Bim Afolami is MP for Hitchin & Harpenden.
Last year on these pages, both in June and September, I wrote about the potential impact of rising global energy prices on the cost of living. Polls are clear that it is now regarded as the most important issue for the British public. Higher energy prices mean stretched budgets for households and for businesses. Higher energy prices mean higher food prices, and higher prices for goods; and are therefore a significant contributor to rising inflation. Winter is no longer coming; it has arrived.
Although nothing could compare to the shock of Covid, by any normal measure, the soaring gas price is one of the worst economic shocks this country has seen in years. And it’s not just this country, of course. Gas is an internationally traded commodity, so the price is much the same wherever you go. That’s why even major gas-producing countries like Norway are enduring record electricity prices this winter.
First of all, we need to be honest with the public. The Government cannot alter these basic economic facts, and nor should it try. Price changes are at the heart of a free market economy, and a government that gets into the business of deciding what the price of any given good or service ought to be is playing with fire. As Conservatives, we should never forget that. However, I believe that government nevertheless has a role at a time like this. Why? The truth is that unless we help families manage this sudden upwards lurch in energy bills, not only will many hard working people simply not be able to cope, but that will have a deleterious macroeconomic effect by reducing demand in the economy in key areas (e.g. hospitality) that are still emerging from the difficulties created by Covid.
The Chancellor has done the right thing in his three point plan to do exactly that. First, we’ll give all households a £200 rebate on their energy bill, to be paid back over the next five years. Secondly, a non-repayable £150 cash rebate for homes in Council Tax Bands A-D. That’s equivalent to 80 per cent of all households, helping both lower and middle-income families. And finally, for the most vulnerable households, an increase in the Warm Homes Discount – and we’ll also extend eligibility by one-third, to three million people.
For most households, these measures will amount to £350 – approximately half of the energy bill increase they’ll see this spring. They’ll feel the benefit, via their council tax bill, as soon as April, with the £200 rebate coming this autumn, in time for the winter increase in their energy consumption. And whilst our package helps the poorest the most, it also helps a very broad range of households, like many thousands of middle income people in towns in Middle England like Hitchin in my constituency. Middle income families need support too, and we are ensuring that they get it.
The overall up-front cost of this package is £9 billion. Over time, though, the cost to taxpayers will fall by about half, as the £200 pay-outs are repaid. That’s fiscal responsibility in action, recognising that there’s still a long way to go before our public finances are restored to their pre-Covid state. The need for fiscal responsibility is why I voted for the new Health & Social Care Levy. It isn’t popular, nor did I come into politics to raise taxes. I believe that the NHS and the social care sector need reform and real attention – spending money alone won’t fix its problems. However, we do need to finance a permanent uplift in the amount we spend on those things, as the demand for both is skyrocketing due to an ageing population.
Some people have argued for removing VAT from energy bills. But much of the benefit would have gone to the wealthiest, biggest-spending households. This package, being a flat rate, will be proportionately more valuable to the less affluent. Others may say that we should have got rid of green levies. But they only account for about 12 per cent of energy bills, and they are helping to fund the important shift to renewable energy sources, which is the only sure way to reduce our reliance on gas and unlock Britain’s rich endowment of wind and wave power.
This is not easy to deal with. I think that the Chancellor has struck the right balance here. The package isn’t about permanent intervention in the energy market – it’s about using the State’s balance sheet to smooth the edges of a particularly sharp adjustment in family budgets. As we put this package into effect, for the medium term we need to intensify our focus on improving home insulation so that households become more energy efficient (thereby reducing their bills over time), and we need to speed up and grow the renewable energy that we generate here in the UK – so that we reduce our dependence on natural gas.