Liz Truss’s expensive energy lifeline

Liz Truss dislikes “handouts”, but she has shown a welcome readiness to be flexible when overwhelming need dictates. British families and households finally have some clarity that substantial support in paying crippling gas and electricity bills is on its way. The new prime minister’s bold package, including an energy price guarantee, is estimated to cost £150bn — more than double the Covid-19 furlough scheme. This is a huge sum, but so is the challenge.

Many more households will stay warm, fewer businesses will fail, and the economic slump this winter will feel slightly less grim. This will help to maintain resolve in the economic war against Vladimir Putin that the UK and its partners cannot afford to lose.

A two-year price cap for households is, nonetheless, a blunt instrument to tackle a multi-faceted crisis. The UK will be paying the cost for decades. As it subsidises costs regardless of income level, it provides a big giveaway to the better-off, while some of the most vulnerable will still struggle with prices at this level. The cap also lessens incentives to reduce consumption, though the price will still be significantly higher than prewar levels.

Precise details will need to be ironed out quickly. Many businesses will also be anxious about how they will cover costs after the government’s six-month price guarantee passes. Truss’s team may need to develop their package as the crisis evolves. Yet with many households and enterprises just weeks away from financial ruin, the government had to opt for speed.

The cap should pull down near-term inflation, reducing immediate debt interest costs, while also potentially easing inflation expectations. But the additional boost to demand may mean inflation proves stickier. And if wholesale prices go even higher, the government’s outlay to maintain the price freeze will increase.

After giving ground on “handouts”, Truss is determined to maintain her campaign pledge to reverse this year’s increase in national insurance and freeze corporation tax at current rates. If she goes ahead, however, borrowing will soar further, and there is little room elsewhere for cutting spending.

Revenue will have to be raised from somewhere. Sterling has crashed to its lowest since 1985 and gilt yields have pushed higher. Investors are jittery over the hefty borrowing and the risks that debt, already at 96 per cent of gross domestic product, could become unsustainable. The Bank of England will have to reassure markets that it remains committed to fighting high inflation despite the government’s intervention. A planned fiscal statement this month also needs to provide precise details on the funding plans, and an independent assessment by the Office for Budget Responsibility.

Attempting to boost energy security — in part by short-term steps to exploit more UK fossil fuels — and to reform pricing to better reflect the country’s energy mix are reasonable goals. But they must not detract from vital efforts to reduce long-term reliance on oil and gas and accelerate the transition to renewable and nuclear energy. In the near-term, gas supplies may become even more scarce, while the price cap might not restrain demand. That makes it vital for the government to push ahead with an information campaign for households and businesses to save energy and raise efficiency.

Today’s package is a crucial step in the battle against Putin’s weaponisation of gas. It will certainly not be the last. But the government must balance the urgency to protect consumers and win the economic war with the Kremlin with the need to preserve Britain’s invaluable reputation for economic prudence.