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The Guardian - UK
The Guardian - UK
Business
Phillip Inman

Extend UK energy price cap to hold inflation back, thinktank says

A London residential district in Winter
The IPPR says the price cap could repay the exchequer in lower wage demands and lower interest rates. Photograph: Shomos Uddin/Getty Images

Jeremy Hunt should allow the energy price cap to run beyond the existing six-month deadline to act as a “shock absorber” that would reduce inflation and give consumers £90bn of extra spending power, a leading thinktank has argued.

The left-leaning IPPR said the energy price cap could repay the exchequer in lower wage demands and lower interest rates, boosting economic growth and raising tax receipts.

In a report ahead of the chancellor’s 17 November autumn statement, the IPPR said the funds released from preventing a deep recession could be used to support public services and boost welfare and pension payments.

But the thinktank warned tax rises would be needed to give Hunt leeway to support households and businesses, in particular from a broader windfall tax on the extra profits generated by energy companies.

A report by the Resolution Foundation called on ministers to use the 17 November autumn statement to consider tax rises on households and businesses that have prospered through the pandemic and are relatively insulated from the cost of living crisis.

The foundation said the chancellor should avoid attacks on public services and welfare benefits, which have already suffered from 12 years of austerity.

It warned Hunt that cuts to public infrastructure spending would save money on the short term but depress growth over the rest of the decade.

Hunt was due to deliver an update on the government’s fiscal plans on Monday but this was pushed back to 17 November last week, after Rishi Sunak replaced Liz Truss as prime minister.

The Office for Budget Responsibility, which produces independent forecasts for economic growth and the public finances for the Treasury, is expected to say on 17 November that a £39bn shortfall predicted in March in public spending this year has grown to £89bn.

James Smith, the Resolution Foundation’s research director, said the weaker economic outlook, higher interest rates and the remaining legacy of “Trussonomics” – £17bn of unfunded tax cuts announced in the former chancellor Kwasi Kwarteng’s mini budget in September – “meant that the government is on course to break these rules unless significant further policy action is taken”.

The OBR is likely to predict an unemployment rise of around half a million, taking it above levels seen during the pandemic.

This weaker economic outlook is set to raise government borrowing by about £23bn a year by 2026-27. The addition of £20bn to pay for higher government borrowing costs – including an extra £10bn since the mini budget – and the costs of inflation takes the total to almost £50bn.

“The government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances,” Smith said.

“While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of a weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole.”

Carsten Young, an economist at the IPPR, said the Treasury could ditch its target of reducing debt as a proportion of GDP to maintain government spending through a difficult time for the economy.

“We propose an alternative mechanism, which we call the ‘shock absorption mechanism’.

“The core idea is that if governments support households and businesses visibly and sufficiently in response to an energy shock, they should have less need to increase their wages and prices to make up for the energy shock,” he said.

“The more we cushion the blow of high energy prices, the more likely we are to avoid high inflation becoming embedded.”

He said the funds could be recouped by a windfall tax on profitable corporations.

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