(Bloomberg) --
Chancellor Rishi Sunak announced a raft of measures as the U.K. government sought to get a grip on a burgeoning cost-of-living crisis, with millions of Britons facing record increases in their energy bills.
“The government is going to step in to directly help people manage those extra costs,” Sunak said in the House of Commons on Thursday, saying his intervention was worth 9 billion pounds ($12 billion). “We can take the sting out of a significant price shock for millions of families.”
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Sunak announced the package shortly after energy regulator Ofgem said it would raise a price cap on domestic gas and power bills by 54% for 22 million customers. That would add 693 pounds to energy bills, but Sunak said the government action would offset 350 pounds of it for most of those affected.
Sunak and Prime Minister Boris Johnson have come under increasing pressure from the opposition and from within their own Conservative Party to soften the blow to households caused by inflation at a three-decades high and a tax burden that's set to reach its greatest since the 1950s.
“Any support from government is really welcome right now and especially support for that targets those on lower incomes but ultimately it's not enough for what we need,” said Simon Oscroft, co-founder and executive director of supplier So Energy. “This is just unsustainable.”
Adding to the pressure on the economy, the Bank of England on Thursday raised its key interest rate by 25 basis points, with four policy makers calling for a larger 50-point hike.
Read More: BOE Hikes Rates as Four Officials Vote for a Bigger Increase
The policies announced by Sunak include:
- A 200-pound upfront discount on domestic energy bills applied from October, financed by the government and repaid by households in annual 40-pound instalments over the next five years
- A 150-pound council tax rebate for 80% of all homes in England, starting in April
- Some 144 million pounds of discretionary funding for local authorities to help vulnerable people who don't pay council tax or who live in the other 20% of homes
The rise in energy bills will start in April, at the same time as a 1.25 percentage-point increase in payroll taxes is due to kick in to fund efforts to clear a backlog in Britain's National Health Service and pay for social care.
Read More: U.K. Energy Bills Jump 54% as Cost-of-Living Crisis Deepens (1)
Ofgem's decision was a response to a surge in gas prices that has pushed dozens of utilities out of business. The cap limits what suppliers can charge customers.
“We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet,” said Jonathan Brearley, chief executive officer of Ofgem.
The increase in the price cap is in line with analysts' estimates, and there are expectations for further increases on the horizon. The next calculation in October could add almost 500 pounds more to annual bills, according to Investec Bank Plc.
“A repayable 200-pound rebate on electricity bills is arguably a political conjuring trick,” Martin Young, analyst at Investec said.
In Sunak's statement he batted away calls to pursue other interventions, such as cutting VAT on energy bills or imposing a windfall tax on oil and gas companies, saying the former would benefit wealthier Britons and the latter would deter investment in the energy sector.
His move is also a one-time intervention that will do nothing to help consumers if prices remain high next winter and pushes some of the cost onto future bills. Futures markets are pricing in elevated wholesale gas prices continuing through next winter.
The opposition Labour Party criticized the plan, calling it a “buy now, pay later scheme that loads up costs for tomorrow,” while the Joseph Rowntree Foundation said it will be “cold comfort” to families already rationing what they spend on food and heating.
“There's no getting away from the fact that this is going to have damaging consequences for households,” said Justina Miltienyte, energy policy expert at Uswitch.com. The measures “will only be sticking plasters on a long-term problem.”
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