Four-fifths of British homes are heated by gas and almost half of our electricity is produced by burning gas. British energy policy, in thrall to the notion that the market never makes mistakes and governments always do, has left us uniquely exposed to the more than doubling in gas prices first driven by Covid and now by the war in Ukraine.
British households spent £36bn on gas consumption in 2021-22, according to energy consultants Aurora Energy Research. They project this will rise to £74bn in the next financial year 2022-23 – a rise of £38bn.
Put another way, the average household will have paid £1,277 a year to this April for its gas, when the price cap will be lifted, and then more than £3,000 in October. These are unparalleled swingeing increases.
Of course the government should have insisted on more diversified sources of supply, intensified the transition to renewables and accelerated rather than turned back the improved insulation of our homes. The country is paying a huge price for the government’s blind faith in the wisdom of markets. The question is what to do now.
Just keeping public sector pay level in real terms would mean expanding the spending by £10bn in 2022-23
However, the chancellor, Rishi Sunak, has signalled that he intends to do nothing in the spring statement on 23 March. Instead, he will stand by the measures he has already put in place – a £200 discount in every household’s energy bill earmarked for October this year that will be recovered in annual £40 instalments over the next five years, along with a non-repayable £150 rebate in council tax payments for homes in bands A to D.
In the context of energy bills that are expected to rise by approaching £2,000 in six months, this is nugatory, mean in its thinking and self-defeating in practice.
It is part and parcel with Sunak’s wider approach. In the next financial year, the rate of inflation alone is projected to be 4% higher than the forecasts on which cash spending was calculated at the time of the autumn statement in 2021. His do-nothing inclination will be to ask departments to keep within that cash envelope, so there will be an enormous cut in real terms for the delivery of services and the pay of public sector workers – as savage as any imposed at the height of austerity. The Institute for Fiscal Studies calculates that just keeping public sector pay level in real terms would mean expanding the spending by £10bn in 2022-23.
There is enough cash. Energy companies are now receiving an enormous unearned boost to their income – not from enterprise, hard work or initiative but because Putin launched his war. Following the EU’s lead, a windfall profits tax should be levied on them, which would raise approaching £10bn. More generally, the chancellor’s plans to freeze allowances for four years from 2022-23 will mean a spectacular increase in income tax receipts.
Sitting on a potential revenue bonanza and on top of having the option to borrow 25-, 50- and even 100-year debt, the chancellor has a unique opportunity to alleviate potential economic and social distress. The energy rebate in October should be lifted to £1,000 per household with no requirement for repayment. He should commit to maintain public spending in real terms. And he should counter recession by supporting levelling up and the green transition, committing substantial resources for both.
Hoarding his cash for pre-election tax cuts, pretending that his hands are fiscally tied, is cynical, deceitful and wrong. The economy and the public need action now.
