Rishi Sunak will tie the knot on Thursday on a controversial windfall tax on energy companies, while proposing measures to ease the pain of rising household bills.
The chancellor has confirmed he will announce new support for those struggling with the cost of living. The measures are expected to help the poorest households as rampant inflation drives up the price of everything from food to fuel.
Sunak is expected to announce an increase in the discount scheme for warm homes, which is worth £150 to 3 million low-income households. This amount can go up to €500.
The government could also put forward a planned increase in benefits expected next year. Sunak can also choose to directly finance a discount on the energy bill or offer a discount on the municipal tax.
The measures will be partly financed by a windfall tax on energy companies, after a fierce battle within the government over the policy, which some ministers, including company secretary Kwasi Kwarteng, strongly opposed. The measure can be extended to all electricity generators and may include investment exemptions.
A senior party official admitted the decision had led to splits in the government. “The arguments have been rigorously tested, both within the Treasury and within the government, and there is high pressure to ensure that the profit is worth the pain and that it does not jeopardize investment,” they said.
“We don’t want to introduce arbitrary taxes that make the environment unpredictable for global companies that can go anywhere. We need to set the bar high and do something that has a real impact and take huge precautions to make sure we don’t jeopardize investment.”
The windfall tax reversal will be seen as a victory for Keir Starmer’s Labour, which has long been calling for such a measure. The Tory official said it would draw a clear line.
“For conservatives, raising taxes is a means of funding public services and helping those who cannot help themselves. So the focus of each package will be on what it allows us to do to help people who are suffering,” they said.
“There will be a new package explaining where some additional funds will be raised… It will be really impactful and comprehensive.”
Oil and gas producers have benefited from skyrocketing global energy prices during Russia’s war in Ukraine. Higher gas prices have pushed up wholesale prices in the electricity market, including for some renewables and nuclear power producers.
The Treasury has reportedly analyzed whether the tax should be extended beyond North Sea operators such as BP and Shell to producers, including renewable energy operators such as wind farms.
It is estimated that the plan could tax more than £10bn in excess profits, although City analysts said the figure was well above their estimates. Labour’s plan for a one-off levy to apply only to North Sea oil and gas producers is estimated to bring in £2bn.
A spokesperson for the Treasury Department said: “We understand that people are struggling with rising prices, which is why we have provided £22bn in aid to date. The Chancellor was clear that as the situation evolves, so will our response, with the most vulnerable is his number one priority.”
Economists say the cost of living for Britain’s poorest households is expected to rise almost twice as fast as that for the richest when energy bills rise this fall.
The Institute for Fiscal Studies (IFS) said the new surge in gas and electricity bills expected in October could lead to average annual inflation as high as 14% for the poorest 10th of households.
The energy crisis came into sharp focus this week when Jonathan Brearley, the chief executive of energy regulator Ofgem, indicated that the energy price cap would rise another £830 to nearly £2,800 in October.
The increase is likely to disproportionately affect poorer families, as a larger proportion of their total spending goes on energy. The IFS said the poorest 10th households typically spend nearly three times as much of their budget on gas and electricity as the richest 10th.
This means that low-income homes experience much higher inflation than the rich. The IFS predicts that while inflation for those on the breadline will hit 14% this fall, the wealthiest 10th could hit a rate of about 8%. For all households, inflation is likely to reach 10%, the highest rate since 1982.
As a sign of increasing pressure on households, figures on Wednesday showed the average petrol price hit a new all-time high of 170.4 pp litre, up from 129 pence per liter a year ago. Diesel rose to 181.4 pence, an increase from 131.3 py a year earlier.