26 August 2022

Next PM will have to introduce fresh measures to deal with energy bills – IFS

26 August 2022

The next prime minister will probably be unable to avoid introducing a fresh package of support, a leading think tank said after confirmation the energy price cap will rise by 80.06% prompted grim warnings for the winter ahead.

The Institute for Fiscal Studies (IFS) suggested on Friday that whoever becomes the next prime minister would be unable to avoid putting together a “substantial package of support”, no matter what is said on the campaign trail.

The new rise in the price cap, the IFS said, means current Government support will cover only 47% of the rise in bills.

It said covering the same proportion of the energy price rise now would cost a further £14 billion.

Looking beyond this winter, energy prices also look like they will remain very high well into next year, which will put pressure on the government to provide further support in the coming months

The IFS said it is difficult to assess the impact of Ms Truss’s plans to cut green levies.

“Cutting only those levies that still add to bills would be complex as they are linked to various schemes and subsidies and apply to business as well as households, but would save households around £50 on average over the three months from October,” the think tank said.

Mr Sunak’s plan to cut VAT on household energy bills, the IFS said, would save a typical household £51 between October and December at a cost of £1.4 billion.

“Looking beyond this winter, energy prices also look like they will remain very high well into next year, which will put pressure on the government to provide further support in the coming months,” IFS economist Isaac Delestre said.

“Whoever becomes the next prime minister will most likely be announcing a substantial package of support very soon after taking office.”

The Resolution Foundation think tank said the country is facing a “winter catastrophe” unless the Government provides extra support.

It said any extra support needs to target those who need help most, while also reflecting households’ differing level of energy usage and stretching beyond simply the benefit system.

Currently, none of the proposals from leadership candidates or opposition parties pass such a test, it added.

Torsten Bell, chief executive of the Resolution Foundation, said: “The benefits system has a crucial role to play this winter, but the scale of the crisis means that combining this with more radical approaches now looks all but inevitable.”

The Government has insisted “help is coming” as the increase, confirmed by regulator Ofgem early on Friday, is expected to send the average household’s yearly bill from £1,971 to £3,549 from October.

Opposition politicians, Ofgem and campaigners were all united on Friday in calling on the Government to intervene urgently, as charities warned that households across the country could be plunged into poverty by the soaring energy bills.

Chancellor Nadhim Zahawi said the increase in the energy price cap would cause “stress and anxiety” for people but that the Government was working to develop more options to support households.

“I know the energy price cap announcement this morning will cause stress and anxiety for many people, but help is coming with £400 off energy bills for all, the second instalment of a £650 payment for vulnerable households and £300 for all pensioners,” he said.

Chancellor Nadhim Zahawi said he was ‘working flat out to develop options’ (Liam McBurney/PA) (PA Wire)

“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support.

“This will mean the incoming prime minister can hit the ground running and deliver support to those who need it most, as soon as possible.”

The announcement comes in the middle of the Tory leadership race, with the identity of the next prime minister set to be decided in a matter of days.

With Mr Zahawi not expected to retain the chancellor role under the next administration, it will ultimately be up to the new leader whether to take the Treasury advice or seek a whole new set of options.

The proposals put forward by frontrunner Liz Truss and rival Rishi Sunak have both been criticised for failing to meet the scale of the challenge, with the Foreign Secretary promising an emergency budget to address the cost-of-living crisis if she enters Number 10.

Labour has been vocal in attacking the proposals put forward by both candidates as failing to meet the needs of the public.

Rachel Reeves, the shadow chancellor, said: “Today’s announcement will strike fear in the heart of many families, and force many to make unthinkable choices this winter.

“The Tories now face an urgent choice.

“They can carry on letting oil and gas companies make huge profits while every family suffers with bills rising this winter.

“Or they can act now and stop the energy price cap rising, by bringing in a windfall tax on those oil and gas profits.

“People deserve a government that can meet the scale of this national emergency.”

Jonathan Brearley, the chief executive of Ofgem, said the problem was beyond what the regulator could address by itself.

Liz Truss is the frontrunner in the Tory leadership contest (Joe Giddens/PA) (PA Wire)

Appearing on BBC Radio 4’s Today programme only minutes after the announcement, he admitted that the news would be “devastating” for many families.

“The truth is this is beyond the capacity of the regulator and the industry to address. So what we are saying today is, look we have 10 days now until we have a new administration, have a new prime minister and a new ministerial team.

“What I am clear about is the prime minister with his or her ministerial team will need to act urgently and decisively to address this.”

Liberal Democrat leader Sir Ed Davey said the rise in the energy price cap is “nothing short of a catastrophe” for millions of households.

Business groups and think tanks continued to offer stark warnings over the course of Friday.

The CBI said the scale of Government help needs to be “urgently reviewed”.

“Government must also step up and deliver a national energy efficiency programme that will help reduce household bills as soon as this winter,” said Matthew Fell, the CBI’s chief policy director.

Chairman of the Business, Energy and Industrial Strategy Committee, Darren Jones, also warned “many businesses will face bankruptcy because there is no price cap on their energy bills”.

“The scale of the challenge will mean that the next chancellor will have to offer business grants and not just temporary tax and business rate cuts,” the Labour MP said.

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