New British PM must be radical to stop power bill catastrophe, says think tank

Tens of billions of pounds in new government support had to be targeted at households least able to cope with surging energy cost. PHOTO: BLOOMBERG

LONDON (REUTERS) - Britain's next prime minister must adopt radical ideas - such as discounted power tariffs, energy bill freezes or a "solidarity" tax hike for higher earners - to cushion the energy price shock for a broad swathe of households, a think-tank said on Thursday (Aug 25).

A day before the latest big jump in power tariffs is due to be announced, the Resolution Foundation said tens of billions of pounds in new government support had to be targeted at households least able to cope with surging energy costs, and ensure that no one needing help misses out.

The calls for support came amid fresh evidence that business confidence is in freefall, with the Institute of Chartered Accountants in England and Wales saying that a surge in costs is “pushing the UK closer to recession”.

With natural gas prices at record highs, roughly 10 times the average of the last decade, thousands of households “could see their power cut off and health endangered” this winter without government action, Resolution said.

"A catastrophe is coming this winter as soaring energy bills risk causing serious physical and financial damage to families across Britain," Jonny Marshall, a senior economist at the foundation, said.

"The new prime minister will need to think the unthinkable in terms of the policies needed to get sufficient support to where it's needed most."

The front runner in the race for Downing Street, Foreign Secretary Liz Truss, wants to cut taxes to address the cost-of-living crisis.

But her promise to scrap an increase in social security contributions would give the richest fifth of households twice as much in cash terms as the entire poorest half of households, the Resolution Foundation said in a report.

The plans of her rival, former finance minister Rishi Sunak, to target support for lower-income households failed to account for families' differing energy usage and exclude those outside the benefit system.

The foundation proposed options such as a cheap power tariff for low- and middle-income households, a universal 30 per cent cut in the energy price cap or a one pence-in-the-pound tax increase for higher-income households.

It also said lump sum payments that reflect household size should be considered.

Many households are already in trouble. The number falling behind on at least one utility bill has increased from 9 per cent to 14 per cent between October 2021 and June 2022, Resolution said.

At greatest risk are the four million households on pre-payment meters. “They could face bills of £613 in January, equivalent to a totally unaffordable 44 per cent of their typical monthly disposable income,” the think tank said.

Philippe Commaret, a senior executive at the power generator EDF Energy UK, has warned that “more than half of UK households will likely be in fuel poverty by January”.

The opposition Labour Party wants a price cap freeze for all households, funded by a windfall tax on oil and gas producers.

The Resolution Foundation said Labour's measures risked creating more inflation pressure and forcing the Bank of England to increase interest rates more aggressively.

Labour’s plan is even more generous to the well-off.

“The richest fifth of households would benefit more in six months from the opposition party’s proposed price cap freeze than they would in a year from cancelling the National Insurance rise,” Resolution said.

Britain's government has so far committed more than £30 billion (S$49 billion) in cost-of-living support for households, almost half the cost of its pandemic-era furlough programme to prop up the labour market.

In a separate proposal, the British Chambers of Commerce on Thursday also called for Covid-19 style emergency support to deal with soaring costs. 

BCC Director-General Shevaun Haviland called for urgent tax cuts and financial grants to help business “protect jobs… and ride out this economic storm.”

The energy regulator Ofgem on Friday will announce the new annual average household bill, which is expected to increase 80 per cent to over £3,500. Another increase to £4,500 is expected in January – leaving households with energy costs four times higher than last year.

Join ST's Telegram channel and get the latest breaking news delivered to you.