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Keeping energy price cap in place will give family finances a break from rising cost of living

Keeping energy price cap in place will give family finances a break from rising cost of living
3 min read

There has been a lot of focus on energy bills which may increase by an average of £700 per household this April. This has led to concern over the cost of living, but energy prices alone are not the problem.

National Insurance is increasing, and income tax thresholds are being frozen, so more people are pulled into higher tax rates through fiscal drag. Locally, council tax, train fares, bus fares, parking charges are all increasing along a whole host of other costs building up on families facing a squeeze on their incomes. It is like a leaky bucket, that just keeps getting leakier.

The stark reality is that government and Whitehall do not understand the pressures facing family finances and never have. They are addicted to wanting to pull a big lever to say the problem is resolved.

Scrap VAT on energy, but please do not claim scrapping it will solve the energy crisis and tackle the cost of living for hard working families

For example, the easy answer is to call for VAT to be cut on energy, but that is only 5 per cent and would not save the average family more than £8 a month. This may be a lot for a low-income family, but not when they are facing a £700 hike in bills.

There are calls to cut some of the green costs, as they make up about £300 of average bills, but some of those funds support the most vulnerable households and better insulation to reduce energy consumption.

Scrap VAT on energy, as it is not a luxury but a necessity. But please do not claim scrapping it will solve the energy crisis and tackle the cost of living for hard working families. Energy bills are going up because the price cap on energy companies is likely to be lifted by Ofgem, as many energy companies are under severe financial strain because they cannot pass increases in wholesale gas prices onto customers. To put it into context, the current price is capped about 63pence per unit, but companies are having to pay up to £2.50 per unit and do not have the financial flexibility to cope.

It is clear the current problems are the result of volatility in the global wholesale price of gas, a lack of storage infrastructure in the UK and energy companies under financial strain. The government should instruct Ofgem to hold the price cap at the current level, give family finances a break and be more courageous as we rebuild the economy from the impact of the Covid pandemic.

The government would have to help smooth out the volatility in prices facing energy companies by giving them access to a credit facility. For example, £25billion, which they could pay interest on, as they draw down funds to get through any sudden spikes and smooth the increases over the next ten years, instead of in a single month in April. Of course, this would also go hand in hand with building more storage infrastructure and ensuring energy companies have to more actively help reduce energy consumption through better insulation.

It is easy to make headlines and pretend pulling big levers solves problems, but the government must focus on delivering for families and level up by providing long term solutions instead of knee jerk reactions.

The cost of living is a complicated issue with special interest groups, the opposition and ministers calling for more money to tackle this issue or that so they can issue a press release. We must solve problems, not just talk about them and be courageous in supporting families. Maybe it is time for a cost-of-living minister or tsar to demonstrate the cumulative cost to families of these press release announcements.

 

Stephen McPartland is the Conservative MP for Stevenage.

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