Truss & the Cost of Living Crisis
September 5th 2022: Liz Truss becomes the UK’s next Prime Minister after securing 57% of votes from Conservative party members (1).
Liz Truss's challenges were immediate, with the most urgent concern being the ‘cost of living crisis’ — particularly relating to rocketing energy bills which we wrote about here.
However, just three days later, on the 8th September, Queen Elizabeth II, the UK’s monarch for the past 70 years, died.
It was a start like no other for the new Prime Minister.
After announcing a policy totalling over £100 billion, hours later she was making a speech outside Downing Street to pay tribute to the Queen (2); the focus of the media switched from this cost of living policy to the significant events which had just unfolded.
But the crisis remains a critical issue for millions of people across the UK. At the time of writing, the rate of inflation in the UK is 9.9% (dipping slightly due to reduced petrol prices, whilst the cost of food has increased), which is still near the highest level for forty years (3).
What is Liz Truss’s plan for energy bills?
The biggest announcement was that a typical household’s energy prices will be capped at £2500 per year for the next two years — starting from 1st October (4) — alongside the existing £400 help which all households are eligible for. The previous price cap announcement for October was £3549 and was expected to rise much further in 2023, so this policy acts to bring stability to energy bills until 2024 — with the hope that markets will improve by then (5).
It is important to note that energy bills could still be more or less than £2500. This plan fixes the cost per unit of gas and electricity — but a household bill will still reflect how much energy is used (4). So a household using a lot of energy will likely pay more than £2500.
There is also going to be support for businesses with prices capped for a period of 6 months —although some worry this is too short a period (5).
A cap on energy prices is undoubtedly welcome across the UK, with 8 in 10 voters backing the policy (6) however energy bills are still rising by ~30% from the last price cap and households will be paying approximately double what they were paying last winter — see graph below.
It is therefore estimated that the cap will not significantly reduce the number of households in fuel poverty (defined as spending >10% of income on energy bills) (7). Aimee Ambrose (Professor of Energy Policy and Trustee of the Fuel Poverty Research Network at Sheffield Hallam University) summarises the effects of fuel poverty.
It damages our health, wellbeing and educational attainment and makes it hard for people to participate in society and the economy.
This may explain why a majority of voters in the UK say that the policy doesn’t go far enough (6).
How is this policy funded & what are some of the additional plans?
The exact cost of the policy is not known, however, it is estimated that it will cost around £150 billion (5, 8). Compare this to the cost of the furlough scheme during the pandemic, which totalled ~£70 billion (9), and you can see the sheer scale of this energy crisis and the policy designed to tackle it.
Liz Truss has set out plans for ‘low taxes’ and stated that she will not introduce any new taxes either (10). This means in practice the policy will be funded by borrowing which eventually will need to be paid back with interest — you can read more about how government borrowing works from this article by the BBC.
But, what about a windfall tax on energy companies?
Keir Starmer, leader of the Labour party, has criticised Liz Truss’s stance that she will not implement a new ‘windfall tax’ (i.e. a tax on the unexpected additional profit due to global circumstances) on energy companies, citing treasury sources that they could receive as much as £170bn in windfall profits. Liz Truss argues against the windfall tax because she believes it will be ‘putting companies off investing in the United Kingdom’ (8).
However, the reality is the argument may be more about principle than practicalities. A windfall tax could generate additional billions of pounds if extended, however, many more billions would still be needed to fund the policy as a whole (8, 11). Further, when the BBC asked the Chief Executive of BP which planned UK investments would not go ahead if there were a windfall tax, he replied “There are none that we wouldn’t do” (12).
It is likely that both Keir Starmer and Liz Truss are trying to show the differences in their approach to the economy. Liz Truss is cancelling tax rises and ruling out further taxes, arguing it will help grow the economy and bring down inflation, whereas the Labour leader argues that cutting taxes does little for those most vulnerable and that the principle of tax cuts that benefit profiting businesses and wealthy individuals in the current economic climate is wrong (8).
In contrast, the European Union is planning on windfall taxes on energy companies and hopes to raise €140bn to help with its response (13).
Energy security, being able to produce significantly more energy in the UK rather than relying on foreign imports, is also going to be important.
With this, Liz Truss has announced plans to resume fracking in the UK and for new licenses to drill for oil and gas in the North Sea as a way to help increase energy production in the UK (5). This article does not have time to go into these policies in detail, however, there is widespread opposition to these plans on the basis of the negative impact on the climate, the fact it will take many years to see the benefits, and that fracking is widely unpopular with the public (5, 14).
What change will I actually see in my bills?
Energy companies are currently working out what this announcement will mean for prices. For now, most customers will need to wait and see how it affects them. But there are some things we know for sure.
All customers will receive £67 off their energy bills in October, the first instalment of £400 which had already been announced by the last government. Most people will get this automatically off their bills but some will be sent vouchers.
The most vulnerable UK households will also continue to receive £1,200 of support provided in instalments over the year.
Those on fixed rate tariffs can expect their bill to be adjusted down in October, whilst those on variable rate tariffs will see their bill increase as the price cap has still risen, just by less than previously announced (4).
TL;DR → Liz Truss has introduced a new price cap for energy bills although a typical household will be paying double what they did last year and many millions will remain in fuel poverty. There is significant opposition and debate to the way in which the policy is funded and the additional aims to increase drilling for oil and restart fracking.
References
- Liz Truss wins leadership contest — Reuters
- Liz Truss first days as PM — Reuters
- Latest UK inflation — BBC News
- Energy price cap — Which
- Liz Truss energy plans — BBC News
- Polling on new price cap — YouGov
- Millions to be in fuel poverty despite cap — The Conversation
- Keir Starmer criticises Truss’ stance on windfall tax — Financial Times
- Furlough costs — Bloomberg
- https://twitter.com/LBC/status/1565056915603955714
- Windfall tax argument — Metro
- https://www.bbc.co.uk/news/business-60295177
- EU windfall tax — Financial Times
- Oil, Gas & Fracking — Oil Change International
