The UK Government’s Energy Package Risks Causing More Harm than Good

The new government’s economic policy with its problematic energy package is negatively affecting many throughout the country.

While Kwasi Kwarteng’s (the now ex-Chancellor) tax plans could be seen to have been announced at a poor moment, the real problem with the new government’s economic policy is its energy package. Although much of the controversy had centred on a tax cut for the highest earners of 45% to 40% (now U-turned), it is dwarfed by the energy pay-outs that this government will provide. For comparison, the tax cut was projected to have cost £2 billion while energy aid is projected to be costing over £100 billion in its first year alone (4% GDP), and that is before the aid promised to businesses is considered (another estimated £25 billion). [1]

The Conservative leadership race saw disagreement over energy policy. Rishi Sunak, contrary to Liz Truss, pledged to give targeted help to households that could not afford their energy bills as opposed to a blanket price cap. He was undoubtedly right in his approach. [2]

Economically, it makes little sense to have a blanket price cap. Pricing is one of the fundamentals of any economy as it tells producers as well as consumers how much they should be producing/using. Controlling the price will do little to help those least well off in the long run as consumers will continue to use energy as if it were more affordable than the global price indicates. This, in turn, will fail to lower the price and force the government to continue spending extraordinary amounts of money to keep households warm.

The policy also gives those higher up the economic ladder the same per unit cap as those on the lower end, which seems to be a remarkably poor use of public funds. It is evident that targeted help, which would aid those who are in need and be less of an economic drain on government spending, is far more preferable.

The mess that the price cap has created is also being exacerbated by poor budgetary responsibility. The cap is being exclusively paid for by borrowing, spooking financial markets and heightening future government interest. An unwise move, particularly in an era where rates appear on course to being much higher. [3]

Finally, it is important to point out that this crisis has not only been caused by the rising cost of gas and oil, but also (and more worryingly) by the nosedive of 20% that sterling has taken to the dollar in the last year. Given that commodities (including oil and gas) are traded in dollars, this means that even if the price hadn’t increased at all in the last year, that it would still mean all commodities would be 20% more expensive. The exchange rate may continue to depreciate as markets, like in the last few weeks, do not look favourably upon irresponsible government spending. [4]

While it may well be that geopolitical events in Ukraine could provide this government with a get out of jail free card, its energy policy is without economic sense and risks to cost the UK dearly.





The new government’s economic policy with its problematic energy package is negatively affecting many throughout the country.