The government’s decision to slash energy bills support risks stoking inflation

Ministers should be pulling out all the stops to persuade small businesses to stay the course – not scolding them , writes Martin McTague

Gambling that wholesale energy prices will continue to fall this year simply tranfers the risk of further energy price shocks to small businesses (Getty Images)

Since the onset of Covid, we’ve lost half a million small firms. Allowing more well-run businesses to go under creates a false economy – and the government’s absurd and out of touch decision to slash energy support is taking us one step closer to this nightmare.

Small businesses have been let down. They spent Christmas and New Year’s Eve worrying about whether they will survive beyond 2023, but at the same time hoping there’d be a way to get through this unprecedented energy price crisis.

Just like that, after keeping us in suspense for weeks, small firms’ last bit of optimism was crushed, by a less than 10-minute and much-delayed speech. The outgoing scheme has made a real difference to small companies. But our research shows that, if we face continuing high energy prices, a quarter (24 per cent) of small firms will consider whether to close, downsize or restructure when energy support largely reduces in March.

The replacement scheme – the Energy Bills Discount Scheme (EBDS) – provides next to nothing: two pence off a kWH of electricity and half a pence off gas with a price threshold is a pittance that barely touches the sides of their huge energy bills. It may as well have been called the Energy Bills Disappointment Scheme.

The level of support is so low for each small firm that it will make no difference to businesses’ decisions to close or not, despite costing billions. Evidence from the Federation of Small Businesses shows that it is small firms that need the help most, and if funding was being cut, then it should have been targeted on those small firms instead of being spread thinly across the economy.

It would have been a better use of taxpayers’ money if the £2bn cost of the universal element of the scheme had been used to fund energy efficiency improvements in small businesses, to reduce dependence on energy from the grid.

This decision also risks stoking inflation. As small businesses’ bills rise, their prices will rise at the same time. The EBRS suppressed inflation by five percentage points, but this has been cancelled, just as we are about to enter a recession.  The Treasury yesterday said the higher support for those in energy or trade intensive sectors warranted higher support because it’s not as easy for them to pass on costs to customers.  This appears to be Rishi Sunak’s priority – small firms are expected to up their prices and drive inflation, even though one in five small firms have said their customers simply cannot afford any further price rises.

Gambling that wholesale energy prices will continue to fall this year simply tranfers the risk of further energy price shocks to small businesses, and millions of jobs that are dependent on them. From the small engineering company in Leicester facing a 500 per cent increase in gas bills, to the children’s nursery in nursey in East Sussex which will lose the 50 per cent discount on bills provided through the EBRS, they will have no way to mitigate a sharp jump in energy costs.

What’s certain is this catastrophic move sets up a cliff edge after March. The small fish and chip shop around the corner, your local pub and the family-run independent laundrette – just like last year, they will all see much higher bills and they could become totally unaffordable.

It’s only five days before this energy announcement that the prime minister pledged to restore optimism and hope, and grow the economy. But words have not been followed by actions. Ministers should be pulling out all the stops to persuade small businesses to stay the course and that they shouldn’t just give up. Instead, they choose to castigate them.

One line that particularly stood out in the government speech is the offensive: “It’s not for taxpayers to prop up failing or unproductive firms.” If this is the government’s attitude to hardworking small firms up and down this country, then the energy price crisis is just the start of our problems.

Martin McTague is the national chair of the Federation of Small Businesses