The world has changed on energy prices, so our policy response must also change. That is what every politician should understand after the confirmation that typical bills are heading for £3,600 in October and £5,000-plus in January. Whatever they thought they came into politics for, whatever pet projects or prejudices they have, must be set aside. Their task is to avert the winter of discontent ahead.
Gas prices are shooting up just as we need it to keep our homes warm: half of annual gas consumption happens between January and March. The result will be average winter bills of £500 a month, three times those of last year. Monthly energy costs will peak at more than £700 in January. Anyone who thinks low- and middle-income Britain can afford this hasn’t noticed the living standards stagnation of the last 15 years that has left low-income households spending 59% of their budgets on essentials (up from 52% in 2006).
Alongside energy, the cost of food is on the rise. This is a heating and eating squeeze the like of which none of us has seen before. Thousands will turn off their heating or have it shut off. Millions will run up arrears, dragging down their mental health and credit ratings.
The government’s approach has been to let prices rise (incentivising people to cut consumption) while providing £30bn of support, including via the benefits system, to help pay rising bills. This is what economic textbooks and the IMF recommend and it was the right answer when we faced bills of £2,000. But we are no longer living in that world. The scale of the coming catastrophe means we will need a different policy response. Both Conservative leadership candidates, and opposition parties, have recognised that more will need to be done but their plans fall well short. Scrapping VAT on energy or shifting green levies off bills – as proposed by Rishi Sunak and Liz Truss respectively – will help, but only in the amount of £100 this winter. This is not serious stuff.
The tax cut focus of the leadership campaign is a distraction. Scrapping the recent national insurance rise would see twice the benefit going to the top 5% as the entire bottom half, who must be our priority this winter. While energy bills are rising everywhere, this would benefit Londoners twice as much as those in the north-east.Freezing everyone’s bills – as proposed by most opposition parties – tackles the core problem of surging prices, but because it’s not targeted has a huge price tag: £36bn this winter and £64bn next year. The richest households would gain more from Labour’s bill freeze over six months than from scrapping the national insurance rise over a year.
Sunak wants to repeat the lump-sum payments to those on benefits that he introduced as chancellor. This focuses support on those most in need, but its problems grow the more we rely on it. With only 45% of the poorest half of the population receiving benefits, the cliff edge between those receiving support and those missing out would become too big. And lump-sum payments don’t fit with the reality that energy bills vary hugely given family sizes and home types. So it’s time to accept that we are going to need more radical policy options, involving capping the costs of energy at below-market rates. Concerns that this will limit incentives to cut energy use are important but lack perspective, especially for poorer households; 62% of them rent and surging bills do nothing to incentivise landlords to invest in insulation. We also do not want ever stronger incentives for people to turn off the heating: cold homes lay behind 8,500 excess deaths in 2019.
One way is a radical social tariff to cut bills for low- and middle-income households. A 30% reduction for households on benefits or without a higher earner would cost £15bn, targeting those with lower incomes and the biggest bill rises. Putting it in place would be hard, but not impossible. Those on benefits could be automatically enrolled, while others would apply to their energy company with the government confirming eligibility using tax data. The administratively easier, but politically more difficult, route is to cut everyone’s bills and claw back the gains from higher income households via a temporary tax rise. Well over a third of the £23.5bn cost of a 30% bill cut for everyone could be offset by a 1% increase in all income tax rates.
Tax cuts, not rises, are the fashion and clearly borrowing will do most of the work of paying for lower bills this winter, but there are good reasons for asking those able to contribute to do so. It avoids putting more pressure on the Bank of England to raise interest rates further and recognises the huge uncertainty about how long this will last. Prices could fall quickly, but we should plan an approach that the government can afford to sustain into next year if necessary.
Imposing windfall taxes, including on renewable generators making huge profits where the price they charge for electricity is linked to gas prices, is a no-brainer. But we must be honest: windfall taxes can’t cover this. Too many windfalls accrue outside the UK, beyond our tax grasp. That’s why solidarity taxes on those able to contribute more come into play in situations where geopolitics requires huge sacrifices of ordinary people. Churchill wasn’t a communist but taxes on the top rose a lot during the Second World War.
It’s crucial that we avoid distractions from working through these hard policy choices and putting in place the longer-term answers to today’s nightmare: accelerating new renewable and nuclear generation capacity, reforming our energy market and making energy efficiency (especially of our leaky housing stock) a policy priority. So, ignore the debate about nationalising energy suppliers (which is irrelevant to the costs of delivering below-market prices) or calls from those same suppliers for expensive and complex government guarantees. Those distracting us with their anxieties about intervening in the free market should remember that there’s nothing free about a market being manipulated by Putin to further his war aims.
We live in the world as it is, not as we would like it to be. Energy bills have risen so far that they have changed the nature of the problem facing us. It’s time for politicians to understand that that means changing the nature of the answers they are offering.