The impact of rising electricity bills has seen two important responses.
The latest projections from Cornwall Insights are that the utility price cap (which is actually a rate cap) will rise from the current £1,971 to £3,582 in October 2022 and then £4,266 in January 2023, when the Ofgem recalculation moves to a quarterly basis. At the time of Rishi Sunak’s May statement on utility price cap support the October figure was projected to be £2,800 and expected to last through until April 2023.
If you consider the utility cap cost for 2022/23, then in May, crudely, it looked to total £2,389 ([£1,971 + £2,800]/2). It is now – equally crudely – £2,948. That crude calculation, while not uncommon, understates the true difference as energy consumption in April-September is much less than in October-March. It also hides the fact that, within the cap, the gas cost (more heavily used in October-March) is projected to rise faster than electricity in October.
The Labour Party recently announced its support for a freeze in the cap until April 2023, a move already proposed by the Liberal Democrats and the Scottish Nationalists. The cost of the measure would be £29 billion for the six months according to Labour. Its funding of the proposal is not fully clear, but Keir Starmer, the Labour leader, told the Today programme on Radio 4 that he would backdate the current Government’s North Sea oil & gas windfall tax to January and remove the associated investment allowances. The planned £400 subsidy for all energy bills, announced in May would fall away as unnecessary. The cap freeze would also reduce inflation, thereby reducing the revaluation cost on £550 billion of index-linked gilts, although the suggested cut of 4% in inflation would only be a deferral unless the freeze were continued into 2023/24.
Coincidentally, on the same day as Labour’s announcement, the Institute for Fiscal Studies (IFS) issued an observation on the utility price cap. It noted that the May package, in overall terms, would have covered about 75% of the increase in the cap, assuming a £2,800 level, at a cost of £24 billion. To maintain the same proportion of support based on the latest projections would need an additional £12 billion. The IFS suggests several ways of distributing this extra sum, including increasing the £400 subsidy to £660 as a starting point before addressing low-income and vulnerable groups.
The IFS also highlights the issue of the timing of the benefit increase calculations. These use the September CPI, so, for the increases that will apply from April 2023, will miss both the October 2022 and January 2023 utility cap rises. The Bank of England projects a little over 13% as the inflation rate in 2022 Q4, while Goldman Sachs, using more recent price cap figures, sees 14.4% as a peak at the start of 2023. After abandoning the Triple Lock for this April’s increase, the optics for next April’s benefit price protection look set to be similarly bad.
Current rumours focus on an Emergency Budget announcement on 21 September, a little over a fortnight after the new Prime Minister is named and the day before the House of Commons rises for its Conference Recess. Whoever gets the job, she (or he) faces a rapid first test in squaring campaign rhetoric with economic and fiscal reality.