Sorry, but axing VAT or green levies on energy bills isn’t going to cut it
In the contest to mouth the words “tax cuts” as often as possible to attract the gaze of Tory Party members, Rishi Sunak now says he would remove VAT on energy bills for a year. However much his camp protests otherwise, this is a U-turn of the screeching sort. As chancellor, Sunak had two goes at constructing an energy support package for households and he kept the 5% VAT rate in place both times.
More importantly, it’s a U-turn that does not come close to recognising the size of coming hit to the pockets of poorer households. The sums here are not difficult. At £3,400 – a reasonable estimate for October’s price cap for an average household – axing VAT would produce an annual saving for consumers of £170. At £3,850 – the more speculative estimate of where the cap could be set in January if Russia continues to reduce gas flows through Nord Stream 1 to a trickle – we’re talking £192.50.
Now consider the current level of the cap (£1,971) and remember that Sunak was assuming £2,800 when he put together his second support bundle. If we could now be contemplating a level nearer £4,000 in the new year, chopping 5% off the top wouldn’t move the dial meaningfully for poorer households. An unaffordable bill would be 5% smaller, but would still be unaffordable. Remember, too, that January tends to be a month of peak consumption, a significant factor for pre-payment customers.
Exactly the same criticism of fiddling around the edges can be made of Liz Truss, incidentally. The foreign secretary sometimes talks as if axing “green levies” is the answer to everybody’s prayers. Those levies, shown as the “policy” element in the breakdown of bills, are projected by the regulator Ofgem to be £155 from October. Again, the dial doesn’t move far.
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