Proposals being considered by Rachel Reeves to cut tax on electricity bills will backfire, experts have warned, resulting in a giveaway to richer homeowners and undermining the UK’s climate commitments.
The chancellor is understood to be looking at plans to eliminate the 5% VAT charge on electricity bills as a fast and simple way to reduce bills for consumers and ease the cost of living pressures that have aided the rise of Reform UK.
However, a host of experts have said such a move would disproportionately benefit better-off people with larger homes, would almost certainly result in higher carbon emissions and could end up being underappreciated by cash-strapped voters.
Tim Leunig, a former government adviser and visiting professor at the London School of Economics, said: “This is a terrible idea. Most of the benefit would go to people in larger houses with larger than average electricity bills.”
He added: “If they take VAT off energy bills, you have to give up on Labour as a sensible economic party.”
One former energy department official said: “The government has to find some short-term relief for people and removing VAT from electricity bills is attractive because it is simple and easy for voters to understand. But they’re supposed to be asking those with the broadest shoulders to accept the highest burden, and this would fail that test.”
Reeves faces a career-defining budget on 26 November when she will have to explain how she will fill an expected shortfall of around £30bn while also trying not to push up living costs for millions of voters.
As part of that package, the chancellor is considering a range of measures to bring down energy bills, having made a pre-election promise to reduce them by £300.
Among those proposals is one to remove the 5% VAT charge on domestic energy bills, at an estimated cost to the exchequer of £2.5bn a year. Calculations by the charity Nesta suggest it would save the average household £86 a year.
Asked about the idea last month, the energy secretary, Ed Miliband, said: “The whole of the government, including the chancellor, understand that we face an affordability crisis in this country.
“We face a cost-of-living crisis, a longstanding cost-of-living crisis, that we need to address as a government. We also face difficult fiscal circumstances … so obviously we’re looking at all of these issues.”
Such a plan, however, would mean those with the highest energy bills receive the biggest benefit, meaning the benefits will be felt most by the wealthiest.
Experts also warn that it could damage relations with the EU, which sets a minimum VAT rate of 5% on energy bills and so could feel undercut by unilateral British action to stop doing so.
Some are also concerned that reducing tax on energy bills will undermine the government’s green commitments by encouraging households to use more electricity.
Cutting VAT is not the only option available to Reeves, however, and some in government are promoting other ideas to bring down bills instead.
One option supported by some senior officials is to remove most green levies from bills and transfer an estimated £3bn in annual costs to taxpayers instead.
Schemes such as subsidies for renewables and the Great British Insulation Scheme would then be funded by a larger group of people, and be based on their income rather than the size of their bill.
Supporters of the idea say that removing green levies rather than tax would help combat Reform, which has promised to scrap levies altogether and abandon the push for net zero.
But it will also make Reeves’s decisions on tax even harder, at a time when the chancellor is already considering breaking a manifesto commitment to raise income tax because of the size of the fiscal hole.
Some are urging Reeves to move any levies that do remain on to gas bills rather than electricity in an attempt to make it cheaper for homeowners to install more climate-friendly heat pumps instead of new gas boilers.
Madeleine Gabriel, director of sustainability at Nesta, said: “We would suggest taking almost all levies off electricity, and moving any that remain on to gas. As far as decarbonisation goes, this is a really big opportunity to even out the difference between electricity and gas bills.”
Nigel Topping, the chair of the Climate Change Committee, told the BBC’s Laura Kuenssberg on Sunday: “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, so that that switch from a gas boiler system at the end of life to a heat pump delivers real economic benefit.”
One final option remains open to the chancellor: the kind of targeted action taken in 2022 by one of her predecessors, Rishi Sunak, who gave every UK household a £400 rebate on their energy bills.
Doing so could prove electorally popular but critics warn it would be expensive and complicated to administer.
