Liz Truss energy support package ‘could add 2.5 per cent to interest rates’

‘Sensible’ to use windfall levy or solidarity taxes to limit extra borrowing, says thinktank

The energy price guarantee will restrict average domestic bills in England, Scotland and Wales (Dominic Lipinski/PA) (PA Wire)

Liz Truss’s energy support package force interest rates up by 2.5 per cent, while benefiting the rich more than the poor, new analysis has found.

Ms Truss’s refusal to consider extending the windfall tax on energy companies or imposing “solidarity taxes” on the wealthiest to pay for the package means that the full cost – estimated at up to £150bn – will fall on general taxpayers.

The Resolution Foundation economic thinktank said that this was the equivalent of a penny on income tax for the next 15 years.

It said it would be “sensible” for Ms Truss to back down on her “no new taxes” pledge and consider topping up Rishi Sunak’s £5bn windfall levy or imposing an immediate 1p hike in income tax to recoup some of the estimated £25bn support being paid to wealthy households with no need for it.

In a new report, the thinktank found that the average household will benefit by £1,074 over the next six months from the lower cost of domestic energy bills, which are set to be frozen at an average £2,500 for two years.

But it said that the richest fifth of households will gain around £1,300, compared to £1,100 for the lowest-income fifth, because they typically use more energy.

Because the cap on prices relates to units of energy and not the overall size of the bill, actual savings will vary widely according to gas and electricity use, with more than one in ten power-guzzling households gaining over £2,000 and one in eight (13 per cent) saving less than £500.

And when Ms Truss’s planned reversal of this year’s national insurance rise is taken into account, the richest tenth of households will gain £4,700 on average while the poorest tenth receive £2,200.

Cutting energy bills will knock around four points off inflation this winter, forecast the thinktank. But because the package effectively hands £120bn to households – and “tens of billions more” to businesses – it is predicted to force prices up in the longer term.

The huge payouts will increase the pressure on the Bank of England to increase interest rates faster than they otherwise would, said the Foundation.

“Offsetting a £120 billion boost to the economy could require the Bank to raise interest rates by a further 2.5 percentage points,” it warned.

This would not only force up the cost of borrowing and servicing mortgages but also increase the burden on the government of repaying the massive debt, with another £11bn of borrowing needed for each percentage point rise in the base rate.

Meanwhile, the thinktank warned that Ms Truss’s plan for a new Energy Supply Taskforce to negotiate long-term contracts risks “locking in” windfall profits, as companies are likely to agree to prices below market level in the near term only in exchange for terms which are more generous that forecasts in the future.

“With the £116bn cost of the Energy Price Guarantee support for households roughly equating to 1p on basic and higher rates of income tax for around 15 years, the alternative of raising more through windfall taxes – including on low-carbon electricity generators - should receive more attention,” said the Foundation.

And it added: “Given that the highest-income fifth of households consume more than a fifth of domestic energy, over £25bn of the projected cost would go to them (over £13bn a year on average), despite them not needing the same support as lower-income households to pay their energy bills.

“The tax system could be used to offset some of those gains via some form of solidarity tax: for example, a 1 per cent increase in all income tax rates would raise £9.5bn in tax revenue, with 60 per cent paid by the top fifth of households.

“Reducing windfalls, better taxing them or asking better-off households to contribute more are sensible routes to reducing the pressure on taxpayers tomorrow, and the Bank of England today, from the extent of additional borrowing.”