Not convinced by every politician’s sketch of how to protect UK households from rising energy costs this winter? It is 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 taxes” is the worst of the lot as she doesn’t even come close to acknowledging the size of the coming storm. Reversing national insurance increases the hands the biggest benefit for big incomes. And cutting the odd £160 in bill charges, or even 5% VAT, is a case of tinkering around the edges if the average household is looking at a £2,000 rise. An encounter with reality awaits him if he reaches number 10.
Rishi Sunak’s hint that he would increase cost-of-living support from the £15bn he unveiled in May as chancellor is better, as it would direct cash to households most in need. But even a repeat payment of £650 to 8 million low-income households on Universal Credit would not cover the rise in energy bills according to the latest projections. Meanwhile, the unaffordable bill definition moves higher and higher on the income spectrum.
Labour’s proposal to freeze the price cap at its current level has the virtue of simplicity, but at £29 billion for just six months, it would become very expensive when repeated. It is also not targeted: the biggest beneficiaries would be the biggest energy consumers, which tend to be wealthier households. As the Resolution Foundation points out, the richest fifth of households would benefit more in six months from the Labor price cap than in a year from a cancellation of national insurance increases.
The foundation has a better idea. Or rather two. As a preference, I would support a social charge for low- and middle-income households, including those on no benefits, which would target support where it is most needed. If the logistics of designing a scheme in time for winter are insurmountable (they probably are), then a fairer and better designed version of Labor’s plan would be opted for.
In short, it would apply a universal reduction in the price cap – he suggests 30% – and then impose a “solidarity tax” on households with higher incomes in the form of a 1% increase on all types of ‘income tax. The foundation is not aiming for the figures to break even: £23.5bn for six months of bill support would only be partially offset by a one-year tax increase of £9.5bn. But the maneuver would at least begin to keep a lid on additional public borrowing, a vital consideration if small businesses are also going to need support to get through the winter. About 60% of income tax would be paid by the top fifth of income.
A solidarity tax, the foundation freely admits, is “an unthinkable policy in the context of leadership debates.” very true But the otherworldly debates are thankfully almost over. In September’s world of tough decisions, trade-offs and affordability assessments, pragmatism will have to prevail. A solidarity tax, or something similar, seems like a dose of realism.
Scottish Power’s ‘deficit fund’ proposal is playing with time
The other big idea doing the rounds ahead of regulator Ofgem’s announcement on Friday in October is the proposed “deficit fund” led by Scottish Power and other big energy companies.
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Bills (or, rather, prices per thermal) would be capped at close to current levels, and the industry would tap into the government-funded fund to cover the gap with wholesale prices. If that gap is £2,000, we’re talking over £100 billion over two years, as there are roughly 28 million households in the UK. The costs would be recovered by applying a charge to energy bills over the next 15 years or so, or through general taxes, or a combination.
To put it mildly, £100bn is a daunting figure – around £30bn more than the cost of the Covid leave programme. But the idea appears to be gaining mileage as a way to buy time until electricity prices can be decoupled from gas prices to begin with. If so, two refinements are essential.
First, a two-tier pricing system is needed to deter overconsumption: consumers would get the discounted rate up to a set level, but then pay more for thermal. Price signals are still important.
Second, don’t allow big banks to step in as fund organizers. This setup would be an aesthetic breather to keep formal accountability off the public books. It’s not necessary. On top of the higher energy bills, we definitely don’t want to pay a discount for the banks.