With estimates that the annual average combined gas and electricity bill will rise from £1,971 in the summer to £3,582 in early October and more than £4,000 by January, households fear they will have to choose between heating and consumption. winter. Sir Keir Starmer, the Labor leader, said the situation was a “national emergency” on Monday, echoing consumer champion and MoneySavingExpert.com founder Martin Lewis, who said last week that households faced “a national crisis on the scale we saw in the pandemic”. Around 28.9 million households are connected to the UK electricity grid and these households are set to pay £59 billion more for their energy next year, according to estimates by Cornwall Insight. This increase represents almost 2.5 per cent of the UK’s gross domestic product.
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What are the main proposals for household relief?
On Monday, Labor boosted Conservative leadership candidates Liz Truss and Rishi Sunak with a promise to cap household energy bills at the current level of £1,971 over the winter if they were in power. Her proposals to end the threat of higher bills were more radical than the energy industry’s proposals for the government to remove some charges on bills unrelated to the wholesale cost of gas and pay for them from general taxation. This would take £420 a year off the current average bill, but would not prevent subsequent increases reflecting the much higher wholesale price in the gas and electricity market. The government has so far offered a £400 discount for all households and an extra £650 for those on means-tested benefits such as Universal Credit or Pension Credit. Pensioners will also receive additional winter fuel payments as part of a £15bn package announced by Sunak in May. The Institute for Fiscal Studies has estimated that to maintain the generosity of support, an extra £12bn would be required. The two leadership contenders have offered radically different ideas about what to do next. Sunak has promised to scrap the 5 per cent value added tax on energy bills and offer £10bn of extra support for vulnerable households. Truss was skeptical of offering what she called “handouts” and instead promised to cut taxes as well as some green levies from energy bills. However, her team did not rule out further direct support after heavy criticism from Sunak.
How does Labor plan to pay for their proposals?
Starmer says his plan to cap bills at £1,971 this winter will cost £29bn, half the estimated annual rise in bills this year. Because households use more gas in winter than in summer, this will be an underestimate. Labor is proposing to backdate the government’s windfall tax from January rather than May 26, the date Sunak announced, leaving energy companies to fund £8bn of the cost at the expense of a more arbitrary tax system. The party will also roll back some of the support Sunak has announced, removing £484 for every household pledged over the winter. Finally, Labor said that by reining in the bills, inflation would be contained, peaking at around the current rate of 9% rather than rising to 13%, as the Bank of England had predicted. This would save the government £7 billion in index-linked debt servicing costs According to Paul Johnson, director of the IFS, Labour’s proposals would be “very expensive” because he doubted they could be reduced to just six months. “We are looking at the cost of the license,” he added.
Could energy support lower inflation and its cost to the government?
Among advanced economies, the UK has an unusually high outstanding public debt linked to retail price inflation. At the end of last week, there was around £547 billion of index-linked debt, a quarter of total public debt. This means that for every percentage point that RPI inflation rises in each year, the cost of servicing public debt linked to the index rises by £5.5bn. Although the Treasury does not have to physically pay the money until the debt is paid off, it is included in the government borrowing figures because the liability is created in the year in which inflation was recorded. Labour’s — and to a lesser extent the energy companies’ — plan would deliver permanent savings if energy bills were only temporarily high, but the half-yearly support would do little to cost government funding if it merely delayed rising prices. More broadly, the government hopes the Office for National Statistics will classify its £400 support for households as a bill discount when it gives its view on the matter on August 31. it would reduce peak inflation this winter by around 2 percentage points, according to FT calculations. But most experts, including government officials, believe the statistics agency will not oblige. The ONS must make a decision about the “economic reality” of the £400 rebate. If it decides that this is actually cheaper energy bills, inflation will be correspondingly lower. But if it decides that the government simply gives money to households regardless of the size of their bills, the support will be seen as akin to a universal welfare payment and inflation will remain unaffected.
What do economists recommend that governments do?
The IMF issued what should be seen as orthodox economic advice on rising costs last month, saying countries should offer targeted one-off support to vulnerable households while letting energy prices reflect market forces. This, he said, would protect poorer households while maintaining the incentive to save energy as prices rose. He found that many European countries were following Labour’s approach and cracking down on price rises, which he criticized as “keeping[ing] global energy demand and prices higher than they would otherwise be.’ But with governments across Europe facing similar pressures, the UK would not be alone if it simply set prices and absorbed cost increases this winter just like its continental bonds.
