The first item on Liz Truss’s to-do list upon becoming Prime Minister was a stark one – avert the living standards catastrophe coming this winter. Energy bills were set to soar just as households needed to start putting their heating on. Bills were on course to hit £550 in January alone – simply unaffordable for millions of families, and at risk of leaving pre-payment customers out in the cold this winter.
So, on day three of her Premiership, Liz Truss has gone bold by announcing a two-year Energy Price Guarantee, capping bills for a typical household at £2,500, and with plans to support businesses and public sector institutions coming soon.
This package of support does a pretty good job of protecting families from soaring energy costs – saving the typical family £1,074 over the next six months and, together with the £400 bills discount already due this winter, offsetting three-quarters of the rise in bills compared to last year. It has the added benefit of flattening the peak of inflation that was due to come this winter. We estimate that it will cut inflation in the short-term by around 4 percentage points, and by almost 7 percentage points for the poorest.
But while catastrophe has been averted, politicians and policy makers should be clear-eyed that this winter is still going to be very tough – bills are still rising and pay packets are still shrinking. Britain’s four million pre-payment meter customers are still going to need to find £264 in January alone to keep their heating on.
And the energy bills package comes a hefty, and highly uncertain price tag that the Prime Minister shied away from setting out. Future taxpayers are being asked to foot a very large bill to help energy bill payers today.
Support for households alone is likely to cost around £57 billion over the next six months, a figure set to rise to around £120 billion over the two-year course of the guarantee on current forecasts for future gas prices. Add in support for businesses and public institutions, and the energy bills package could easily top the £137 billion bank bailout at the height of the financial crisis.
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The sheer scale of this spending commitment will have huge implication for both monetary policy and the state of the public finances. The Government has rightly ignored industry calls to fund it via guarantees to energy companies, instead opting to borrow directly. But, by ruling out further windfall taxes to help cover the cost of the scheme, and ignoring suggestions to implement a solidarity tax on those who can more easily afford the higher energy prices, the Government has increased the chances of the Bank of England having to impose higher interest rates, and left future taxpayers an almighty bill.
And while the Government has now prevented a disaster this winter, nothing it does can stop Britain from ultimately becoming poorer as a country when global energy prices rise. It remains the case that families will end the current parliament significantly poorer than they were at the start of it – an unwelcome and unprecedented feat in modern British history.
Turning this sorry economic outlook around will require a fundamental reboot of our economic strategy that delivers the productivity-driven economic growth that Britain has sorely lacked over the past 15 years. Having dealt with the winter crisis with a dramatic intervention, the new Cabinet’s much trickier task is to turn the Government’s unashamed desire for growth into action delivering stronger wages and living standards for all UK households.
Mike Brewer is Chief Economist at The Resolution Foundation, an independent think-tank focused on improving living standards for those on low to middle incomes.
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