Unconvinced by every politicians’ sketch of how to protect UK households from the soaring cost of energy this winter? It’s a reasonable view. There are holes in every plan we’ve heard so far.
Liz Truss’s preference for tax cuts and the removal of “green levies” is the worst of the lot as it doesn’t get close to recognising the size of the coming storm. Reversing national insurance increases hands the greatest benefit to high-earners. And cutting the odd £160 of charges on bills, or even VAT at 5%, is a case of tinkering around the edges if the average household is looking at an increase of £2,000. An encounter with reality awaits if she makes it to No 10.
Rishi Sunak’s hint that he would boost the £15bn cost of living support he unveiled in May as chancellor is better in that it would direct cash at households most in need. But even a repeat of £650 payments to 8 million low-income households on universal credit wouldn’t cover the rise in energy bills under the latest projections. Meanwhile, the definition of an unaffordable bill moves ever higher up the income spectrum.
Labour’s proposal to freeze the price cap at the current level has the virtue of simplicity but, at £29bn for just six months, would become hugely expensive when repeated. It is also untargeted: the biggest beneficiaries would be the heaviest consumers of energy, who tend to be wealthier households. As the Resolution Foundation points out, the richest fifth of households would benefit more in six months from Labour’s price cap than they would in a year from a cancellation of national insurance rises.
The foundation has a better idea. Or rather two. For preference, it would back a social tariff for low- and middle-income households, including those not receiving benefits, which would direct support where it is most needed. If the logistics of designing a scheme in time for winter are insurmountable (they probably are), then it would opt for what reads roughly like a fairer and better-designed version of Labour’s plan.
In short, it would apply a universal reduction on the price cap – it suggests 30% – and then impose a “solidarity tax” on higher-income households in the form of a 1% increase in all income tax rates. The foundation isn’t pretending the numbers would balance: £23.5bn for six months of support on bills would only partially be offset by a one-year tax increase of £9.5bn. But the manoeuvre would, at least, make a start in keeping a lid on extra public borrowing, a vital consideration if small businesses will also need support to get through the winter. About 60% of the extra income tax would be paid by the top fifth of earners.
A solidarity tax, the foundation freely concedes is “an unthinkable policy in the context of the leadership debates”. Very true. But the otherworldly debates, thankfully, are almost over. In September’s world of hard choices, trade-offs and affordability assessments, pragmatism will have to prevail. A solidarity tax, or something like it, sounds like a dose of realism.
Scottish Power ‘deficit fund’ proposal plays for time
The other big idea doing the rounds ahead of regulator Ofgem’s announcement on Friday of October’s price cap is the “deficit fund” proposal led by Scottish Power and other big energy firms.
Bills (or, rather, per-therm prices) would be capped close to current levels and the industry would tap the government-backed fund to cover the gap with wholesale prices. If that gap is £2,000, we’re talking £100bn-plus for two years given that there are roughly 28 million households in the UK. The costs would be recouped by putting a charge on energy bills for the next 15 years or so, or by general taxation, or by a combination.
To put it mildly, £100bn is a daunting number – about £30bn more than the cost of the Covid furlough scheme. But the idea seems to be gaining mileage as a way of buying time until, for starters, electricity prices can be unhooked from soaraway gas prices. If so, two refinements are essential.
First, a two-tier price system is required to deter excessive consumption: consumers would get the discounted rate up to a defined level, but then pay more per-therm. Price signals still matter.
Second, do not allow big banks to insert themselves as arrangers of the fund. Such a setup would be a cosmetic wheeze to keep the formal liability off the public books. It’s not needed. On top of higher energy bills, we definitely don’t want to pay a skim-off for banks.
