Carl Court/Staff/Getty Images LONDON — New UK Prime Minister Liz Truss is set to announce a package worth tens of billions of pounds to help people pay their energy bills on Thursday, but there are concerns about how it will be funded. The policy announcement is expected to freeze the price of energy either at the current level or at £2,500 ($2,870). As it currently stands, the cap which comes into effect next month will increase the average energy bill from £1,971 to £3,549 a year. Truss said she would “deal with the energy crisis caused by Putin’s war” in her maiden speech as prime minister on Tuesday night. “I will take action this week to tackle our energy bills and secure our future energy supply,” he said. The announcement comes as more than 170,000 people in the UK plan to cancel their energy bill payments on October 1 in protest at the increased energy price cap. The number of people in Britain in fuel poverty, defined as being unable to adequately heat a home, will hit 12 million households (42%) this winter if financial support is not given, according to campaign group End Fuel Poverty Coalition. .
£180 billion worth of support?
The exact details of the package are yet to be revealed. Initial forecasts suggested it could be around £100bn of support, but Deutsche Bank’s latest estimates said it could be closer to £200bn. The Bank raised its expectations as reports said the freeze on energy bills would be around the £2,500 level, which was “significantly lower” than the bank had forecast, it said in a research note on Wednesday. Reports also say a £40bn package will be put in place to support businesses with their energy costs, according to the bank, bringing the total expected support measures to £180bn. Initially it was expected that support would only be available to households. The figure is almost half of what was spent on providing financial support during the Covid-19 pandemic and just over 8% of GDP, according to Deutsche Bank. He estimates that the freeze will be effective from October.
“The bill will ultimately fall on the taxpayers”
The package to be announced by Truss may not be too different from a plan proposed by the opposition Labor Party on August 14. The main difference is that Labor had proposed funding the move through a windfall tax on oil and gas companies – something the new prime minister ruled out. “I am against a windfall tax,” Truss told the House of Commons during her first questioning with fellow MPs on Wednesday. “I think it’s wrong to stop companies from investing in the UK, which is exactly what we need to grow the economy,” he said. Growing the UK economy through “tax cuts and reform” was one of three key mandates set out by the new prime minister in her first speech on Tuesday night. The others were tackling the energy crisis and improving Britain’s National Health Service. The new energy package will likely be financed through additional government borrowing, but the reverberations of the economic support could be felt for decades to come, according to Christopher Dembik, head of macroeconomic analysis at Saxo Bank. “There is only one path he should take: open the door to a massive stimulus package and, once the crisis is settled, raise taxes,” Dembik said. “It’s great news in the short term, although the bill will ultimately fall on taxpayers in the long run and could take generations to pay off,” he told CNBC.
“It won’t help us in the coming winters”
An energy stimulus package would be a short-term solution to a long-term problem for people in Britain, according to economist Jeevun Sandher. “The plan, as it is currently stated, will stop the disaster, but the crisis is still there,” he said, referring to the cost of living crisis that is already affecting many families and businesses in Britain. “This energy price freeze may stop this disaster coming this winter, but it won’t help us in future winters,” he said. The natural gas sector may also feel the negative effects of a stimulus package, said Salomon Fiedler, an economist at investment bank Berenberg. “If incumbent utilities freeze rates now but individually keep them above cost in the future, they could face competition from new entrants in the future who don’t have to recoup current losses and so could drive them down,” Fiedler said. . “An additional problem is that a blanket freeze on energy prices would remove incentives for households to reduce natural gas consumption,” Fiedler told CNBC. “This will likely make the policy very expensive and further increase gas shortages for sectors not covered by the freeze.” There is also speculation about the impact on the economy as a whole. While Truss’s low-tax and deregulatory policies may boost the economy, the benefits won’t be felt for several years or even decades, Fiedler said. “In the short term, additional fiscal stimulus, whether through tax cuts or support measures, would worsen inflationary pressures (even if reported inflation rates will depend on the details of those measures) if they are not financed by… spending cuts elsewhere,” He wrote. The cost of energy bills “is definitely the most important issue for voters right now,” said Chris Curtis, head of political polling at Opinium Research. he told CNBC. “It’s important as a new prime minister to make a good first impression and Liz Truss is hoping that by having a big intervention in the voters’ biggest priority, she will make some positive first impression,” Curtis said. “Most voters are telling us that they still don’t know much about her and opinions of her are pretty weak, so it’s a really important time for her to try and land well with the public,” he said.
“Impossible challenges” for the most vulnerable
With warnings that the next decade of winters could be “terrible” if serious action is not taken to control gas prices, some are questioning whether the upcoming package will be enough to protect the most vulnerable. Freezing prices at their current level would cause energy needs to rise and make the situation worse, according to a research note by Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. “While anyone paying on a fixed charge will already technically spread higher costs across the year, those on lower incomes are more likely to use pre-paid meters, where they pay for the energy they use as they use it,” Coles said. . . “If prices freeze slightly higher, it will exacerbate the impossible challenges facing the most vulnerable this winter,” he said.
