food. A study by LSE found that Brexit added nearly £6 billion to U.K. food bills in the two years to 2022, “increasing food prices due to increased red tape when food is imported from Europe”, and this effect hit poorer households disproportionately (since they spend more of their budget on food). That equates to about £210 extra per household on average – not enormous, but in a cost-of-living crisis every bit matters. Brexit also contributed to labor shortages in some sectors (like agriculture, hospitality) by reducing EU worker migration, which can push up wage costs in those sectors (and thus consumer prices) even as it left other workers with more job opportunities. The Bank of England’s Andrew Bailey estimated Brexit could be adding 1–2% to U.K. inflation in the short term via trade frictions and a weaker pound.
On currency, we should mention that fiscal mishaps can directly raise living costs by spooking markets. The U.K.’s September 2022 “mini-budget” of unfunded tax cuts caused the pound’s value to plummet to near parity with the dollar (around $1.03, an all-time low). This currency crash, albeit brief, made imports more expensive and rattled mortgage markets (as bond yields spiked) – effectively a self-inflicted exacerbation of the crisis. While quickly reversed, it highlighted how economic policy credibility is key to keeping import prices and borrowing costs stable.
In sum, tax and welfare choices have significantly shaped the cost-of-living landscape. Where governments have cut back support and allowed more of the burden to fall on individuals, people have fewer buffers when prices rise. Countries with more robust social safety nets (e.g., France or Germany, where unemployment insurance and social aid are more generous) saw somewhat less increase in poverty through the inflation spike, compared to those with weaker nets (U.K., U.S.). This doesn’t mean anyone was spared discomfort – but it affects the depth of the crisis. The policy lesson some draw is that strengthening automatic stabilizers (like indexing benefits to inflation, something the U.K. does for state pensions via the “triple lock,” but not for most working-age benefits until political pressure forced ad hoc rises) would mitigate such crises. Others argue for tax reform (e.g. cutting regressive consumption taxes or providing tax rebates during high inflation).
Looking ahead, public sentiment is likely to demand more government action if the crisis persists. Already, the crisis has been politically salient: British polls show the cost of living ranked as the top public concern in 2022–2023, and likely contributed to changes in government leadership. In the U.S., inflation was a central issue in the 2022 midterm elections, with fierce debate over whether the American Rescue Plan overstimulated inflation (conservative view) or whether corporate greed was to blame (progressive view). How governments balance fiscal responsibility with providing relief will be a key part of resolving the cost-of-living crisis in a fair way.