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Government needs a big-bang solution or faces consequences of rising energy bills

·4-min read
<span>Photograph: Henry Nicholls/Reuters</span>
Photograph: Henry Nicholls/Reuters

Hard though it is to remember, the UK’s energy price cap was originally marketed as a modest measure designed to protect households on expensive variable tariffs from being fleeced. Nobody in early 2019 had the slightest inkling that by the summer of 2022 it would be a key barometer of the UK’s economic health.

Yet here we are – one pandemic and one unfinished war later – on tenterhooks for the latest intelligence on what is likely to happen to household gas and electricity bills this winter.

If the energy consultancy Cornwall Insight is right, a bleak outlook has suddenly become bleaker. It says the price cap is on course to rise to £4,266 a year in January – up by more than £650 on its previous estimate.

There are two reasons for the increase: global wholesale gas prices keep rising, and Ofgem – the energy regulator – has changed the way it calculates the cap in order to stop a wave of suppliers going bust. The change means higher bills for customers in the short term but should mean lower bills later next year.

Craig Lowrey, Cornwall’s principal consultant, says if the price cap is not controlling consumer prices and it is jeopardising suppliers’ business models, it is worth asking whether it is fit for purpose. There are more pressing questions than whether the price cap should be radically reformed or scrapped altogether, but the short answer is: it isn’t.

Before it gets to sorting out the price cap, the government needs a response to energy bills on course to more than double by early next year. Price rises on this scale will drive millions more into poverty and devastate the economy.

Ministers need to assess whether public support for Ukraine will be sustained in the absence of a generous support package. The Bank of England governor, Andrew Bailey, noted last week that there is an economic cost to the war but few expected it to be this high. Left struggling this winter, more and more people will ask whether it is a price worth paying.

At a time when Whitehall is drawing up worst-case plans for the winter including shortages and organised blackouts, the debate between Liz Truss and Rishi Sunak about who is the heir to Margaret Thatcher is entirely beside the point. The measures brought in to safeguard jobs and incomes during the pandemic involved an increased role for the state in the running of the economy, and set a precedent. That’s why Ed Davey, the Liberal Democrat leader, can call for an energy furlough scheme so energy bills would not rise.

Every previous sharp increase in energy costs in the past half-century – 1973, 1980-81, 1990, 2007-08 – has been followed by a recession, and there is no reason to imagine that trend will be broken this time.

For either Truss or Sunak, the logic is inescapable: drop the small state rhetoric and go for a big-bang solution paid for by higher borrowing, or face the economic and political consequences.

Business needs to win back older workers

Although storm clouds are gathering over the economy, the labour market is currently tight. The unemployment rate is below 4% and record job vacancies illustrate how hard it is for businesses to find staff. The reason interest rates are going up is that the Bank of England fears strong demand for workers will spill over into inflationary wage increases.

Dame Sharon White, the chair of the John Lewis Partnership, says a big factor behind the 1 million drop in the size of the workforce since the start of the pandemic had been a sharp fall in the number of people over 50 in employment. The government, she adds, needs to make more of an effort to encourage these lost workers back into the labour market to ease recruitment pressures.

White is correct in her diagnosis. The Office for National Statistics says the over-50s are responsible for most of the increase in activity seen since the start of the pandemic. Her solution to the problem, though, is incomplete.

To be sure, there is an argument for the government to make retirement more flexible so that people can split their time between paid employment and leisure. But there is also an onus on business to make it more attractive for older workers to get and keep jobs commensurate with their skills and experience.

Companies need to ask themselves why so many over-50s have given up paid work. Is it really the lack of flexible retirement or more the result of good old-fashioned ageism?