Liz Truss Energy Plan Is An Important Fiscal Intervention But There’s Still Much We Don’t Know | Business newsletter

There’s a lot we don’t know about the government’s new plans to help people tackle their energy bills.

We don’t know how much they will cost. We have no clear idea of ​​how they will be funded or paid. We don’t know exactly how this scheme will work in Northern Ireland or for that matter the unit cost of gas and electricity will be capped.

But here are a few things we do know.

The first is that this will be a significant fiscal intervention – perhaps the most expensive tax or spending policy in peacetime history.

The second is that while this is certainly a big and unique move, it is no different from the interventions we are seeing in most of Europe. We are all on the same boat, or rather the same boats in a stormy sea.

Simply put, now that we can no longer rely on Russian gas supplies, the energy in Europe today will be much less. That is driving prices up to the point where it could collapse all of our economies and leave millions of households in dire straits. This is not an exaggeration: it is the logic of the energy market, which is absolutely essential to our lives, and the prices are now many times higher than before.

The fact that the government doesn’t provide us with any expenses is frustrating and, to be honest, unnecessary.

Yes, this is really put together very quickly, but the Treasury is still trying to give some guidance on the potential costs of the furlough plan even though it is hastily assembled outside of the Regular Budget. However, a key feature – in a sense the defining feature – of this policy is that we simply don’t know how much it will cost.

Here’s why.

The Government has told us it will cap the average household bill at a typical £2,500 a year. By the way, note that this doesn’t mean you won’t pay anything more than a certain amount; it simply means it will limit the average energy cost per unit of energy our utilities can charge us. The government only wants to refer to these costs in terms of what it means to the “typical” household and their “typical” usage.

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Of course, there is no such thing as a “typical” household. Your final bill could be more than or less than £2,500. And – this is really important – if you use more gas or electricity, you will still pay a lot for it. Your bill is not limited; the cost of per kilowatt hour is limited.

A lot can happen in two years

And since we don’t know where the market price of energy will go in the coming months, and because the ultimate cost of the cap depends on the “wedge” between what the market thinks you should pay for energy and what the government thinks you should pay, it’s hard to know exactly how much this will cost.

Indeed, it’s hard to think of another government policy that has the potential to raise costs so much – especially since Liz Truss has pledged to leave bail, as she created it, to apply. in two years. A lot can happen (and probably will) in that timeframe.

But since the government is refusing, let’s bear the costs ourselves, shall we?

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What we do know is that bills will go up (again the “typical” household average is) £3,549 in October. Imagine that would remain the market-determined price for two. next year. It would cost the government around £30 billion a year to make up the difference between those two numbers. That’s about the same amount we spend running the UK’s armed forces each year.

The single biggest fiscal intervention in peacetime

But the problem with this illustration is that prices have risen sharply since Ofgem last looked at the figures. According to Cornwall Insight, an agency that keeps a close eye on the matter, wholesale prices now look like they will reach the equivalent of £5,000 per household next summer. If this is indeed what happens, it means the cost of the policy will be much further away: perhaps £70 billion a year. This would be larger than the annual cost of the furlough plan, making it the single largest financial intervention in peacetime. Over two years, that means the government could easily spend more than £100 billion just to support households.

And note that this is just the beginning, as Ms. Truss has also announced plans to support businesses and schools. It will only last for six months, although it is expected to be extended if prices continue to soar next year. Again, no cost is provided, but it will almost certainly cost tens of billions of dollars.

Truss says nothing about the need for households to conserve energy

A few other points worth pondering over.

First, the various support schemes launched by the previous government including a £400 reduction for all households and additional support for pensioners, people with disabilities and people enjoying their rights. Benefits are tested means, will still be maintained. That means that in some respects this latest measure is “flat”, benefiting wealthy households as well as those less well-off, but the previous options would help to reduce support for more disadvantaged households to some extent. However, this is not a redistributive measure: it’s as blunt as you get.

Second, the prime minister talked a little bit about the changes she is planning for the broader energy market: cracking, more contracts for difference for energy companies (meaning fixed electricity prices). instead of taking the market price) and more nuclear power plants. Although this is great, but it is not likely to make much of a difference if any soon.

Households don’t need to try as hard as they can to save energy and cut back if possible. As odd as it may seem, since power cuts are one of the obvious ways to respond to Russia’s weaponization of energy, British politicians are still too nervous to talk about it.

Energy allocation in progress

However: energy allocation has been happening, even if it’s not by that name. Businesses across the country have been forced to cut operations and reduce production simply because it doesn’t make economic sense to continue to pay for power.

The sad reality is that many households across the country are facing similar difficulties – but this time what is at stake is not their profit margins but their heating and welfare. This government support could prevent poverty for millions of families (that’s really what we’re aiming for) but everyone’s bills will still be far more expensive than what we’d expect. passed for a long time.