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Energy bills: £15bn in one-off payments needed to help UK households

·Business Reporter, Yahoo Finance UK
·4-min read
Smart meter on the wall of home interior showing current energy bills
Energy bills: The Resolution Foundation warned that things could get worse as the energy price cap is set to rise by a further £800 in October, to reach £2,800 a year. Photo: Getty

One-off payments are needed for the UK’s poorest households to prevent rising energy bills putting millions of families into further crisis next winter, a think tank has warned.

According to the Resolution Foundation, the government should provide up to £15bn ($18.8bn) through one-off payments via the benefits system to help support low-income households as the cost-of-living squeeze is set to worsen.

Its latest data highlights how rising energy bills will deepen the cost-of-living crisis this winter, who is worst affected, and how the government can best support families through these difficult times.

The report noted that poorer families are being hit hardest as they spend a greater share of their budgets on energy bills and food, both of which have helped drive inflation up to a 40-year high of 9%.

“As a result, the cost of living gap – the inflation rates experienced by the poorest and richest households – is at its highest level since records began in the mid-2000s,” the Resolution Foundation said.

It also warned that things could get worse as the energy price cap is set to rise by a further £800 in October, to reach £2,800 a year.

Energy bills already rose £693 to £1,971 in April after regulator Ofgem announced a 54% increase amid soaring oil and gas prices, meaning that prices will have more than doubled in just over six months.

Read more: UK inflation heading for 14% for poorest households

Families could now find themselves spending £1 of every £5 of their household budget on energy bills. An estimated 325,000 families in England experienced severe fuel stress last winter, but that number could soar to 1.9 million this winter unless significant, targeted support is provided, the Foundation warned.

The report said that the benefits system was the best route to providing targeted support. This approach would mean 73% of support would go to the poorest half of households, compared to 56% under the government’s Band A-D Council Tax Rebate scheme, just 36% if delivered by cutting VAT, or 20% if Income Tax was cut.

It added that the most effective way to provide immediate targeted support to the 15 million households across the UK (including 8.6 million pensioner households) who receive either the state pension or means-tested benefits would have been to uprate benefits by far more than 3.1% last month.

It also called on the government to consider varying the size of payments to take account of need.

With large families and households with a disabled person all facing greater risks of severe fuel stress this winter, the Foundation said these groups should receive larger one-off payments.

Watch: How to save money on a low income

“The scale and depth of the crisis means that effective support will not come cheap,” it said. High inflation means that the real-terms value of benefits is set to fall by £15bn this year.

“Offsetting that fall would require payments to average up to £1,000 for every family in receipt of the State Pension or means-tested benefits. This would mirror the one-off energy allowance adopted in the Netherlands, where all those receiving social assistance receive payments of €800.”

Given the cost of providing targeted support to avoid rising destitution this winter, the Foundation highlighted that it was inevitable that chancellor Rishi Sunak funds some of this support via a windfall tax on energy providers.

Read more: What is the cost of living and how you can manage yours

“With many people’s energy bills due to almost double in a year to around £2,800 from October, Britain risks seeing a new phenomenon in the cost-of-living crisis – severe fuel stress that could leave almost two million families facing awful ‘heat or eat’ decisions and bills they will simply be unable to pay,” Karl Handscomb, senior economist at the Resolution Foundation, said.

“The scale and depth of the cost-of-living crisis requires unprecedented, targeted support of up to £15bn. Delivering that support is far from straightforward, but it can be done.

“The chancellor should ignore calls from both political parties to deliver support via cutting income tax and VAT, and instead focus on the 15 million households receiving benefits.

“And having missed the chance to uprate benefits in line with inflation last month, he should announce one-off lump payments averaging £1,000 to be paid this Autumn. That would be the best way to help millions of families through what will be a very tough winter.”

Watch: How does inflation affect interest rates?

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