Liz Truss's energy support package to benefit richer households, IFS warns

·Business Reporter, Yahoo Finance UK
·3 min read
New British Prime Minister Liz Truss. She is expected to reveal an energy support package on Thursday
It is expected that average energy bills could be capped at around £2,500 for potentially 18 months, with full details expected on Thursday. Photo: Reuters/Henry Nicholls

The new prime minister’s energy support package will benefit those from richer households compared to the less well-off, an industry body has warned.

The Institute for Fiscal Studies (IFS) said on Wednesday that Liz Truss’s plan to freeze UK energy bills was “very poorly targeted”.

It comes as the new Conservative government is planning to borrow billions of pounds to limit the staggering rise, particularly over the winter period.

It is expected that average energy bills could be capped at around £2,500 for potentially 18 months, with full details expected on Thursday.

Goldman Sachs (GS) revealed that the move could help inflation peak lower in October, at 10.8% rather than the 14.8%. Meanwhile, Liz Martin, UK economist at HSBC (HSBA.L) said: "Cancelling all or most of the planned October and January prices rises could be a game-changer in our view.

"It would mean that, on a mechanical basis, inflation might already have peaked."

Read more: New PM's term in office to be marked by deepest living standards squeeze in a century

However, Paul Johnson, director of the IFS, told BBC’s Today Programme: “If this is a straightforward bill freeze then the majority of the money will go to better-off people who use more energy. So this is very poorly targeted.

“Not only is it poorly targeted, but it also means that we don’t see the full price signal that across the world people need to see.”

He added that the government can afford to borrow as much as £100bn to tackle the cost of living crisis, although the amount may well rise.

“We can afford to borrow that amount. We’re still managing to borrow relatively straight forwardly on the international markets.

“The big question here is: ‘Is it going to be £100bn? What is the exit strategy from supporting bills?’ My guess is it might end up being an awful lot more than that unless we react quite quickly to make it a better system.”

Watch: What support is expected on energy bills?

But, Deutsche Bank (DB) said on Wednesday that it now expects the package to be near £200bn – amounting to roughly half the scale of pandemic support measures and nearly double its initial estimate.

Currently, a typical gas and electric bill in a British household is due to rise from £1,971 to £3,549 in October.

Although the move will come as a relief to consumers, UK businesses are not covered by the cap.

The British Chambers of Commerce (BCC) has called for emergency business grants, and for the government to give the energy regulator Ofgem more power.

Shevaun Haviland, director general of the BCC said: “One of our manufacturers said because of their energy bills, cash flow is really difficult. That means they can’t use cash to buy raw materials to make products even though they have a really strong order book.

“[Businesses] need emergency grants quite quickly to help them keep the doors open. We need them to get help through this winter.”

Read more: Liz Truss promises tax cuts and action on energy bills in first speech as PM

Meanwhile, insolvency company Red Flag Alert, which monitors the financial health of firms, has cautioned that tens of thousands of businesses are at risk of going under without further support.

It said that many will be forced to make workers redundant, and that more than 75,000 larger firms that are high energy users are at risk of insolvency.

"Businesses can't absorb these costs and they're going to be forced very quickly into a decision about headcount or being able to pay energy bills," Nicola Headlam, chief economist, said. "That's going to be the reality and it's coming down the track very quickly."

Watch: How does inflation affect interest rates?