In his first full day as Prime Minister, Andy Burnham has announced that VAT on household energy bills will be removed from October. While no doubt well intentioned, this would be a mistake.
First, it is risky for the public finances. VAT on energy bills brings in a significant amount of revenue. The Government has claimed that the money will come from scrapping the rollout of Digital ID. It was never clear exactly how much this would have cost and the former Chief Secretary to the Prime Minister has revealed that it was actually unfunded. Given that the public finances are in a parlous state and gilt yields spiked yesterday, this is likely to hike borrowing costs, increase the already unsustainable National Debt, and pile even more pressure on officials at the Debt Management Office.
Trying to tackle high inflation through price controls is a nasty habit which the Government urgently needs to break
Second, it is a poorly targeted move. It will disproportionately benefit people with larger homes and those who use the most energy. This tends to be wealthier people as well as older people who have fewer bills to worry about as they have likely already paid off their mortgages. While I don’t think we should be that worked up about the distributional impact of tax cuts, it does seem like a rather odd priority for a Labour Prime Minister who has spent the past few months railing against neoliberalism and attacking the strawman of trickle-down economics.
Third, it will do almost nothing to tackle the cost of living. The Government estimates that it will save the average family roughly £45. While every little does help, it is negligible in the grand scheme of things and is, of course, intended to be only a temporary measure. It is a move which suggests the Government does not have a credible plan to deal with poverty in a sustainable way.
Fourth, it ignores the reason why energy prices are so high in the first place. It is due to the plethora of regulations and other taxes placed on energy producers as part of the misguided push towards Net Zero by successive governments, the costs of which are then passed onto consumers in the form of higher prices. Moreover, there is a lack of supply due to the failure to build more energy infrastructure such as nuclear power plants or to properly exploit North Sea oil and gas reserves.
Fifth, it only helps households while doing nothing for businesses who face VAT at 20% on their energy bills. The high cost of energy is already placing pressure on the hospitality sector and has made some industries such as heavy manufacturing unviable. Given that Burnham has stated that he wants to reindustrialise Britain, ignoring the high energy bills faced by businesses is not an effective way to go about this.
Sixth, it will add even more complexity to the country’s tax system. The UK already has one of the most complex tax systems in the world and VAT is a major culprit. VAT is a relatively efficient revenue raiser but in Britain it is riddled with exemptions and different rates. Rather than creating even more exemptions and distorting economic activity even further, the new Chancellor should be thinking about simplifying the tax system – starting with VAT. He should remove the different rates and exemptions and levy VAT at the same rate on all goods and services and use the extra revenue raised to provide targeted support for the very poorest households and abolish more damaging taxes such as Stamp Duty Land Tax.
Seventh, it will likely scupper Burnham’s plans to bring the UK closer to the EU. It is a stated aim of Burnham and many people in his party would like to see the UK rejoin the EU. The zero rating of VAT for domestic energy bills is only possible due to Brexit and so the Government needs to be honest about the trade offs involved if it is determined to drag the country back into the EU or align more closely with the bloc.
Finally, it reveals that the Government really doesn’t understand what drives inflation. This is part of a pattern with politicians (and which arguably started with Theresa May) who seem to think that high inflation can be tamed through the Government controlling prices of essentials. It ignores the fact that inflation is driven by too much money chasing too few goods. While these policies might bring some temporary respite to households, they will do nothing to tackle the root cause of high energy bills or inflation in general. Trying to tackle high inflation through price controls is a nasty habit which the Government urgently needs to break.
None of this is to say that the Government should not try to help households with high energy bills. It should, but it needs to go about it in a much more responsible and effective way. It needs to slow down on the frantic push towards Net Zero by abolishing the majority of taxes and regulations on energy producers. It needs to liberalise the planning system so it is easier and cheaper to build energy infrastructure such as nuclear power plants. It also needs to grant new licences so that more oil and gas can be extracted from the North Sea. All of this will help the UK to achieve energy security, tackle the high cost of living, and drive economic growth.
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