Rishi Sunak will unveil a multi-billion pound package on Thursday to help people cope with soaring energy bills – but has resisted cutting green levies, despite the cost of living crisis.
Ofgem will announce a rise in the energy price cap, with industry estimates saying bills will increase by 50 per cent to about £1,915 for the typical household.
The Chancellor is reportedly set to unveil state-backed loans that will allow energy firms to reduce the bills of every household in the UK, to ease the financial impact.
The Telegraph also understands that Treasury officials have been preparing plans for a council tax rebate, a targeted measure that would help the poorest families.
The proposal would mean council tax is temporarily cut in the lowest property bands, with many of the beneficiaries living in former Labour “Red Wall” constituencies that the Tories won in the 2019 election.
Three government sources said the plan – which had been pushed by Michael Gove, the Levelling Up Secretary – was being seriously considered. The Treasury declined to comment.
Yet all the Treasury moves are unlikely to be enough to cover the full increase in household energy bills expected, which means 22 million households will still be out of pocket.
The Bank of England is also expected to announce an increase in interest rates on Thursday, potentially from 0.25 per cent to 0.5 per cent – further squeezing families with mortgages. It is the second interest rate rise in three months.
Some 2.2 million homeowners, or one in four mortgage borrowers, on variable rate deals will be impacted by the decision, while banks are also beginning to raise costs of fixed-rate deals.
While 0.5 per cent is still historically low and below pre-pandemic levels, there is an expectation on the financial markets that Thursday’s decision will be followed by three more rises – pushing rates up to 1.25 per cent.
For weeks, MPs have been calling on Mr Sunak to cut the 12 per cent of energy bills that goes towards funding green energy programmes, known as “green levies”.
The policy was championed by the former Labour government and has continued under successive Conservative prime ministers David Cameron, Theresa May and Boris Johnson.
On the eve of Thursday’s announcements, a string of former Tory ministers urged the Treasury – already under pressure to reduce taxes – to cut green levies.
‘Tax cuts and lasting cuts to fuel costs is what we need’
Steve Baker, the former Brexit minister, said: “Once again they are piling intervention on intervention, when we should be a free market, conservative government.
“The levies should be suspended and moved on to general taxation.
“I’m always going to be attracted to doing things which reduce the tax burden on consumers, rather than bailing out people on the supply side at the taxpayers’ expense. That’s not capitalism, that is a form of crony corporatism which I’ve always opposed.”
Sir John Redwood, the former Welsh secretary, said: “Taxing us more through National Insurance to lend more money to power companies is not the way to ease the cost of living squeeze. Tax cuts and lasting cuts to fuel costs by producing more is what we need.”
Another former minister said: “After the bounce-back debacle, you would have thought the Government would have learnt that lending out people’s money with no guarantee it will be paid back is a bad idea.
“The Conservative Party surely would be better off cutting taxes like green levies and VAT.”
A string of interventions have been considered by Number 10 and Number 11 Downing Street over recent weeks to ease the cost of living crisis that looms this spring.
It is one of the most politically challenging issues facing Mr Johnson, with inflation and interest rate increases happening at the same time as tax rises and soaring energy bills.
Government sources indicated that Treasury interest in expanding the Warm Home Discount had faded, despite the move being considered for weeks.
Although any Government intervention to help households will be welcome, there is a risk that if gas prices do not start to fall, there could be further pressure in October.
The market currently indicates wholesale natural gas prices could remain high for months or years. Cornwall Insight has indicated the price cap could climb to more than £2,300 per year in October.
An ally of the Chancellor told this newspaper that officials in the Treasury had discussed a council tax rebate at length in recent weeks, adding that the option was “definitely under consideration”.
“It’s quite an imprecise measure, but there is an ease of delivery there,” they continued.
While the Exchequer is also said to have looked at whether a number of benefits could be made more generous, a source said Mr Sunak was wary of making changes to the welfare system due to fears any temporary uplift could be hard to roll back later.
They pointed to a series of prominent political rows during the pandemic over the £20 uplift in Universal Credit, which saw Mr Sunak repeatedly lobbied by Labour and dozens of Tory MPs to make the change permanent.
“The Universal Credit row has conditioned him to look towards things to turn off,” the insider said. “Clearly it [a council tax rebate] would be a one off thing.”