There has been much talk ahead of the budget about the prospect of income tax reductions, possible reform of inheritance tax and promises to help households with the cost-of-living. This latter goal is not easily achieved, covering a range of areas such as childcare, healthcare costs and education. But in the short term one key area will be in focus: energy.
The Government will have hoped that the ceasefire between the US and Iran would continue the gradual reduction in wholesale energy prices. But the recent resumption of hostilities has sent oil and gas prices higher again due to renewed fears of ongoing supply disruption. The situation is volatile, but there is no sign of an early resumption of uninterrupted flows through the Strait of Hormuz.
This poses a problem for the Government. As this week’s Summer Economic Statement will make clear, it has room for manoeuvre in the budget. But it also faces many demands.
Its decisions on energy will be important and must be set in a longer-term context. Central to this must be helping less well-off households with energy costs, which are causing undue pressures on their budgets. There is no reason to believe this is a temporary problem, though it could get worse if the Gulf crises goes on.
READ MORE
The energy world changed when Russia undertook its full-scale invasion of Ukraine in 2022. This means a group of households require supports which go beyond those currently available. As well as cash, this may extend to making their homes more energy efficient and secure. There could, for example, be an argument for supporting households to move away from home heating oil where, as we have seen, prices can be particularly volatile, supply uncertain and emissions high.
A Government taskforce is preparing options under a range of headings. There is thus no excuse to return to the wasteful use of energy credits for all, which are hugely expensive and give cash to those who don’t need it, as well as those who do.
There are other decisions on energy, too, such as whether to phase out the temporary excise cuts announced earlier this year and how this sits with the promise to increase carbon tax again. Much of this will depend on the trend in wholesale prices, which could go either way in the months ahead.
Budget planning needs to take place on the basis that relatively high energy prices will remain. It is not a situation similar to 2022, when prices surged. But a group of poorer households have seen costs ratchet up and need ongoing support. If delivered efficiently, the cost should not be too high, but it may require other tax and spending measures to be amended to keep within budget targets. It is all a question of priorities.
