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The Guardian - UK
The Guardian - UK
Nils Pratley

Sorry, but axing VAT or green levies on energy bills isn’t going to cut it

Liz Truss and Rishi Sunak composite
Screeching U-turns or not, fiddling around the edges by Liz Truss or Rishi Sunak does not come close to recognising the size of imminent financial hit to the poor. Photograph: Getty Images

In the contest to mouth the words “tax cuts” as often as possible to attract the gaze of Tory party members, Rishi Sunak now says he would remove VAT on energy bills for a year. However much his camp protests otherwise, this is a U-turn of the screeching sort. As chancellor, Sunak had two goes at constructing an energy support package for households and he kept the 5% VAT rate in place both times.

More importantly, it’s a U-turn that does not come close to recognising the size of the hit coming to the pockets of poorer households. The sums here are not difficult. At £3,400 – a reasonable estimate for October’s price cap for an average household – axing VAT would produce an annual saving for consumers of £170. At £3,850 – the more speculative estimate of where the cap could be set in January if Russia continues to reduce gas flows through Nord Stream 1 to a trickle – we’re talking £192.50.

Now consider the current level of the cap (£1,971) and remember that Sunak was assuming £2,800 when he put together his second support bundle. If we could now be contemplating a level nearer £4,000 in the new year, chopping 5% off the top wouldn’t move the dial meaningfully for poorer households. An unaffordable bill would be 5% smaller, but would still be unaffordable. Remember, too, that January tends to be a month of peak consumption, a significant factor for pre-payment customers.

Exactly the same criticism of fiddling around the edges can be made of Liz Truss, incidentally. The foreign secretary sometimes talks as if axing “green levies” is the answer to everybody’s prayers. Those levies, shown as the “policy” element in the breakdown of bills, are projected by the regulator Ofgem to be £155 from October. Again, the dial doesn’t move far.

Sunak was right the first time about scrapping VAT on domestic fuel bills. It is a measure that “would disproportionately benefit wealthier households”, he said in February. The same point was made by the Institute for Fiscal Studies on Wednesday – richer households tend to use more energy, so would benefit most in cash terms.

The costs of scrapping VAT for a year would be bearable for the Treasury, added the IFS, but the risk is that it would be “politically difficult” to restore the policy. “As a permanent policy, removing VAT on energy bills would be a move in exactly the wrong direction: distorting households’ choices towards more energy use, making it harder to meet the UK’s net zero targets and meaning that any reduction in emissions happened in a way that was more costly overall to households than it need be,” it said.

The inescapable conclusion, which both PM candidates must grasp, is that a third support package will be needed in October. Flashy, but inconsequential, tweaks with VAT or green levies aren’t going to cut it, and would create longer-term problems. Bring on the real debate.

At the ready to help struggling customers: Lloyds can afford it

The old rule of thumb said that Lloyds Banking Group, the UK’s biggest lender, is a barometer of the health of the UK economy. That rule is out of date. The bank’s first-half financial report – profits higher than expected, full-year guidance raised, dividend up 20% – was almost perky, which is definitely not the mood of the nation.

A key factor is that banks enjoy periods of rising interest rates. They improve net interest margins, the difference between what is paid to depositors and what is charged to borrowers. Lloyds now expects a margin above 2.8 percentage points this year, as opposed to 2.54 in 2021, a significant jump when you’re making loans and advances of £7.5bn in six months.

Meanwhile, Lloyds hasn’t seen the increase in bad debts that one might assume during a cost of living crisis. An impairment charge of £200m in the second quarter should be seen in the context of a very large bank with 26 million customers that takes such charges in the normal course of business. Across the half-year, defaults were below pre-pandemic levels.

The chief executive, Charlie Nunn, was careful to sound the necessary notes of caution and sympathy with customers. About 1% – so 260,000 people – are “really struggling to make ends meet”, he said, and 20% had adjusted their spending “significantly”.

But the bottom line for Lloyds is that its customer base is skewed towards middle- and upper-income households who are more able to adapt. The biggest worry for banks in downturns tends to be surging unemployment, which hasn’t happened this time. Lloyds stands ready “to proactively help potentially impacted customers”, added Nunn. So it should: it can afford it.

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