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Gas price plunge predicted to slash cost of energy bailout by half

reading on a domestic household gas meter energy price cap
reading on a domestic household gas meter energy price cap

Plunging gas prices will mean that Kwasi Kwarteng's massive support package for energy bills costs £30bn instead of £60bn, according to new forecasts that predict he will balance the books within three years.

The blow to the public finances from the Chancellor's mini-Budget could be far smaller than feared as Treasury costings on tax cuts and the energy bill freeze are too pessimistic, according to the Centre for Economics and Business Research (CEBR).

The cost of subsidising household and business energy bills for six months could be £30bn lower than officials fear, according to calculations by the CEBR based on a Goldman Sachs forecast that wholesale energy prices will drop to €100 per MWh this winter from a current level that is closer to €200.

The Chancellor has faced a fierce backlash from markets and voters over his £45bn package of debt-funded tax cuts.

Fears of Mr Kwarteng shifting to an unorthodox fiscal policy that creates huge deficits has triggered a record-breaking slump in the pound and UK bonds since the mini-Budget.

Many forecasters expect the tax cuts to lead to permanently higher deficits unless offset by spending cuts but the economic consultancy challenged the prevailing view in the City.

The CEBR said the Treasury’s estimates do not account for expectations of extra revenue from falling gas prices and fiscal drag – where inflation and pay rises push taxpayers into higher tax bands. Fiscal drag is known as a stealth tax and boosts the public finances by increasing revenue.

The CEBR said this suggests that borrowing will fall to £64bn in 2023/24 and the Government will run a small surplus by 2025/26 if gas prices slump.

Current gas prices suggest the energy bills support would cost £60-70bn in 2023/24. But many forecasters expect prices to fall this winter after a successful drive to boost storage levels in Europe.

If gas prices halve from their level in early September as Goldman Sachs expects, the cost would fall to £30bn in 2023/24, according to the CEBR.

Doug McWilliams, deputy chairman at the CEBR, said: “If our calculations are right, it would appear that the Chancellor has managed to burn his reputation for fiscal prudence for no good reason at all.

“He would have been so much better advised to have done his sums before presenting his budget to the markets.”

The Treasury estimated that Mr Kwarteng’s tax cuts would cost £45bn by 2026-27 but CEBR warns this is a “gross exaggeration”, estimating the price tag at £25bn.

The cost of cancelling the rise in corporation tax from 19pc to 25pc is half of the Treasury’s £19bn estimate, according to the forecasts. It said abolishing the top rate of income tax would become “at least self-financing” by boosting economic activity and attracting wealthy migrants.

A Treasury spokesman said: “The Growth Plan announced tax cuts and ambitious economic reforms to unleash higher and sustainable growth for the long term – which is the best way to improve living standards for everyone.

“The Chancellor has commissioned the Office for Budget Responsibility to produce an economic and fiscal forecast which will be published on 23 November. He will set out the Government's Medium Term Fiscal Plan alongside this, which will build on the commitment to get debt falling as a share of GDP in the medium term.”