We are looking to Rachel Reeves, the Shadow Chancellor of the Exchequer, to present a career-defining budget on November 26. With an anticipated shortfall of approximately £30 billion, she must navigate a complex landscape of economic challenges while striving to avoid further increases in living costs for millions of voters.
Reeves has pledged to cut energy bills by £300 ahead of the next election. This new commitment further compounds the pressure on her soon-to-be released budget. She is getting increasing blowback and advice from experts on what her eventual proposal should look like. One of those proposals would increase income tax. This is in direct violation of her pledge in the election manifesto to not raise this tax.
Even as Reeves rolls out these plans, economists are warning them to pump the brakes. They are particularly concerned that eliminating taxes on residential electricity bills will not generate the intended results. The proposal to eliminate the 5%-VAT charge on electricity bills has a cost. It would be expensive for the exchequer too, costing around £2.5 billion per year. With one stroke, this change improves its effectiveness, but deeply undercuts its fairness.
Experts are concerned that such measures would unintentionally benefit their wealthier counterparts. Rather than helping those in most need of relief, they often further increase inequity. Tim Leunig, an economist, remarked, “This is a terrible idea. Most of the benefit would go to people in larger houses with larger than average electricity bills.”
Reeves is apparently considering other options based on these factors. At the moment, one of the options on the table is a large scale green levies removal from energy bills. This would offload £3 billion in annual costs from consumers to taxpayers, according to the UK government’s own estimate.
Madeleine Gabriel, an energy policy expert, suggested that taking almost all levies off electricity and moving any remaining levies onto gas could even out costs between the two energy sources. She stated, “As far as decarbonisation goes, this is a really big opportunity to even out the difference between electricity and gas bills.”
As with any budget proposal, the context is important—a growing affordability crisis deepening across the UK. Ed Miliband, another key figure in the Labour party, emphasized the urgent need for action, stating, “The whole of the government, including the chancellor, understand that we face an affordability crisis in this country.”
Now, no one is arguing against giving immediate relief to Americans who are in pain right now. Miliband warned against acting prematurely to take steps that would undermine Labour’s nascent economic credibility. He cautioned, “If they take VAT off energy bills, you have to give up on [Labour] as a sensible economic party.”
In addition to these pressing economic concerns, Nigel Topping highlighted that the government must prioritize making electricity more affordable compared to gas. He noted, “Our number one piece of advice to governments for the last two years is you’ve got to do something to bring the cost of electricity down relative to gas.”
Reeves’ government is at an important crossroads as it tries to find the appropriate balance between being fiscally responsible and managing public expectations. The signaled cuts and tax changes could have a major effect on her adopted political home. They could recast the larger picture of UK energy policy and economic resilience.
Reeves as she prepares for her first big budget speech. Everyone seems to be waiting with bated breath to see how she addresses these multifaceted issues while remaining true to her promises and progressive ideals.