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Slashing Energy Price Guarantee will make Recession Worse

Simon Lambert

October 27, 2022.

Slashing the energy price guarantee will make a recession worse as we hunker down, says SIMON LAMBERT (writing for This Is Money), because markets like certainty but so do people.

And that’s why I can’t help but think Jeremy Hunt made a mistake by tearing up the energy price guarantee. The new Chancellor has sought to put a very big expanse of clear blue water between himself and his predecessor: demonstrating that he’s very different from that nice Kwasi man who wanted to give us all money and would much rather take it off us instead.

And so, after three of the most astonishing economic weeks that I’ve seen in my time at This is Money – a period that includes the credit crunch, financial crisis, eurozone debt crisis, Brexit and Covid lockdowns - Hunt binned almost every single one of Kwarteng’s ill-fated tax cuts. But that wasn’t enough for our tough medicine Chancellor.

He also decided to go a step further and announce the energy price guarantee that stalls the price cap at £2,500 for the average household would not last two years, as we had all been assured, but would end in April. This was an extra bonus measure designed to please those pesky markets, but it came with the kicker that the average household’s energy bill is now forecast to rocket to about £4,300, according to Cornwall Insight figures.

To put this in context, that’s a 73 per cent rise from already very high energy bills. Furthermore, factor in the removal of Rishi Sunak’s £400 energy rebate for all, which is also due to end in April, and the annual cost of the energy price guarantee is £2,100. Allow for what households are actually paying and come April people’s annual bills are forecast to be 105 per cent higher than now. That would also make gas and electricity prices 3.4 times higher than they were in September 2021.

The average energy price cap tariff bill if forecasts are correct will be about £360 per month from April onwards.

For any unfortunate household staring down the barrel of a fixed rate mortgage up for renewal between now and then, there will be a double whammy hit to their finances. With average two and five-year fixed rates at about 6.4 per cent, a borrower with a £200,000 mortgage over 25 years coming off a two-year fix is looking at monthly payments rising by about £450.

This is a colossal squeeze on household budgets and one that most people cannot afford.

Of course, even if the base rate keeps rising, mortgage rates may come down by next April – it does feel as if we may be at the height of the storm at the moment. Similarly, if gas and electricity prices fall, those energy price cap forecasts may prove too pessimistic and bills will be cheaper. But there are unlikely to be many people banking on that glass half full scenario. Even among those I speak to whose mortgage fixes don’t end for a year or longer, a common thread of the conversation is the worry over how much their monthly costs will rocket when it finally is time to re-mortgage.

The exact same fears were being expressed about energy bills through late summer, over the looming October price cap rise to £3,549 and forecasts of even higher bills ahead. Until Hunt dropped his energy price guarantee bombshell this week, the one bit of good news was that at least we didn’t have to worry quite as much as before about energy bills thanks to Liz Truss’s two-year lock in. That has now been swept away and we have only the vague promise of some new help with a ‘Treasury-led review’ to find a way of targeting support that ‘will cost the taxpayer significantly less’.

For many people that was an ominous statement. They know what targeted support translates as: it means they won’t be getting it.

It’s entirely understandable why Jeremy Hunt felt the need to limit the energy price guarantee, it was predicted to be hugely expensive, amounted to something of a blank cheque and did little to promote energy efficiency. Yet, it is not the fault of British households that their energy bills have sky-rocketed and they did need help across the board.

They are not to blame for years of government mismanagement of the energy market, a move to renewable energy that somehow still left us paying fossil fuel prices, and a shift to being overly reliant on foreign gas while closing storage facilities. Vladmir Putin has weaponised energy prices in his war on Ukraine and you could also question whether the impact of that is something that should really be laid at the door of ordinary people’s energy bills too.

The energy price guarantee was an imperfect emergency solution, but the general reaction was that in the absence of any better ideas it at least provided help to all - avoiding awkward cliff edges and winning the support of the higher-earning taxpayers who will end up paying most for it – and gave people certainty.

Markets also had no problem with it, gilt yields didn’t even budge when it was announced despite immediate forecasts of the eye-watering cost. But now the energy bills certainty for households has been blown out the water and people will hunker down further.

This is likely to lead to a more painful recession and unless a solution is come up with swiftly, we’ll spend the next six months debating what it could be and how bad bills will get. To my mind, even if the new Chancellor wanted to limit the energy price guarantee it would have been wise to sit tight until a replacement had been come up with, or energy prices looked as if they would fall, and spare Britain’s households another dose of worry.

© Simon Lambert / This Is Money 2022
Image © Provided by This Is Money


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