Britain's new Prime Minister Liz Truss used her first prime ministerial appearance in parliament on Wednesday to commit to a £100 billion-plus plan to support households and businesses hit by rising energy costs, as she ruled out imposing a windfall tax on energy companies to offset soaring bills.
As investors took on-board the prospect of mammoth borrowing to fund a package to deal with soaring energy bills, the pound moved lower on the foreign exchanges to a new 37-year low against the dollar. Sterling dipped as low at $1.1403, slipping below the trough of 1.1412 seen at the outset of the Covid-19 pandemic in March 2020.
The Truss blueprint for mitigating the rapidly escalating energy crisis is an intervention that will help the UK to “get through this winter,” as well as bolster Britain’s long-term energy security, she said.
It has been widely predicted that she will announce a freeze on UK energy bills for up to two years.
Scottish Power has already put forward a plan costing £100bn for a two-year energy bill freeze that will be financed by loans underwritten by the Treasury.
Eager to prove her tax-cutting credentials, Ms Truss is scrapping a previously announced increase in corporation tax from 19 per cent to 25 per cent. She has also pledged to reverse April's rise in national insurance.
Ms Truss would not cancel a windfall tax imposed in May by former Treasury chief Rishi Sunak, her defeated leadership rival, but would not bring in a new one. “I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy,” Ms Truss told a packed House of Commons.
“This country will not be able to tax its way to growth.”
The new government's energy proposal is backed by energy companies and new Chancellor Kwasi Kwarteng has overseen the preparations.
The current UK price cap stands at £1,971 but, if bills were not frozen, this would rise to £3,549 in October.
As the table shows, if this rise were to come into effect, it would make the UK a European outlier with only Germany close to such a heady level.
Germany, however, has already announced a €65bn package to help its households to get through winter, including a windfall tax on electricity producers.
In France, even its notoriously market-loving President Emmanuel Macron has backed a EU-wide windfall tax on the profits of energy companies.
So, while Ms Truss's refusal to countenance a similar tax in the UK plays well among the free-marketers on her own backbenches, it puts her at odds with the rest of Europe ― and with the UK opposition Labour Party.
Labour leader Sir Keir Starmer said the refusal amounted to handing billions to energy firms that have pocketed hefty profits because of high energy prices.
Instead, the cost of the energy price relief will have to be paid by British taxpayers, he said, branding Ms Truss’s economic plans a “Tory fantasy.”.
Liz Truss the borrower
If this does not come to pass, in the absence of meaningful taxation, Ms Truss will have to borrow heavily.
In its September bulletin, the economic think tank the Centre for Policy Studies suggested borrowing was unavoidable, while hinting at a return to austerity to pay for it.
“Given the sheer scale of the emergency, it is easy to see why ministers may resort to fixing the price of energy,” wrote CPS senior researcher Karl Williams.
“Whatever the solution, it will be extraordinarily expensive. We will probably have to eat up the costs through borrowing, and rely on economic growth and the consolidation of the state to get public finances back on track over the longer term.”