The price cap freeze: It’s not good, but it’s not the worst
Liz Truss, as a true believer in the free market, may not have expected to launch her Premiership with a massive tax-payer-funded market intervention. But these are extraordinary times.
She is expected to announce a support package as soon as today to tackle energy prices, with freezing the energy cap at their current level of £2,000 the flagship measure.
The cap would effectively subsidise losses that energy companies would make through selling discounted energy.
But how effective will the package be?
There are clear drawbacks to freezing the price cap.
It risks doing little to address supply and demand imbalances by encouraging laissez-fair energy use and blackouts are not impossible without reduced consumption.
It’s also staggeringly expensive.
But other options on the table don’t necessarily look more appealing.
An expanded windfall tax on oil and gas producers would discourage investment, while Ovo Energy’s proposal to introduce income barriers would take time to perfect.
Benefit system support would be quicker, but risks missing millions of suddenly poverty-hit Brits.
It’s the economy, duh
Capping energy bills does keep a lid on headline inflation, which some experts had tagged to rise to nearly 20 per cent
Neil Shearing, chief economist at Capital Economics, said the domestic freeze would probably see inflation peak at 11 per cent.
Although still eye-wateringly high, lower inflation would ease pressure on the Bank of England to hike rates steeply now, though the rescue package may keep inflation higher in the medium term.
But if it staves off a short-term eco- nomic storm – which would have been hugely damaging – it is still staggeringly pricey and will blow a sizable hole in the public finances.
The longer energy prices stay high, the higher the eventual bill will be – paid for by taxation or by borrowing from markets at what are now elevated rates.
The first option goes against Truss’ basic principle that cutting taxes stimulates growth, while the second puts further pressure on other areas of government expenditure at a time when an aging population and myriad challenges are already looking more expensive.
As Bill Blain, the head of capital markets at Shard Capital put it, the plan “smacks of a swift, sudden compromise cobbled together in response to the growing pressure to be seen doing something.”
He may be right, but faced with a host of bad options, a transparent freeze on energy prices might be the least bad of the lot.