The Tony Blair Institute weighed in behind Labour’s pre-election promise of reducing household energy bills by £300.
Yet with the Chancellor promising that the Budget “will get a grip of the cost of living’, it’s reasonable to assume that energy will be a major focus on Wednesday.
However, there’s real risk that the three tax interventions under consideration will prioritise short term savings, at the expense of investment needed to reduce UK energy costs long-term or to meet Clean Power 2030 and Net Zero 2050.
VAT relief
Removing 5% VAT payable on domestic electricity and gas should save average UK households around £80-85 on total usage.
As this saving is based upon energy consumption, larger homeowners will receive a much greater benefit than smaller flat-dwelling voters.
Costs will be slashed further for wealthier homeowners with EV off-street parking. They will be able charge electric vehicles tax-free vs those using public chargepoints who’ll continue to pay 20% VAT.
No tax on domestic energy also means the Treasury will need to find a further £2.5 billion elsewhere on top of the £40 billion forecasted to maintain current public services.
1. Green levies
Gas customers – around 85% of UK all UK homes – currently pay around a third of a penny every year through the Green Gas levy, while most household electricity bills include over £100 in green levies. This means clean, renewable electricity is more expensive than equivalent gas energy.
With over a fifth of UK carbon emissions from residential buildings, rebalancing green levies towards gas would boost incentives for households to go green. On the other hand, making gas bills more expensive before winter will require deft political communication.
Completely removing green levies will reduce funding for decarbonisation policies – like the delayed Warm Homes Plan – by £5.9 billion, undercutting hundreds of UK suppliers of insulation, heatpumps, and other low carbon technologies.
2. EV per-mileage taxation
The Chancellor has proposed a 3 pence per-mile charge on electric vehicles.
Perceived as an expensive luxury enjoyed by wealthier drivers, EVs cause greater wear and tear to roads than lighter internal combustion vehicles.
The £25 billion a year currently raised by fuel duty will need to be replaced as more drivers choose to go electric. But with only 1.7 million EVs out of the 34 million cars on UK roads, a 3 pence per-mile EV charge would raise only £1.8 billion. On the other hand, reversing the now totemic 14-year freeze on fuel duty, would raise an additional £2 billion.
While unfreezing fuel duty would increase the cost of living for millions of UK drivers, increasing the running costs of EVs will further delay progress towards the Government’s 2035 ban on the sale of non-low emission vehicles.
So has Rachel Reeves got the balance right? With these three proposals, the Chancellor is prioritising short term savings for consumers at the expense of investment unlocking far greater savings in the medium-term.
Time will tell if the Government has found the right balance on Wednesday.
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