It’s poisonous time for a government that needs to know that letting low-income households bear the brunt of the expected rise in energy bills in April is a political non-starter.
After six months of high gas prices in the wholesale market, the regulator Ofgem’s pricing formula is likely to spew out a figure close to £ 2,000 on average for an annual dual fuel bill, an increase of about £ 700. It is simply unaffordable for many. And the implied £ 20bn impact on discretionary consumer spending will do little to encourage a wave of post-Omicron activity that the Treasury relies on in other areas of the economy. You have to find some form of subsidy or a smoothing mechanism for invoices.
From where the Chancellor is located, however, you can see why he might not be keen on cutting VAT. It’s charged 5% on energy bills, so even a temporary withdrawal would only reduce a £ 2,000 bill by £ 100. It would not be targeted either: all billpayers would benefit. On this point, Boris Johnson is right to describe him as “a blunt instrument”.
Rishi Sunak’s real worry, however, could be whether a planned temporary measure could become semi-permanent. The treasury, remember, is convinced that VAT revenues from electricity will increase over time as taxes on fuel from gasoline and diesel decrease when we plug in our electric cars. VAT must be considered fixed.
A windfall tax on North Sea gas producers? It will be tempting, but the design would be the key. Some of the producers who benefit from the current terms are also linked to government-backed carbon capture projects, so a one-off tax risks complaining about undermining long-term incentives and investments. Should nuclear producers or energy trading companies also be included since they also benefit from high wholesale prices? Determining who should pay and defining a “windfall” profit while wholesale prices are still volatile can quickly become a complicated matter.
In 1997, the beauty of then-Chancellor Gordon Brown’s one-off tax on privatized utilities was its simplicity: it was seen on the grounds that companies had been sold too cheaply, which was almost indisputable. The definitions were clear and the growls of the boards could be ignored.
Increasing the size and availability of the Hot Home Rebate available to vulnerable households is a much simpler idea. There is at least an established payment mechanism and the benefits, unlike a VAT removal, would be targeted. How much would it cost to make a significant difference? A case can be made for any number as high as £ 10 billion, which would rock the arithmetic of Treasury spending for the next fiscal year. And, again, Sunak could be worried about an exit as analysts expect next fall’s price cap to be even higher than April’s.
So, you can see the political temptation to give a multi-year loan of £ 20 billion to power supply companies to get them to handle the headache. The government would avoid appearing to be issuing energy bills and consumers would pay over time.
However, it is not a painless or risk free option. This means telling consumers that their bills will not go down, even if wholesale prices go down. And taking loans to an industry where two dozen businesses have gone bankrupt in the past three months would be a courageous move. The government has already nationalized Bulb and probably does not want to add to its collection of failing suppliers.
It’s hard to predict where ministers will land among this range of unappealing choices, but a massively expanded hot houses program gets the vote here. It would be targeted, which is an essential requirement, and tackle the problem head-on instead of putting the bill on forever. The hardest part would be to broaden the definition of “vulnerable” consumers: the whole point of an increase of £ 700 in the default tariff is that new vulnerable households will be created, which is the penny that does not drop until late among the ministers.
Meetings with supply companies, like Wednesday, do not change the basic fact that a political choice must be made about how much money to spend on mitigating the price shock. To do nothing is not plausible. Ofgem sets the price cap in early February and any support program for low-income households must be announced simultaneously. Ministers must hurry.