Liz Truss’s energy plan is a momentous fiscal intervention but there is a lot we still don’t know | Business News
There is much we do not know about the government’s new plans to help people out with their energy bills.
We do not know how much they will cost. We do not have a clear sense of how they will be financed or paid for. We do not know precisely how the scheme will work in Northern Ireland or, for that matter, the unit costs at which gas and electricity are to be capped.
But here are a few things we do know.
The first is that this will be a momentous fiscal intervention – perhaps the single most expensive tax or spend policy in peacetime history.
The second is that while this is certainly a big and unconventional move, it is not dissimilar from interventions we’re seeing across much of Europe. We are all in the same boat, or rather similar boats in a tempestuous sea.
Simply put, now that we can no longer rely on Russian gas supply, there is much less energy around in Europe these days. That is pushing up prices to levels which would crash all of our economies and send millions of households into genuine destitution. This is not an exaggeration: it is the logic of the energy market, which is utterly essential for all our lives and where prices are now many multiples of what they once were.
The fact that the government has not provided us with any costings is frustrating and, to be honest, unnecessary.
Yes, this was put together very quickly indeed, but the Treasury still managed to provide some guidance on the potential costs of the furlough scheme even though it was hastily assembled outside of a usual Budget. However, a key feature – in a sense the defining feature – of this policy is that we simply do not know how much it will end up costing.
The government has told us it will be limiting average household bills to a typical level of £2,500 a year. Note, by the way, that this doesn’t mean you won’t pay any more above a certain amount; it simply means that it will limit the average per-unit cost of energy our utilities can charge us. The government just prefers to refer to these costs in terms of what it would mean for the “typical” household and their “typical” usage.
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There is, of course, no such thing as the “typical” household. Your eventual bill may be bigger or smaller than the £2,500. And – this is really important – if you use more gas or electricity, you will still have to pay a lot for it. Your bills are not capped; the cost of every kilowatt-hour is capped.
A lot can happen in two years
And since we don’t know where the market price of energy is heading in the coming months, and since the eventual cost of the cap depends on the “wedge” between what the market thinks you should be paying for energy and what the government thinks you should have to pay, it’s hard to know precisely how much this will cost.
Indeed, it’s hard to think of another government policy which has quite such potential to balloon in cost – especially since Liz Truss has committed to leave the guarantee, as she’s styling it, in place for a full two years. A lot could (and plausibly will) happen in that timeframe.
But since the government is refusing, let’s have a stab at the costs ourselves, shall we?
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What we do know is that bills are due to increase to (again an average “typical” household level of) £3,549 as of October. Let’s imagine that were to remain the market-defined price for the next two years. It would cost about £30bn a year for the government to make up the difference between those two figures. That’s about the same amount we spend on running the UK’s armed forces each year.
Single biggest fiscal intervention in peacetime
But the problem with this illustration is that prices have risen sharply since the last time Ofgem looked at the figures. According to Cornwall Insight, an agency which keeps close tabs on this, wholesale prices now look like they’re heading up to the equivalent of £5,000 per household by next summer. If this is indeed what happens, that would imply the cost of the policy would be far, far more: potentially £70bn a year. This would be bigger than the annual cost of the furlough scheme, making it the single biggest fiscal intervention in peacetime. Over two years it means the government could easily end up spending well over £100bn on supporting households alone.
And note that this is only the beginning, for Ms Truss also announced a support scheme for businesses and schools. It will only last for six months, though one would expect it to be extended if prices stay elevated well into next year. Again, no cost was provided, but it will almost certainly cost in the tens of billions.
Truss said nothing about the need for households to preserve energy
A few other points are worth mulling over.
First, the various support schemes introduced by the previous government including £400 off your bill for all households and further support for pensioners, those with disabilities and those on means-tested benefits, will remain in place. That means that while in some senses this latest measure is “flat”, benefiting wealthy households as much as the less well-off, those previous schemes will help skew the support somewhat to more needy households. However, this is far from being a redistributive measure: it is about as blunt as you get.
Second, the prime minister talked a little about the changes she’s planning for the broader energy market: fracking, more contracts for differences for energy firms (which means the fixed rates for power rather than taking the market rate) and more nuclear power stations. While this is all very well, it is unlikely to make much if any difference any time soon.
There was nothing whatsoever on the need for households to try, as much as they can, to preserve energy and cut back if possible. It seems odd, given that power curtailment is one of the obvious ways to respond to Russia’s weaponisation of energy, that UK politicians remain too nervous even to mention it.
Energy rationing is already happening
Still: energy rationing is already happening, even if it doesn’t go by that name. Businesses across the country are already being forced to pare back operations and reduce production simply because it makes no economic sense to carry on paying for power.
The depressing reality is that many households around the country are facing similar straits – but this time around what is at stake is not their levels of profits but their heating and welfare. This government support may avert destitution for millions of families (that was genuinely what we were heading for) but everyone’s bills will still be far more expensive in the coming months than we have experienced for a long time.
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