Newly elected British Prime Minister Liz Truss is set to announce a multi-billion pound stimulus package to help those struggling with soaring energy prices.
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LONDON — Britain’s new Prime Minister Liz Truss is set to announce a package worth tens of billions of pounds on Thursday to help people pay their energy bills, but there are concerns over the how it will be funded.
The policy announcement is expected to freeze the energy price either at its current level or at £2,500 ($2,870). As it stands, the cap coming into effect next month will increase the average energy bill by £1,971 to £3,549 a year.
Truss said she would “address the energy crisis caused by Putin’s war” in her first speech as prime minister on Tuesday evening. “I will act this week to meet energy bills and to secure our future energy supply,” she said.
The announcement is expected to come as more than 170,000 people in the UK consider canceling the payment of their energy bills on October 1 to protest against the energy price cap increase.
The number of people in fuel poverty in Britain, defined as being unable to heat a home properly, will affect 12 million homes (42%) this winter if financial support is not in place, according to campaign group End Fuel Poverty Coalition.
£180bn of support?
The exact package details have yet to be revealed. Initial projections suggested it could be around £100bn of support, but the latest estimates from Deutsche Bank indicate it could be closer to £200bn.
The Bank raised its expectations as reports suggested a freeze on energy bills would be around £2,500, which was ‘a significantly lower amount’ than the bank had expected, she said Wednesday in a research note.
Reports also suggest a £40bn package will be put in place to support businesses with their energy costs, the bank said, bringing the total of expected support measures to £180bn.
It was originally planned that the aid would only be available for households.
That figure represents nearly half of what was spent providing financial support during the Covid-19 pandemic and just over 8% of gross domestic product, according to Deutsche Bank. He estimates that the frost will be in place from October.
“The bill will eventually fall on the taxpayers”
The package that will be announced by Truss might not be too different from a plan proposed by the opposition Labor Party August 14.
The main difference is that Labor had suggested funding the move through a windfall tax on oil and gas companies – something the new prime minister has ruled out.
“I am against a windfall tax,” Truss told the House of Commons during his first question and answer session with fellow lawmakers on Wednesday.
‘I think it’s a bad thing to deter businesses from investing in the UK when we need to grow the economy,’ she said.
Growing Britain’s economy through “tax cuts and reform” was one of three key mandates set out by the new Prime Minister in his maiden speech on Tuesday evening.
The others were tackling the energy crisis and improving Britain’s National Health Service.
The new energy package will likely be financed by additional government borrowing, but the consequences of the financial support could be felt for decades, according to Christopher Dembik, head of macro analysis at Saxo Bank.
“She will only have to follow one path: open the door to a massive stimulus package and, once the crisis is resolved, increase taxation,” Dembik said.
“This is great news in the short term, although the bill will eventually fall on taxpayers in the long term and could take generations to pay,” he told CNBC.
“It will do nothing to help us in the winters to come”
An energy stimulus package would be a short-term solution to a longer-term problem for Britons, according to economist Jeevun Sandher.
“The plan as it is currently stated would prevent the disaster from happening, but the crisis still exists,” he said, referring to the cost of living crisis that is already affecting many families and businesses in Brittany.
“This energy price freeze might prevent this disaster from happening this winter, but it will do nothing to help us in the winters to come,” he said.
The gas sector could also feel the ripple effects of a stimulus package, said Salomon Fiedler, an economist for investment bank Berenberg.
“If incumbent utilities freeze prices now but individually hold them above cost in the future, they could be overtaken by new entrants in the future who don’t have to recoup current losses and could therefore reduce them,” Fiedler said.
“Another issue is that a general energy price freeze would remove incentives to reduce household gas consumption,” Fiedler told CNBC. “This will likely make the policy very expensive and further increase gas scarcity for areas not covered by the freeze.”
There is also speculation about the impact on the economy as a whole. While Truss’s low-tax and deregulation policies may support the economy, the benefits won’t be felt for years, if not decades, Fiedler said.
“In the short term, additional fiscal stimulus, whether through tax cuts or support measures, would exacerbate inflationary pressures (although reported inflation rates will depend on the details of these measures) if they are not funded by … spending cuts elsewhere,” he wrote.
The cost of energy bills “is definitely the biggest issue for voters right now,” Chris Curtis, head of political polling at Opinium Research. told CNBC.
“It’s important as a new prime minister to make a good first impression and Liz Truss hopes that having a big talk on voters’ top priority will help make that positive first impression,” Curtis said.
“Most voters are telling us they still don’t know much about her and opinions of her are quite low, so this is a very important time for her to try and land well with the public.” , did he declare.
“Impossible challenges” for the most vulnerable
With warnings that the next decade of winters could be “awful” if serious action is not taken to control petrol prices, some wonder if the coming package will be enough to protect the most vulnerable.
Freezing prices at their current level would lead to increased energy needs and make the situation worse, according to a research note by Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
“While anyone paying with direct debit will already technically spread higher costs throughout the year, low-income people are more likely to be on prepaid meters, where they pay for energy than ‘they use it when they use it,’ Coles said. .
“If prices are frozen at a slightly higher level, it will compound the impossible challenges facing the most vulnerable this winter,” she said.