Not for decades have Britons faced the kind of agonising choices they will confront this winter. The grim confirmation of an 80 per cent increase in the cap on household energy bills from October will force many to choose between heating and eating this Christmas. For businesses, many of whom could face a fourfold rise in bills, the decision may be between cutting jobs and shutting up shop. A surge in unemployment would compound the misery for families across the country. Whatever their other ambitions, finding ways to tackle what is a national emergency will be the defining challenge for Britain’s next prime minister.
First, the new leader must level with the public. Sky-high inflation is being driven by energy prices, above all gas, and it is here that consumers will experience most pain. This is a direct result of Vladimir Putin’s invasion of Ukraine and squeeze on supplies to Europe. Ukraine is fighting not just for its independence but to defend values many European countries have long taken for granted. Britain is part of the broader economic struggle with the Kremlin.
Yet the government should also emphasise that the necessary but arduous adjustment of shifting from fossil fuels to solar, wind and nuclear power, and becoming far more energy efficient, will bring long-term rewards. It will help meet climate goals, and prevent Russia from ever again being able to drive up prices.
This is a seismic shock, and many billions of pounds of further state support will be needed. But the national debt is mounting, and higher interest rates make it more expensive to service. The priority must be helping the most vulnerable households and businesses to weather this winter, creating time for a broader adjustment to prices that may be high for several winters to come.
The poorest households spend a greater portion of their income on energy. It is harder, too, for small and medium-sized businesses — which account for three-fifths of UK jobs — to absorb soaring bills and pass on price increases to customers. Aid must be skewed above all towards them.
For households, an efficient way forward is to build on Sunak’s package of support in May, which included payments to those on means tested benefits, alongside the disabled and pensioners. For small businesses, direct support could be targeted via rebates through the business rates system, together with discretionary grants administered by local authorities. Holding down energy prices across the board for long periods, as some are advocating, could prove inordinately expensive, and dull incentives to economise. Indeed, while cutting value added tax on energy may help at the margin, VAT revenues are also useful to fund support packages and the energy transition.
Short-term support for cash flow should also be paired with efforts to help businesses and households contribute to long-term energy security. The government must overcome its apparent aversion to raising awareness on how enterprise and society can ration gas and electricity use. Explicit support for businesses, ideally through the tax system, to incentivise green investments — for example in insulation and solar panels — will also keep future bills down. A halfhearted focus on this in the past has exacerbated today’s energy bind.
Battling Putin’s weaponisation of gas calls for shared efforts across government, business and households. Outgoing UK prime minister Boris Johnson rightly noted this week that “If we’re paying in our energy bills . . . the people of Ukraine are paying in their blood.” Liz Truss, the frontrunner to succeed him, and her team have shown little sign of grasping the scale of the problem, and the response needed. They will need to quickly come to terms with reality.
Source: Economy - ft.com
