Liz Truss, the new UK Prime Minister is about to announce her proposed plan to protect people against escalating energy prices this winter. This is potentially good news. I’m pleased that something is going to happen. The changes already planned to the price cap were going to cause significant harm to families this winter. The worst effected would have been poorer families on low incomes, the elderly and the vulnerable.
It looks likely that there won’t be any major surprises. The announcement has already bene heavily leaked/briefed through the media and so we know that it will centre on a price freeze at about £2.5k with bill payers still receiving the £400 crisis payments from the Government.
There are a few positives if the announcement is in line with the rumours. First of course there will be a level of relief from many that the crisis is not going to be as bad as feared -although bills are still going to be significantly high for many. Secondly, I agree broadly with the Prime Minister that implementing an additional “windfall tax” would have been unhelpful. Using the tax system to make subjective moral judgements is a risky business.
The Leader of the Opposition has confidently declared energy company profits “excessive” but who determines what counts as excessive. For some, it would be any profit at all. Indeed, many consider the wages paid out to politicians to be on the excessive side too. Further, whilst some of the energy companies have made large profits, though it seems not directly from domestic supply of gas and electric, there are many other companies around who make large profits. If we believe that larger corporations and wealthier individuals should contribute a greater share of their wealth and income back into the State then we should be looking at overall structure. A “windfall tax” is basically a desperate attempt by politicians no longer comfortable with socialist philosophy to claw back some money without making the case for higher taxation and progressive taxation generally.
You will notice that I talk about an additional windfall tax. It is worth remembering that Rishi Sunak introduced the UK Energy Profits Levy earlier in the year. This was a 25% tax on profits over and above the 40% already paid meaning that the energy companies pay a 65% tax on profits. So, in effect, the debate between Starmer and Truss is not about whether to levy a windfall tax but whether or not to increase it further. Similarly, the Leader of the Opposition hasn’t challenged the wisdom of a price freeze but rather said that he would freeze prices at a slightly lower level.
I am also pleased to see that Gordon Brown’s proposals to nationalise some of the energy companies don’t seem to have gone anywhere. I explain in more detail why I don’t favour that approach here.
However, I am not convinced that the measures proposed will be the most helpful and whilst they may provide some short term relief they may be storing up trouble for the long term. It’s not so much that the funding will come in the form of loans that the energy companies will have to pay back. Yes, we do have to recognise that someone at some point has to foot the bill. No, I don’t think that the energy companies should get away with passing that bill on to us for the long term. However, I think it should be possible to set out the terms of repayment so that energy companies are required to use profits first before passing on costs.
The big problem I have with a price freeze is that it is an attempt to suppress prices and as we know from other attempts to suppress things that they tend to bounce back sooner rather than later. The Prime Minister’s reason for introducing this price freeze appears to be the belief that within the next two years the cause of the crisis can be fixed. I am less confident and these types of interventions risk bringing in unforeseen consequences.
I have to be careful because the cynic within me is telling me that these short term measures primarily buy time for a General Election!
It remains my view that the key things we need to do to support people not just for one or two winters but for a significant period of time are as follows:
- Increasing benefits including Universal Credit, the winter fuel allowance, child benefits and tax credits.
- Increasing the State Pension
- Reducing VAT and fuel duties
- Reducing the lower rate of income tax.
- Gaining agreement from the Banks and Building Societies to use their profits to cancel significant proportions of domestic debt.
- Gaining agreement from energy companies to go further in ensuring that they use their profits directly to substantially reduce the bills of the most vulnerable.
I hope that the Government’s optimism about a short term freeze buying time to resolve energy supply issues. However, I suspect that we may be in the same situation, or worse, in two years time.