Chancellor John Healey is considering spending more than £1bn on support for energy consumers in this month’s budget, with most of the money likely to help poorer households, The Guardian Business reported. Ministers are responding to forecasts that the Iran war could lift the energy price cap by as much as £442 in January, wiping out the benefit of an earlier electricity VAT cut.
No final decisions have been taken, according to the report. The leading option is an increase in the warm homes discount, which currently provides £150 off energy bills for households receiving certain benefits. Healey is understood to be considering an additional £100. Taxpayers would finance that increase, unlike the existing discount, which is funded by bill-payers.
Energy secretary Miatta Fahnbulleh has advocated a broader intervention: shifting all levies that support renewable energy and efficiency programmes from bills to taxation. That could cut consumers’ bills by up to £120, The Guardian Business reported, but would cost as much as £3.2bn. Healey is expected to reject the proposal. Although removing the levies would lower inflation, the change could be difficult to reverse if energy costs subsequently fell.
The spending choices come as the chancellor seeks funding for an additional £4.7bn in defence expenditure while rebuilding a fiscal cushion weakened by higher borrowing costs. Government sources described the planned budget as restrained but centred on living costs. Ministers had previously indicated that the electricity VAT reduction announced by prime minister Andy Burnham would be the final support offered this year.
Beyond the budget, energy officials are developing options that would alter the prices suppliers can charge rather than subsidise bills. One is a social tariff, under which poorer households would pay less per unit of electricity than wealthier consumers. However, the necessary information gathering across tax authorities, the Treasury and energy companies would take considerably longer than a few weeks.
Another option is a rising block tariff, which would set a lower price for an initial allowance of essential energy and higher charges above that threshold. The New Economics Foundation proposed the approach when Fahnbulleh led the thinktank. The Treasury declined to address speculation about tax measures, saying such decisions would be announced by the chancellor at fiscal events.