Energy bills put Starmer in a spending bind

The U.K. government can’t afford to spend big on protecting voters from looming energy bill hikes. But politically, the British prime minister has little choice.

Starmer said Monday that his “first instinct” in responding to the Iran conflict — and the global energy price shock it has triggered — is protecting the household finances of ordinary voters.

“It’s moments like this that tell you what a government is about,” Starmer said, addressing yet another hastily-arranged Downing Street press conference.

“My answer is clear. Whatever the challenges that lie ahead, this government will always support working people.”

He was announcing £53 million in state support for low-income families already hit by a sharp rise in the cost of heating oil, a fuel that warms around one in 20 U.K. homes.

But much bigger, much pricier policy choices are coming down the track.

Straitened finances

A regulated cap on energy costs is keeping a lid on most people’s household bills. But the current cap expires in July — at which point, without intervention, bills could jump significantly. Wholesale gas prices, which significantly influence household bills, have nearly doubled since the crisis began.

Starmer’s Energy Secretary Ed Miliband told The Mirror newspaper he would “keep looking at how we can do more” to protect consumers. The government must decide how big they go with any support package.

But the Institute for Fiscal Studies think tank has already sounded the alarm over the government’s fiscal wiggle room. “The public finances are in a more strained position than they were [in 2022] at the start of the Russia-Ukraine war, and a sustained increase in energy prices is likely to worsen them further,” the think tank said last week.

Starmer sought to contrast the situation now with that faced by Liz Truss’s Conservative government in 2022, and her multi-billion pound energy bailout.

The policy reduced the energy bills of every family in the country. It also, coupled with sweeping tax cuts, led sterling to crash, borrowing costs to soar, and forced Truss out of her job days later.

His Labour government, Starmer said, had “brought stability back to our public finances, stability that I will never put at risk.”

Now he faces the challenge of meeting that pledge on stability, while standing by his cost-of-living guarantee to the British people.

To target

To help people most exposed to rising bills, while avoiding Truss’s fate, the obvious option for Starmer is to make a targeted intervention on energy bills come July.

The heating oil policy follows this approach, aimed squarely at “people who need it most,” Chancellor Rachel Reeves said Monday. The Treasury is similarly looking at “targeted options” for any future energy support package, she told The Times at the weekend.

Starmer himself said on Monday “we’re not ruling anything out.” But the signals are that a universal offer like Truss’s — which ended up costing an eye-watering £23 billion — is unlikely.

Among Labour MPs, the penny is already dropping that not all households will benefit from government largesse.

“It’s right that the government steps in at a time of national crisis and supports those that are struggling,” Suffolk Coastal MP Jenny Riddell-Carpenter told the BBC on Monday. “But it’s complex,” she added. “There isn’t a limitless pot of money.”

And targeting the right people for help will not be straightforward. In 2022, government lacked the data required to know which households should be targeted, Reeves told MPs on the Treasury committee last week.

Work on this inside government is now “more advanced,” she insisted. But officials still lack the targeting data needed, said Ben Westerman, director of policy at the energy campaign group Electrify Britain.

Officials simply “haven’t moved on” with targeting data since the last energy crisis, Westerman said, adding: “That is a failure of governments plural to learn the lessons from last time.”

Energy companies, pushing ministers over the issue, have grown frustrated.

“Industry has called for government to provide the data so that we can target support [to] those who need it. And there’s just been little to no progress on this,” Caitlin Berridge-Dunn, head of external affairs at energy supplier Utilita, said.

New and old ideas

One option, separate from bills, would be to maintain a longstanding, five pence per liter tax relief on gasoline and diesel, a fuel duty cut which expires in September. The oil price shock has driven up costs at the pump by more than eight pence per liter for gasoline and more than 18 pence for diesel.

Another approach officials could opt for, according to Westerman, and reported in The Times Monday, is to expand the existing Warm Homes Discount, a one-off payment to reduce bills for the poorest households, as a vehicle for getting more support to people who need it most.

But that approach, he cautioned, would not catch the “squeezed middle” of households.

Another option is to repeat a trick Starmer and Reeves pulled off at last year’s budget — shifting green and other levies currently added to energy bills into general taxation.

Miliband hailed that move at the time — which saved around £150 on the average energy bills — as a way of “asking some of the wealthiest in our society” to subsidize everyone’s bills.

There is enthusiasm for the principle in Whitehall, even if no decisions have yet been made. A government official, granted anonymity because they were not authorized to speak on the record, said the £150 cut could be “the beginning of a big principled move” of the burden of energy costs from consumers onto tax.

A study by the industry group the MCS Foundation found that moving all such levies onto taxation could cut bills by up to £410 a year. But that, of course, would put taxpayers on the hook. MCS Foundation estimated it would cost £5.7 billion per year.

The most important difference from the Truss era, argued Sam Alvis, a former Labour adviser and now a director of energy security and environment at the influential IPPR think tank, is that Starmer cannot hang around.

The government should be planning any intervention now and not allow prices to rise in July, he argued, avoiding a repeat of the last Conservative government’s mis-step, when it waited until the fall to act.

“I think the public tolerance for [energy bill] increases will be a lot lower than it was in 2022, when Liz Truss waited from February to September to react,” Alvis said. “I just don’t think we’ll have that same time.”