The Energy Package
Earlier this week, our new Prime Minister Liz Truss announced a new price cap that will keep energy bills to £2500 for the average family over the next two years and will provide businesses with similar support over the next 6 months.
On top of that, all families will get £400 over this winter to help with bills, taking the cost down to £2100 for this year. Other previously mentioned measures for people with disabilities and those on benefits and pensions will also remain in place.
It had been predicted that our energy bills would more than triple in January (when compared to the previous year), so this was a welcome announcement for many families. But – and you’ll have to bear with me here – was this the right decision?
Paying for the Price Cap
There is first of all the question of how the energy price cap will be paid for. Labour had been calling for a windfall tax on the excess profits of energy companies, which are estimated by the Treasury to be as much as £170 billion over the next two years.
The £29 billion plan set out by Labour to freeze energy prices would have lasted until March 2023 (in comparison to Truss’s plan lasting until October 2024). Labour claim that the proposal was fully costed and would stop any sort of a price rise for consumers, but the Institute of Fiscal Studies believes there was an £8 billion shortfall due to not taking into account higher energy usage in winter.
Under Truss’s plan, there will be no windfall tax and so the government will have to borrow a lot of money to fund this plan. The figure that’s generally floating about is £100 billion. The UK’s gross general debt is already at over £2.3 trillion (more than double the amount it was in 2009/10). This means that in interest payments alone, the government spent almost £20 billion in June and this new measure, along with rising interest rates, means that this amount will only rise. The taxpayer is, in effect, being forced to pay to protect the excess profits of large corporations.
Who It Benefits
There is also the point that many families are already struggling to pay for energy bills and that under new plans, there will still be a rise in the cost of energy, forcing even more people into fuel poverty. The rise in prices will equate to about £200 this year and a further £400 next year (assuming the £400 payment is not repeated) for the average family.
The families struggling to make ends meet are the ones that need the support the most, but the new cap will benefit wealthier people more. This is because the price cap is being done on a flat per unit basis and so those who can afford to spend more on bills will get more off their bills.
On top of this, there is the issue with hiding the true cost of energy bills from consumers. If energy measures were significantly more targeted, then households with lower incomes and those with increased energy usage due to a disability would be able to afford their bills, whilst wealthier consumers would be forced to review their energy usage.
Instead, energy usage will largely remain the same for many households, when, as the director of the Institute of Fiscal Studies points out, “the reason that gas prices are so high is because there’s less gas around.” If energy consumption remains at the same levels as they are now when these measure run out, we will end up in largely the same position, just with a much worse environmental situation (Truss has said she will reverse the ban on fracking and wants more oil and gas from the North Sea).
Some Alternatives
Whilst it is genuinely great that the owner of British Gas announced this morning that they would look at voluntarily capping their profits, in addition to their work supporting poorer customers announced last month, it is not enough. It will not force other corporations to follow suit like a windfall tax would, nor will it address the inequalities and inadequacies of the price cap.
So perhaps we could look at alternatives, like a variable price cap that would operate in a similar way to how income tax does so that those with larger shoulders take a larger burden. A scheme designed by the National Institute for Economic and Social Research would mean that “the average energy bill for the poorest consumers would come down from almost £3,000 to about £1,000 a year.”
The Resolution Foundation offer up the idea of a social tariff, whereby low-to-middle income households would receive a reduction in household energy bills. By offering a 30% reduction in energy bills to households with no one earning more than £25,000 and 12% to those with no one earning over £40,000, 94% of those in the poorest half of the population would benefit.
There’s a string of other options suggested by the Resolution Foundation and even more proposals by other think tanks, so make sure to go check them out, if you’re interested.
Closing Points
The current government policy is not our only option in dealing with this energy crisis. We could have a fairer, more effective and cheaper way of addressing these issues and we could ensure that corporations making unbelievable profits off this crisis play their part through a windfall tax.
A windfall tax would enable us to take some of the money we will borrow to protect corporations’ profits and use it instead to pay for the retrofitting of homes for poorer households and discount the retrofitting of homes for wealthier people. This would mean that there is a long-term solution to people’s bills that would also help the environment.
Alternatively, we could use that money to pay for the cladding crisis, which shows no signs of being properly addressed more than five years after Grenfell. That particular crisis is estimated to cost £50 billion to resolve, ten times what the government has made available so far – but that’s an article for another day.
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