As we recover from the Covid-19 pandemic, the UK has been hit by a cost-of-living crisis. Nearly one in three British adults say they are now struggling to meet their financial commitments. The challenge of making ends meet is forecasted to worsen, with an increase in National Insurance tax taking effect in April and rising inflation predicted to reach over 7% this year. As such, the government has taken action to attempt to alleviate the financial stress on households. Although more thought through than Labour’s suggestions, the Government’s strategy may have missed the mark with effectively helping the most vulnerable.
Rishi Sunak unveiled a package of measures to soothe the cost-of-living crisis. The package includes a £200 discount off of all households’ energy bills this year, and 80% of households in England receiving a £150 council tax rebate. While this is useful in alleviating the current financial squeeze felt by families, it can be said that this fails to support those most in need.
For instance, the £200 discount has to be paid back incrementally by households from 2023, arguably postponing the issue of unaffordable energy prices rather than providing a solution. Additionally, almost half of those benefiting from the £150 council tax rebate are in the top 50% of the population. Even taken together, the measures will account for just half of the price cap rise – increasing by 54% or £693 a year.
Currently, VAT on domestic fuel bills is charged at 5%. The out-cry for VAT to be cut on fuel was amplified by the unusual coalition of Labour Party parliamentarians and the climate-sceptic Net Zero Scrutiny Group (NZSG) on the Conservative backbenches. The argument for this is simple: the aforementioned cost-of-living crisis pushing millions into hardship, with estimates suggesting that the energy cap rise will put 6 million people into fuel poverty, almost double that of 2021.
Removing VAT on energy bills would not solve the crisis at hand, as well as being poor value for taxpayers’ money. This is because eliminating VAT would only help ease energy bills by less than £100 for the average household whilst losing the Treasury close to £2bn a year. The issue is that cutting VAT helps everyone, even those that do not need state aid. In other words, bigger homes with greater heating requirements receive more benefit from the cut, which are homes that are often occupied by high-income families.
More targeted measures provide greater help for hard-pressed households with a similar financial cost to the Treasury. For example, the Warm Home Discount, affects over 2 million struggling Britons, which could be more than doubled to £300 and expanded in coverage to help over 8 million for a cost to the Exchequer of around £2.5bn. This option offers a more targeted approach providing relief to families who are most vulnerable to fuel poverty.
The long-term solution to the energy cost crisis is rooted in its cause. It’s our reliance on gas, which around 23 million or 85% of homes in the UK depend on. The UK’s gas supply is sourced from foreign providers like Russia, Qatar and Norway which means that the UK’s energy security is partly in the hands of international markets. The repercussions have not only hit households, but businesses too. The 300% increase in prices over 2021 has driven energy providers out of business altogether. For example, Bulb Energy and Avro Energy supplying a combined 2.4 million households have gone bust since the energy crisis began.
On the other hand, the Government has made significant steps towards transitioning to a more secure and sustainable economy. The UK has in the last year been in the vanguard of the global fight against climate change. Hosting COP26 and setting the target of reducing emissions by over three quarters by 2035 have placed emissions reduction at the heart of Whitehall’s agenda. In 2020, 43% of the UK’s electricity came from renewable sources which is partly attributed to the breakthrough in renewable technology. The cost of solar power has fallen by over 80% in the last decade and offshore wind power has increased 715% between 2009 and 2020.
The UK has to continue expanding its energy supply and security with home-grown renewables. This is where the UK’s commitment to climate action can benefit households in the long-term, with renewable energy being cheaper to generate than purchasing and transporting foreign natural gas. This highlights how important fully embracing the green transition is to supporting living standards and avoiding volatile energy prices. Now is the best time to commit to a green energy future.
Tom is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Pexels]
