The Government is boxed in by its deluded choices on taxation and on the way it funds green energy
Sometimes there are no good choices to be made; what to do about soaring energy bills is a case in point. Under the Government’s inappropriately named “price cap”, annual fuel bills are due to rise by an average of £700 in April – an increase of around 50 per cent.
Add in other manifestations of rapidly rising inflation, together with the impact on disposable incomes of scheduled tax increases, and all the ingredients are there for one of the most serious cost of living squeezes in decades. Absent, that is, of wages keeping pace. Already, Tories are counting the potential political costs.
Hold off on those National Insurance increases, says Jacob Rees-Mogg, leader of the House of Commons, which would indeed go some way to alleviating the problem – though not for everyone, as many, including pensioners, don’t pay NI. The trouble is that the Government has committed to an extra £13 billion a year in health and social care spending, and the money has got to come from somewhere. It could admittedly be borrowed, but that would breach the Government’s separate commitment to balanced budgets, and as a fiscal stimulus would further add to inflationary pressures.
Even so, there was never any particular economic case for the immediate imposition of an NI surcharge; the currency isn’t under attack and gilt yields remain extraordinarily low. Rather, the NI increase was entirely a political choice. A conscious decision was made to expand the size of the state, and raise taxes to match. To delay the increase until just before the next general election would scarcely look like good politics.
According to reports, Rees-Mogg is against borrowing more and instead suggests that extra healthcare spending is funded via cuts elsewhere. I don’t want to play down the scope for this; there are some quite hefty welfare-to-work programmes, the purpose of which look questionable given the buoyant state of the jobs market. All the same, almost any spending cut would quickly be labelled “austerity”, and that’s not a place Boris Johnson wants to be.
And that’s just the trouble. There is almost no intervention the Government can make to mitigate the looming squeeze in living standards that doesn’t immediately rule itself out on grounds either of cost, efficacy or politics, and in some cases all three.
Taking them in turn, let’s start with temporarily removing the 5 per cent rate of VAT payable on energy bills. This is not to be sneezed at but would, as it benefits all households equally regardless of income, be a poorly targeted measure and would reduce the average bill by only £100. In the context of a £700 a year increase, it would offer only limited respite to poorer households. Once VAT is removed, it would also be politically very hard to reimpose.
Alternatively, the Government could suspend green and social levies, comprising more than 20 per cent of the average bill. That would indeed be a significant relief, but would not be a good look for a Prime Minister who has just hosted Cop26. And again, the money – this time for green subsidies – would have to be found elsewhere. Swap these levies directly into taxation, and the cost would be around 2p in the pound on income tax, negating the overall relief for energy bills and sending the back benches into spittle-flecked fury.
In Ireland, the Government has decided on a €100 rebate per household on electricity bills regardless of income, which is not a bad approach. But if copied in Britain, it would result in the same problem as the VAT suspension – poorly targeted and not enough to make a significant difference. Whack the rebate up to the full £700 likely increase in bills, on the other hand, and it would become prohibitively expensive at more than £20 billion.
The rebate could be means-tested, by for instance confining it to those on Universal Credit. Yet the sense of grievance among the majority who do not qualify would be something to behold.
Similarly with any increase in the existing Warm Home Discount, which provides relief for poorer households but, as things stand, is paid for by other non-qualifying households through their bills.
Soft loans to energy providers to enable them to smooth the extra costs over time is a not an altogether stupid idea, but it would only be pain delayed, rather than avoided.
In any case, from the Government’s perspective, none of the options looks at all appealing. The roots of the current squeeze are global, yet it has been made very much worse in the UK by years of short-sighted, populist energy policy. One delusional intervention has been piled on another, and almost all of them have backfired.
The long-term solutions to the double whammy of rising taxes and energy bills lie in radical reform of healthcare spending and energy markets. Yet even if this were a Government bold enough to attempt such an exercise, it wouldn’t solve the immediate problem. Unless saved by rising wages, ministers are about to stumble out of Covid straight into the path of an oncoming lorry marked “Lower Living Standards”.
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Image from the Global Warming Policy Foundation