Labour’s energy bill freeze makes more sense politically than economically
The politics of Labour’s plan to freeze energy bills for all households this winter are simple. With Boris Johnson’s government in its death throes and the two candidates to succeed him at loggerheads over what to do, Sir Keir Starmer has come up with proposals that are big, costed and timely. They will put pressure on Liz Truss or Rishi Sunak to come up with something equally ambitious.
The economics of the package are less clear cut, and have already been attacked by critics on the left and the right.
Broadly, the plan involves freezing the energy price cap at its current level of just under £2,000 a year rather than allowing it to rise in line with global wholesale gas prices. Left unchecked, it is estimated the price cap will rise to more than £3,500 a year in October and to well over £4,000 a year in January.
Labour says the plan would cost £30bn, although that’s on the assumption that it would apply only for the next six months. There is, however, no guarantee that the energy crisis will be over by next spring, and some analysts believe prices may stay high for years. As with the furlough scheme introduced during the Covid-19 pandemic, £30bn may be simply a downpayment on a much bigger bill.
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Part of the extra cost would come from extending the windfall tax on energy companies and backdating its implementation to the start of 2022, something Labour says would raise £8bn. There are two issues here: would an expanded windfall tax actually net £8bn, and if it did would it only do so by disincentivising investment?
Labour says one advantage of its plan is that it will reduce the annual inflation
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