Government support for energy bills: neither timely nor targeted

UK Policy Prosperity

Government support for energy bills: neither timely nor targeted

Commentary
Posted on: 3rd February 2022
James Browne
Head of Work, Income and Inequality Analysis

Households are set to be hit by a double whammy of higher taxes and rising energy bills in April. Today we had confirmation that the energy price cap will rise by 54% to £1,971 a year and, as expected, the government has announced measures to ease the price shock for households.

To help households smooth the spike in energy prices over several years, the government will offer loans to energy suppliers that will enable them to reduce energy bills by £200, to be repaid in four £50 instalments in the following four years. However, this support will not benefit households until October, the same month as experts anticipate the price cap rising still further by at least that amount. On top of this, there will be a £150 Council Tax rebate to all households in England in Bands A to D that will benefit households in April and May.

How does today’s news affect the scale of the overnight shock we examined previously? If the government had done nothing in response to the increase in the energy price cap, households in England would have been facing an average hit to their finances of about £800 a year in April, equivalent to 2% of their post-tax income but significantly more for the poorest. The reduction in Council Tax, spread out over the year would slightly reduce this at all income levels, but is of most benefit to middle-income households: the poorest pensioners receive full Council Tax rebates anyway, and the richest are more likely to live in higher-value properties that will not be eligible for the discount.

Spreading the loans that will reduce energy bills in October throughout the year, today’s support package does more for households, reducing the average hit from these changes to £500. But this measure will do nothing for households facing a shock in April. The measure is being consulted on and could yet unravel. And even if it goes ahead in the Autumn it will arrive at the same time as a further roughly £270 increase in the October price cap. What’s more it is important to remember that these loans will need to be paid back through higher energy bills in subsequent years.

The distribution of support also matters. Providing support through Council Tax and energy bills means that it is poorly-targeted on the most vulnerable groups. Households in the bottom half of the income distribution will see the overnight drop in income reduced by about a quarter on average. But of course many low income household will not see any benefit from the council tax rebate.

How does this compare to Labour’s proposed package? Last month the Opposition outlined a plan for an additional £400 Warm Home Discount payment for those on benefits, smaller loans for suppliers and removing VAT on household energy. This would better target support on the poorest, largely eliminating the overnight shock for the poorest households. It does however come at a higher cost to the Exchequer, as more of the support would be provided through transfers to households rather than loans.

Figure 1: Government support package less well-targeted than Labour's proposals

Note: Chart shows overnight impact of tax, benefit and energy bill changes in April with and without support packages described in the text.

Source: TBI calculations using UKMOD version 2.5.1 run on uprated data from 2018–19 Family Resources Survey. UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The results and their interpretation are the sole responsibility of TBI.

The government is set to provide significant support to households with the additional energy costs they face this year. But this will not be timely – households will not see the benefit of the bulk of the package until October – and nor will it be very well-targeted. Additional means-tested support through the benefits system would have been a better way to ensure that the most vulnerable receive the help they need at a reasonable cost to the public purse.

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