By Nicholas Earl
Scrapping VAT on energy bills should only be a temporary measure to ease costs for struggling households, argued the Institute for Fiscal Studies (IFS).
It warned that as a permanent policy, VAT cuts would incentivise further energy use, when households need to be encouraged to use less.
This would and future emissions reductions to meet climate targets more painful and expensive for consumers.
Stuart Adam, a senior economist at the IFS, said: “As a permanent policy, removing VAT on energy bills would be a move in exactly the wrong direction: distorting households’ choices towards more energy use, making it harder to meet the UK’s ‘net zero’ targets and meaning that any reduction in emissions happened in a way that was more costly overall to households than it need be.”
Yesterday, Tory leadership contender Rishi Sunak’s pledge to scrap the five per cent VAT rate on household energy bills for a year, to ease the pain facing energy users this coming winter.
The IFS has calculated that removing the five per cent VAT component for 12 months would save a typical consumer £154 and initially cost the exchequer £4.3bn.
The latest price cap forecasts suggest average energy bills could spike to £3,500 per year in October, and climb again to £3,850 per year in January – with ultra-high prices baked in to the market for at least the next three years.
Commenting on the merits of a VAT cut to tame record energy bills, Adam said: “By providing more support to those whose use more energy, it would be well targeted at those who face the biggest rise in their energy bills, but not at those – the poorest – who are least able to cope with the rise in costs.”
While this would be acceptable as a short-term relief measure, Adam believed the biggest risk with the policy was that it would “prove politically difficult” to restore VAT on energy bills at the end of the 12 months – especially if prices remain historically elevated.
Sunak has also announced plans to ramp up energy efficiency, while during his two-and-a-half-year stint as Chancellor he unveiled multiple support packages for households.
Most recently, this included a £15bn package to provide up £1,200 per year savings for vulnerable energy users and at least £400 per year to everyone else.
However, this was calculated on initial Ofgem forecasts the price cap would rise to £2,800 per year – putting more pressure on politicians to go further to ease household energy bills.
Earlier this week, the BEIS Committee warned further support world be needed this winter, but that measures should be targeted more specifically to low-income households.
In its report on the energy market, MPs warned the size of the package has now been “eclipsed by the scale of the crisis.”
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