Labour’s plan to cap energy bills was blasted by economic experts yesterday who warned it would cost more than the furlough scheme in the pandemic.
The Institute for Fiscal Studies said Sir Keir Starmer’s proposal to help struggling families was ‘very expensive’ and would not bring down inflation permanently.
And the Institute of Economic Affairs warned it would make the energy supply crisis worse and leave Britain ‘more exposed to expensive imports’.
Sir Keir has suggested freezing the energy price cap at its current level of £1,971 rather than letting it rise to £3,500 as expected.
But Paul Johnson, of the IFS, told BBC Radio 4’s Today programme: ‘The Labour Party’s own analysis suggests it would cost £30billion just for six months.
‘Now that really is a very large amount of money… and they would want to do that, I would have thought, for at least a year.
‘So you would be looking at £60billion – you’re looking at the cost of furlough. So that’s a very expensive scheme.
Sir Keir Starmer has pledged to freeze the energy price cap to help struggling families. Pictured right, meeting Dave Church and his ten-month-old daughter Ellen during a visit to Exeter to discuss the cost of living today
‘Of course, what it does achieve is to protect everybody entirely from the increases in energy prices. So if that is what you want to achieve, that is what you need to do. But you do need to recognise that is a very expensive thing to do.’
Mr Johnson said the plan would bring down inflation and interest on Government debt payments this year, but would not change the average rate of inflation if the subsidy is temporary.
He stressed: ‘So that’s not a real saving – it’s a saving this year but it is not a saving in the long run.’ Sir Keir said the length of the freeze would have to be assessed next April based on economic forecasts.
Sir Keir has suggested freezing the energy price cap at its current level of £1,971 rather than letting it rise to £3,500 as expected but the move has been slammed by economic experts. Picture shows the rise in energy prices
His proposal to extend the windfall tax on oil and gas company profits also came under fire from free market think-tank the Institute of Economic Affairs.
Its energy analyst Andy Mayer said: ‘High UK energy prices are caused by a global shortage of gas and domestic energy policies.
FIVE reasons why Kier’s plan just won’t work
By Mark Shapland, Associate City Editor
1. Freeze now would lead to shock increase later
Under Labour plans bills would be frozen at £1,971 from October to March next year. But they could then jump to a mammoth £4,600 in April – where the price cap is expected to be. The vast increase is likely to leave many households in disarray and in a worse position than if their bills rose gradually over the winter months. Many would not have planned for the rise and simply be unable to pay. Analysts also warn the £29billion policy would fail to bring energy use down, with households continuing to consume large amounts during the six months. Current hopes are that consumption will be scaled back this winter – helping tackle the lack of available oil and gas.
2. Extending freeze would cost as much as furlough
Faced with a massive increase in bills after six months, Labour’s freeze could be extended to a year. If the policy ran for one year the cost would be doubled to £60billion, according to the IFS think-tank, which is roughly how much the Government spent on furlough. Analysts have warned the country simply could not afford to spend this much.
3. It would not tackle inflation in the long run
Keir Starmer says his plans will keep inflation down at 9 per cent, rather than the 13 per cent forecast by the Bank of England. Labour says the plan will reduce the Government’s debt interest payments by another £7billion as a result. But the IFS says this is ‘nonsense’ and an ‘illusion’ adding that inflation would quickly pick up again once the subsidies ended, meaning the cost of servicing the nation’s debt also increases. Paul Johnson, director at the IFS, said: ‘It’s an illusion in the sense that it will reduce interest debt payments in the short term but unless you maintain these kinds of subsidies permanently, it won’t reduce them in the long run. Inflation will be higher later on.’
4. No help for schools, hospitals or business
Labour’s policy only helps households – it does nothing for others that are struggling including schools, hospitals and businesses. Energy bills could see off small businesses still reeling from Covid, and schools and hospitals face ever higher costs.
5. Biggest handouts would go to the wealthy
CRITICS say the proposals would mean big handouts to wealthy voters. The very rich use more energy than the average household but under these proposals would pay no more money. Economists say the rich should be forced to pay more to help tackle the crisis.
‘Labour’s proposal to punish companies for investing in the North Sea and continue a ban on fracking will extend the supply crisis.
‘It will leave us more exposed to expensive imports, unable to help Europe reduce its reliance on Russia, and with lower tax returns from drilling.’
He also said the plan would not help businesses, but would ‘impede energy market competition ensuring higher costs’. Mr Mayer added: ‘This will inevitably mean higher bills or taxes for far longer than letting markets work.
‘Labour repeats errors made during the last energy crisis in the 1970s – economic mismanagement through “make believe” price controls – that left the UK seeking a bailout from the IMF [International Monetary Fund].’
The Labour leader has been under pressure to set out how his party would address the cost-of-living crisis.
Former Labour PM Gordon Brown last week called for an emergency budget, a price cap freeze and the temporary nationalisation of energy firms if they do not cut bills.
Asked if he and his party should have acted sooner, Sir Keir told BBC Breakfast he had wanted a ‘fully-costed, comprehensive plan’.
He insisted: ‘We’ve been working on that for six or seven weeks… I’ve got a very important job as leader of the Labour Party, leader of the Opposition.
‘But I’ve also got another job that’s really important and that is I’m a dad and I’m not going to apologise for going on holiday with my wife and kids. It’s the first time we’ve had a real holiday for about three years.’
Labour’s former shadow chancellor John McDonnell criticised the policy, branding it a ‘short-term solution’ which would do ‘nothing extra’ to help the poorest households cope with existing bills.
He tweeted: ‘Freezing energy bills is right call, but short-term solution of giving £29billion of public money to energy companies with nothing in return – either control or ownership or reform – and back here in six months.’
Former Tory chancellor Philip Hammond labelled the plan ‘a populist response that is untargeted’.
He told Radio 4: ‘It’s fine for the Government to intervene to support people through a short-term pressure, but the Government can’t protect us indefinitely if this is a long term shift in relative prices.
‘So I don’t support Labour’s proposal because it is a populist response that is untargeted. I’m sure everybody would like to have their energy bills frozen this winter, but not everybody needs that support from the taxpayer in the same way.’
Labour said it would raise £14billion by scrapping the £400 rebate for households this winter and £8billion by closing a windfall tax loophole giving energy giants a discount if they invest in the UK.
The rest of the money would come from lower debt interest payments as inflation falls. Meanwhile, sources said last night that Tory leadership front-runner Liz Truss will continue with plans to give all households a £400 discount off energy bills. It followed suggestions it could be stripped from the richest.
But allies of Miss Truss insisted she would not reverse the policy.
But Paul Johnson, of the IFS, told BBC Radio 4 that Sir Keir’s plan would be looking at a cost of around £60b – equivalent to the furlough scheme. Sir Keir is pictured left with Steve Race, the Labour Parliamentary candidate for Exeter during a visit to discuss the cost of living today
A campaign source told the Daily Mail: ‘We wouldn’t be looking to unpick existing plans. However, going forward, it’s fair to assume Liz would not be in favour of universal handouts to support with energy costs.’
Nationwide building society is handing 11,000 staff a £1,200 bonus to help with the cost-of-living squeeze.
The payment will target workers earning £35,000 or less each year, who make up nearly two-thirds of Nationwide’s 18,000-strong workforce.
ALEX BRUMMER: When it comes to economic illiteracy, his plan is in a class of its own
By Alex Brummer, City Editor
Sir Keir Starmer has spent most of his near two and a half years as Labour leader seeking to slay the ghost of his far-Left predecessor Jeremy Corbyn and his magic money tree.
Yet stung by criticism of Labour’s lack of policies to deal with an escalating energy and cost of living crisis – and last week’s jibe by Gordon Brown that crises ‘don’t take holidays’ – Sir Keir appears to have rushed back from sunnier climes to unveil an ill thought-out policy to freeze energy prices.
If it were to be implemented it could bankrupt most of the energy suppliers, end consumer choice and run up bills for the taxpayer as large as those used to save the jobs of Britain’s workforce during the pandemic.
When it comes to economic illiteracy, it’s in a class of its own.
So what exactly is Sir Keir proposing?
The energy shortages triggered by Russia’s barbaric war on Ukraine is projected to lead to fuel bills for a typical household rising to £3,600 in October and £4,300 in January 2022.
The Labour leader wants a freeze on the price cap for six months at a reported cost of £29billion, to be financed by ‘retrospective’ taxation in the shape of windfall taxes on the big energy companies.
At first glance it looks seductively simple and is very attractive because every consumer benefits. According to one poll yesterday, three in four Tory voters back it.
And certainly, the huge profits reported earlier this month by oil firms BP and Shell and energy suppliers Centrica (owner of British Gas) and Germany’s EON – a major UK supplier – are enticing prey for Labour.
These, however, are the very same firms that Britain is counting on for investment in the nation’s energy security and the transition to a carbon-free future.
What’s more, taxing oil producers retrospectively would betray a core principle of British public finance that what is past is past.
It would also turn the UK into a pariah state for foreign investment and see the dozens of smaller independent drillers around Britain’s coastline leave in droves and not come back.
And ‘cannon-balling’ cash at every household in the country via the price cap freeze – including those who can afford to take some of the pain – would be a waste of resources.
Starmer’s approach also flies directly against advice from Washington-based economic enforcer, the International Monetary Fund.
The IMF advises advanced nations to focus assistance on those most needing help with ‘well-targeted support’ for households squeezed by higher food and fuel prices.
One only has to look across the Channel to see what happens when governments seek to bail out everyone’s household energy bills.
French investment in nuclear power (which provides 70 per cent of its electricity needs) means that in contrast to most European governments, it is less dependent on Russian oil and gas supplies. As a consequence, the French inflation rate in July 2022 stood at 6.1 per cent, less than half that projected by the Bank of England for the UK this autumn.
Nevertheless, president Emmanuel Macron has protected consumers temporarily from higher household power bills by ordering the nation’s dominant supplier, Electricite de France (EDF), to absorb higher energy costs rather than passing them on to customers.
Faced with the possibility of financial collapse as a result, EDF has been taken back into public ownership, prompting CEO and chairman Jean-Bernard Levy to resign.
It could be argued that the Tories have been slow in responding to the crisis and certainly Labour, the Lib Dems and much of the media have been critical of No 10. But until a new prime minister takes over on September 5 there is no real point in spelling out detailed policies to alleviate winter energy bills.
Yet, according to a paper prepared by the influential Institute for Fiscal Studies (IFS), the Tories can be trusted to do the right thing on the cost of living/energy crisis just as they did in the pandemic.
It shows that the £24billion of assistance to households has been well targeted at those who need it most so far. While middle and higher-income earners will all benefit from £400 to £500 of support, they will still suffer a fall in inflation-adjusted incomes.
In contrast, the package announced in May would mean that an out-of-work single parent with two children would see their real income maintained for this year despite their standard benefit increase of 3.1 per cent being far below the headline rate of inflation.
The job of the next PM is to make sure such well-targeted support is maintained. The IFS reckons the poorest 20 per cent of the population will experience a further 18 per cent rise in energy costs in October (because they spend a higher proportion of their income on utility bills and are more likely to be in fuel poverty) against 11 per cent for the richest.
This perfectly illustrates why committing taxpayers’ cash to every household, by freezing the cap as Sir Keir suggests, would be such a misuse of resources.
Indeed, as the head of the IFS Paul Johnson has pointed out, such a policy could only be a temporary fix for six months and could be as costly as the £70billion spent on furlough.
The suggestion that this could somehow pay for itself, by reducing the interest-rate bill on inflation-linked government bonds (gilt-edged stock), is pure fiction. The debt will still be there once the frozen cap is lifted.
And the impact of freezing the cap would be devastating for the fragile finances of energy distributors. Among the 60 new players in the market, 30 have already gone to the wall, and in several cases the Government has been left paying the bills.
In short, what Starmer is outlining is a plan to take control of the whole industry – nationalisation by the back door, betraying all those Labour voters and supporters who rejected public ownership when they elected Tony Blair for three terms in government.
The job of the Tories is to minimise the unnecessary subsidy of fuel bills for those who can most afford it and make sure the less well off, the elderly and the infirm are fully compensated this winter so terrible trade offs between food and keeping warm are avoided.
Boris Johnson and his Cabinet recognised the need to skew assistance to the most needy. In contrast, the Starmer approach would put free market capitalism, investment and the durability of the public finances at acute risk.