Rishi Sunak, Britain’s Chancellor of the Exchequer, has unveiled a £15billion package of measures to help households cope with the cost of living, after energy watchdog Ofgem announced that would likely increase the price cap on energy bills by over £800 a year. to £2,800 in October.
Oil and gas companies are taking over part of the tab, with a temporary windfall tax expected to raise around £5billion. We asked four experts what they thought of the announcement.
Cost of living crisis
Jonquil Lowe, Lecturer in Economics and Personal Finance, The Open University
The Chancellor’s pledge to give £15billion to help households tackle the cost of living crisis is finally targeting help where it’s needed most.
The package of measures, partially funded by an exceptional tax on oil and gas companies, includes a series of one-off payments. There will be £650 each for the 8 million lowest income families, £300 for pensioner households and £150 for households receiving disability benefits without a means test.
Local authorities will also receive an additional £500million to provide discretionary support to low-income households, while all UK households will receive £400 (they were already due to receive half as a loan later this year, but they no longer need to reimburse it).
The Chancellor says the new package will provide the most vulnerable households with £1,200 to help cover the cost of living – roughly equal to the expected total increase in household energy bills over this year . This takes into account that the price cap, which sets an upper limit on household energy bills and soared by 54% (£693) in April, is set to increase by a further £830 in October.
But energy bills are only part of the pain for British households. Food prices are currently rising at an annual rate of 5.9% and could go much higher. So even with these payments, the lowest income households are still likely to struggle.
The universal payment of £400 to each household will also go to many households who could go without. As the Institute for Fiscal Studies noted, this risks adding additional spending to the economy, which could increase pressure on inflation.
The fear is that the Bank of England could then raise interest rates even further, increasing the cost of mortgages and other debt. Despite these reservations, the new measures are to be welcomed. In the second attempt, Rishi Sunak more wisely targeted government support.
Keith Baker, Energy Poverty and Policy Researcher, Glasgow Caledonian University
While 12 million households are expected to be in fuel poverty when Ofgem raises the energy price cap in October, the UK government has decided to give paltry sums to just 8 million of them. This is not enough, given the expected increase in energy prices this year – well beyond the amounts offered to a small proportion of families.
When we talk about energy poverty, we often hear about the decision that families have to make between “heating or eating”. But with energy and food prices steadily rising, despite these payments, this winter many people will struggle to do either.
The new windfall tax comes with a sunset clause that says it will be scrapped once oil and gas prices fall. But instead, the industry should pay long-term taxes on its historic profits by contributing to the climate crisis. Then, if we are to hope to avoid the crisis, we need national and international plans to manage the decline of the industry and eliminate it completely by 2050.
Let’s not forget that the fossil fuel industry has spent billions lobbying against measures to tackle climate change and hinder the growth of renewable energy. Its successes will cost the peoples and governments of this planet huge sums of money as they are forced to rectify and adapt to the damage they have caused.
Adi Imsirovic, Senior Researcher, Oxford Institute for Energy Studies, University of Surrey
As an economist, I think windfall taxes in a competitive market environment are a very bad idea. On the one hand, Chancellor Rishi Sunak wants oil companies to invest more money in the North Sea. On the other hand, when they earn money, they are taxed more.
Much of the profits of companies like Shell and BP currently come from the refining side. Refineries have been losing money for years and across Europe they have closed, raising serious energy security concerns. As soon as they start making money, we tax them extra. I don’t see the logic in that.
The reason refineries are making money, apart from the war in Ukraine, is that oil companies have not invested in new capacity for fear that the net zero program will prevent them from making a comeback. Over the past two years, we have lost approximately 4 million barrels of daily capacity from the world’s oil supply.
I completely disagree with the argument that the windfall tax is a way to get to net zero faster. The energy transition must be managed from the point of view of supply and demand. Government-friendly buttons have always been on the supply side, but they do nothing to discourage demand.
On the contrary, they subsidize it, for example by charging only 5% VAT on heating in the UK, which allows the wealthy to heat large homes more cheaply. Limiting supply while letting demand flourish means higher prices. This is what the exceptional tax will do, by further discouraging investment.
But the reality is that during the process of energy transition to cleaner fuels, we still need fossil fuels to meet energy demand. Changing this situation requires tackling both supply and demand. One way to balance these policies is to implement a carbon tax.
Also, why target the oil and gas industry with this exceptional tax? Why don’t they impose one on law firms, which have made a fortune in recent years? Or internet companies like Google and Twitter?
Alan Shipman, Lecturer in Economics, The Open University
Restrictions at the start of the pandemic meant that the UK general government deficit had risen to almost 13% of GDP almost immediately after Rishi Sunak became chancellor in 2020. The fact that the deficit has since more than halved and is expected to falling further in 2022-23 has given it unusual fiscal leeway. The Chancellor is in a position to increase public spending, above the budget plans that have fueled these borrowing projections, while keeping deficits and debt down as a percentage of GDP.
After using the public health emergency to raise taxes in his first budget, Sunak was able to return some of it via tax cuts in the March spring declaration, and still has £30billion left for more. spending if household difficulties worsen. It is from this additional “fiscal space” that the additional energy relief will be drawn.
But if weak investment and squeezing consumer spending dampen GDP growth this year – something already signaled by first-quarter data – the deficit may already have stopped falling as expected. Additional spending could widen it again, causing the margin to quickly and unexpectedly disappear.
While extra borrowing cost nothing when interest rates were close to zero, the bill is rising now as rates rise, with financial markets already taking a closer look at governments’ ability to service the extra debt.
Higher inflation is the way governments traditionally write down the real value of debt if they are struggling to repay it. But if inflation stays long around the 10% peak the Bank of England is now forecasting – partly fueled by increased demand for government borrowing – then the extra help with fuel bills may not be there. sufficient to alleviate the cost of living crisis.