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15 August 2022

Does Keir Starmer’s plan to freeze energy bills go far enough?

The Labour leader’s intervention has been welcomed, but critics on the left argue firms should be nationalised, not bailed out.

By Rachel Wearmouth

Labour has finally unveiled its plan to deal with the fast-approaching energy bills crisis. What is it and how will it work?

Keir Starmer said a government led by him would introduce a £29bn scheme to freeze the energy price cap for six months. Ofgem currently has the cap set at £1,971 a year, but due to surges in demand and Russia’s war on Ukraine, it is set to rise to £3,600 in October and around £4,200 in January. 

Starmer’s move would be partly funded by expanding the windfall tax on energy firms’ profits and closing a loophole in the levy that allows them to claim tax relief on 91 per cent of profits they reinvest. This tax change would be backdated and raise an estimated £8bn. 

Labour said it would also raise £14bn by halting the proposed government payment of £400 for all households to compensate for the price cap rise scheduled for October. (The party would, however, retain existing government support, including £650 for pensioners and Universal Credit claimants.)

The remaining £7bn, Labour claims, would be achieved through reduced inflation and savings in debt interest payments. Starmer’s team calculates that freezing energy bills would keep inflation at around 9 per cent as opposed to the 13 per cent rate forecast by the Bank of England. 

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Starmer and the shadow cabinet began fleshing out the plan during meetings in late June, and started polling the policy shortly afterwards. The numbers had to be redone twice due to forecasting updates from the energy market experts Cornwall Insight, but the announcement was timed to be unveiled ahead of Ofgem’s next price cap update on 26 August.

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Labour aides believe that they have seized the political initiative. Tim Montgomerie, the former editor of ConservativeHome, agrees, tweeting earlier today: “Keir Starmer has outflanked both of the Tory leadership candidates on the energy crisis. Truss and Sunak should have made reassurance of households their number one priority. It’s a major political failure that neither have.”

By underlining how cutting energy bills could reduce inflation, Labour has invited comparisons with the US president Joe Biden’s Inflation Reduction Act, which raised taxes on corporations and cut prescription drug prices. It passed through both houses of Congress last week. But Labour also believes that freezing energy bills for all, as opposed to just those on lower incomes, will have wider economic benefits by giving consumers more to spend.

Starmer’s intervention is a significant challenge to the Tory leadership front-runner Liz Truss, who has promised to prioritise tax cuts over further “handouts” to energy bill payers. But a joint letter from 70 charities, including the Joseph Rowntree Foundation and Age UK, has warned the £1,200 that the government has pledged to give to the most vulnerable households only covers around half the rise in living costs. Truss’s plan to reverse the National Insurance rise would save the poorest tenth of households just 76p a month

Chancellor Nadhim Zahawi has reportedly asked Treasury officials to draw up plans to cut gas and electricity bills by an extra £400 in January through a new lending scheme for energy providers. But the End Fuel Poverty Coalition warned this would not “touch the sides”, and with no new prime minister in place until 5 September, time is desperately short.

Boris Johnson – who remains PM – has been pictured on holiday in Greece with his wife Carrie, and has no engagements scheduled for this week. But Starmer, who finalised Labour’s policy while abroad with his family in Mallorca last week, has not escaped criticism.

Those on Labour’s left, including the former shadow chancellor John McDonnell, say the six-month policy is too short-termist, and that Starmer should have looked at nationalising energy firms – an option floated by the former prime minister Gordon Brown last week – since the promised £29bn amounts to a bailout. But the Labour leader rejects “going down the nationalisation route” on the grounds that it would entail using public money to compensate shareholders, rather than getting direct help to those struggling now.

Jonathan Portes, a professor of economics at King’s College London, believes the programme “kicks the can” down the road and is poorly targeted, with more than half of the support set to go to above-average income households. He would prefer a permanent and significant increase in benefits, though others point out that the forecast price rises would leave many on higher incomes struggling. Tax Research UK’s Richard Murphy, meanwhile, has warned that freezing the cap won’t help schools, care homes and hospitals, which will not covered by the policies. 

But Starmer’s intervention has been broadly welcomed and provides him with an opportunity to contrast Labour’s offer with that of a divided and “missing in action” Tory party.

There is now a consensus that tax cuts and small-scale support do not match the gravity of the crisis. Truss’s response will be watched closely.

[See also: Liz Truss’s National Insurance cut would do nothing for Britain’s poorest]