Price Cap Reset at £2,500 Is Needed – But How This will Be Funded?

Robert Salter, a director at the firm, said: ‘Support for individuals, with the price cap reset at £2,500, was needed, but there remains concern about how this will be funded. Further borrowing may lead to higher interest rates later this year, which will squeeze the margins of smaller companies. Among those most impacted will be businesses which took Covid Business Interruption Loans (CBILS), as the government’s interest payments on these are no longer paid for.’

‘In addition, one must realise that while the £2,500 cap on energy costs is better than the ‘status quo’, it will still leave a significant number of families in ‘fuel poverty’ – that is, compared to the prices of only 9–12 months ago. While the Prime Minister indicated that there would be additional help for the poorest/most hard-hit families, the speech didn’t include anything new.’

Salter added: ‘Capping energy costs for businesses should alleviate some concerns of owner-managed companies that they would not be able to survive the winter. However, the Chancellor’s statement later this month is needed to assess these measures’ longer-term impact on business owners – the drawn-out timetable of the Leadership election has pressured the Government to act very quickly.’

‘Many of the PM’s steps promoted in today’s speech are very long-term in their nature and outcome and will not provide any short-term solutions for the UK economy, despite the PM’s claims. For example, per the PM’s speech, UK shale gas supplies could help to provide the UK with increased natural gas supplies within ‘six months. However, this doesn’t appear to realise.’

• Planning restraints (i.e., in the areas affected by the moves).
• Operational/administrative issues that companies would need to overcome.
• The potential lack of a workforce with the required skills and experiences in this area.

‘Similarly, issuing new licences for North sea oil and gas and supporting additional nuclear energy production may be necessary from an ‘energy security’ perspective, but such measures will certainly not provide any short-term cuts to energy costs in the UK.’

He added: ‘The PM’s suggestion that the UK would be a ‘net energy exporter’ by 2040 appears ambitious and quite possibly unrealistic. In this regard, many European countries – which would provide the most natural market for any UK energy exports in the future – are already developing their proposals to become ‘energy secure’ in the coming years. Hence care needs to be taken to ensure that the UK doesn’t invest unnecessarily in a ‘red herring’ in this regard.’

‘The potential cost/scale of this package is very significant. Cost is estimated at potentially close to £150 billion. In contrast, the Furlough Scheme during Covid cost an estimated £70bn. A cost of ca. £150 bn would be equivalent to more than £2,000 per person in the UK. Another way to look at £150bn is that it is equivalent to over 20% of the UK Government’s annual tax receipts (estimated at £718.2bn in the 2021–2022 tax year).’

‘Alternatively, another way of looking at £150bn in support is that it represents approximately 2/3rds of the Government’s income tax receipts for the 2021–2022 tax year. The Truss plan should be applauded for its simplicity and haste – all households and businesses will universally benefit from the support by capping energy prices for the next two years. Businesses will be relieved by the level of support and the alignment to households – businesses were becoming increasingly concerned about keeping the doors open with further increases in energy costs and the likely recession.’

Salter continued: ‘However, it is concerning that there is no answer from the new government on how much support will be funded. The government will need to borrow heavily, but the global markets will undoubtedly be nervous about the country’s ability to repay the debt with any plan. The new Chancellor, Kwasi Kwarteng, will need to clarify the autumn budget around the economics of this plan, as it may restrict the UK’s ability to borrow in the future and at what cost.’

‘Truss has ruled out any tax increases to pay for the energy cap plan, and Kwarteng is expected to announce tax cuts in the autumn budget. Therefore, it remains to be seen if this government is leaving a debt timebomb for future governments and generations to pick up the cost, which will inevitably have to be done through tax increases. One theory is that Truss and Kwarteng will suspend the 1.25% National Insurance increase for it to be revived in two years to cover the cost of the energy cap plan.’

Salter concluded: ‘Overall, the PM’s speech – while welcome in some limited regards – appears to have done relatively little for a significant number of UK families and UK businesses. As such, this speech should be taken purely as a ‘first step’, and additional guidance and information need to be provided by the Government as a matter of urgency in the coming weeks – for example, as part of the ‘emergency budget’ which is expected in the next few weeks.’