MNI INTERVIEW: UK Energy Price Aid Could Be Cheaper This Time

The UK government could cushion the impact of higher prices for a significantly lower cost than its support following the Russian invasion of Ukraine in 2022, so long as it limits support to wealthier households, the research director of the influential Institute for Fiscal Studies' told MNI.

Targeting support based on either income or on energy end usage, or both, would be 18% less expensive than the support for all households in 2022-23 provided through the Energy Price Guarantee and energy bill rebates, which totalled GBP35 billion, Peter Levell said in an interview.

While Chancellor of the Exchequer Rachel Reeves told the Treasury Select Committee on Thursday that the UK was “in a stronger position, in many ways” to respond to an energy shock than in 2022, Levell noted that debt-to-GDP is approaching 100% and debt interest costs are higher. 

"It's clear that the fiscal situation has worsened since the previous energy crisis, partly because we spent a lot dealing with that crisis," Levell said. Nonetheless, "people might need temporary help."

LESS FISCAL SPACE

Reeves referred to a downward trend in inflation, and to Office for Budget Responsibility forecasts which lowered projections for public debt. But the Resolution Foundation estimated on March 6 that the buffer against the fiscal rules would fall to a "whisper thin" GBP3 billion from the GBP24 billion in the latest OBR forecasts, if market moves since the U.S. and Israel began their attacks on Iran were taken into account. (See MNI POLICY: EC Moots Swap Lines In Trade Deals To Boost Euro)

Reeves could lower bills from energy suppliers, with disinflationary effects on consumer price data, or adopt cash transfers to households to lower bills. However, Levell highlighted the flaws in the former approach, as it would struggle to curb energy usage, and sustained energy use would leave the price-capping measures more costly for the government.

"What the government should be focused on is people's real incomes and people's real living standards," Levell said, adding that it was the Bank of England’s job to cope with any inflationary impulse resulting from higher energy prices.

The UK sets energy price caps on a quarterly basis.

The government paid a total of GBP75 billion over two years to support households through higher energy prices. But Levell said that the government did not have data linking energy consumption to household incomes in a way that allowed support to be targeted at the time, something which could be remedied this time round.