Typical household energy bills are set to rise to about £2,800 a year in October, the energy regulator warned on Tuesday, as the scale of the cost of living crisis facing Britain was laid bare.
Rishi Sunak, the chancellor, has been putting the finishing touches to a mini-Budget worth billions of pounds to help households struggling with soaring energy prices; senior government figures say he could present it as early as this Thursday.
Tory officials say Boris Johnson wants to set out the energy support package before the House of Commons breaks for its Whitsun break on Thursday, as he tries to move the political debate on from the “partygate” scandal around Covid rule-breaking gatherings in Downing Street.
But the prime minister and Sunak have yet to agree on a final package and key issues, including an energy windfall tax, remain contentious. If time runs out, the chancellor will have to wait until MPs return to Westminster in early June.
Why is a support package needed?
Jonathan Brearley, Ofgem chief executive, told MPs on Tuesday he expected the energy price cap to rise to about £2,800 when it is next increased in the autumn, a jump of over £800 compared to April’s figure of £1,971. It will have risen £1,500 in a year.
Brearley warned that the price cap was still to be finalised and could be higher if gas prices rose further — if, for example, supplies from Russia to the EU were disrupted.
The Resolution Foundation think-tank warned that the rising energy cap would push almost 10mn families in England into “fuel stress”, meaning they would be spending more than 10 per cent of their total budgets on energy.
With prices rising across the board — the Bank of England thinks inflation could top 10 per cent in the autumn — Sunak is now promising to do more to alleviate the biggest crunch in living standards for a generation.
Who would the measures cover?
The chancellor in February provided £9bn in support to help offset the rise in domestic energy bills, including a £150 council tax rebate and a £200 loan.
But he was widely criticised for failing to offer more help to the poorest people, and especially those unable to work, in his March Spring Statement. Some in the treasury now acknowledge that this was a mistake.
In his emergency energy package, Sunak will target most of his support on those on the lowest incomes, although there will also be help for what his allies call “the squeezed middle” of core Tory voters.
If Sunak chose to cover the entire £800 energy price rise for 8mn of the poorest households, it would cost about £6.5bn. A more broadly targeted package would cost considerably more.
How will support be given?
Torsten Bell, chief executive of the Resolution Foundation, says the most obvious way to help the most vulnerable is to use either the benefits system or targeted support via the Warm Homes Discount, which goes to the poorest households.
Paul Johnson, director of the Institute for Fiscal Studies, said that some 7mn people would eventually be on universal credit and it would be a good way to target support.
But after Sunak announced a £20 a week “temporary” uplift to UC at the start of the Covid pandemic in March 2020, he found it extremely tough politically to claw the money back again.
An alternative would be to bring forward what are expected to be very big increases in benefits due in April 2023, which are linked to the September 2022 inflation rate. “I don’t understand why they haven’t done that already,” Johnson said.
The council tax system has proved an administratively complex way to help people and as a result, Sunak is expected to expand the Warm Home Discount, which is currently due to offer a £150 energy bill rebate to 3mn households this autumn.
Eligibility could be extended to another 5.5mn households in receipt of either pension credit or working age benefits. Kwasi Kwarteng, the business secretary, is said by Tory colleagues to have proposed boosting the rebate to £500, funded by the taxpayer. A separate winter fuel payment could be used to help pensioners.
“There will be subsequent announcements soon which I think could well look at the Warm Homes Discount,” Kwarteng told MPs on Tuesday.
Will tax cuts be included?
Sunak has been urged by Tory rightwingers to bring forward a 1 percentage point cut in income tax — scheduled for 2024 — or to cut VAT on domestic energy bills to stop the economy slipping into recession.
The pressure on the chancellor address demands for a tax cut front will be intense — not least from Boris Johnson — but Sunak is anxious to avoid “pouring fuel on to the fire” of inflation, according to Johnson of the IFS.
The chancellor strongly agreed with German finance minister Christian Lindner, who said at a G7 meeting this month: “At this stage, there is no need for a broad-based, debt-financed demand stimulus, which would actually be more likely to be dissipated by additional price increases.”
Sunak knows he will be criticised by some Tory MPs for funding part of his rescue package through a windfall tax on energy companies, which could raise several billion pounds.
But Johnson said the economic case for such a tax was less to do with the public finances and more to do with helping Sunak reduce inflation-fuelling deficit spending.