Cost-of-living crisis: Think-tank warns no action on energy could cost UK more in long run as businesses make plea for help

A prominent think-tank has warned failing to act on the energy crisis could bankrupt energy firms and cost the UK more in the long run as millions await “with dread” to learn the full impact of the energy price cap rise today.

The Resolution Foundation questioned a lack of investment on dealing with the cost-of-living issue, saying “clearly more is going to be needed” on top of tax cuts.

It comes as the Scottish Chambers of Commerce (SCC) issued a desperate plea for support to save businesses they claim are on the brink of collapse.

The economic body has drawn up an action plan, demanding a business relief package similar to the level of support provided during the Covid pandemic and calling for a moratorium on all policy measures that increase business costs for the remainder of the Scottish Parliament.

The think-tanks claimed not acting now could cost the UK Government more in the long run.

Dr Liz Cameron, chief executive of SCC, said: “The scale of the crisis has reached a tipping point and with so many on the brink, we simply cannot afford any more inaction.”

Energy consultants have warned households could see their fuel bills cost more than their monthly mortgage payments next year as energy prices skyrocket.

Energy prices could soar to as much as £6,823 a year for the average household from next April, the latest forecast by energy consultancy Auxilion has revealed, amounting to about £569 a month.

The full extent of the October energy price cap rise will become known today as regulator Ofgem announces the new level for autumn.

It comes as a new poll by Focaldata showed almost half of Britons questioned on the UK’s current energy crisis blame the UK Government more than the energy firms.

The survey of 1,021 adults from across the UK carried out across August 17-18 showed 47 per cent of respondents blame ministers for “failing to prepare and prevent” the huge rise in energy bills.

Johnny Marshall, senior economist at the Resolution Foundation, explained the poorest faced “destitution” in the wake of today’s energy cap price rise and claimed energy companies could go “bankrupt”.

Foreign secretary Liz Truss, the frontrunner to become the next prime minister early next month, has previously ruled out “handouts”, and focused on promising tax cuts rather than targeted support for low-income households.

Explaining this plan, Mr Marshall said the impact on households could lead to “proper destitution” in the winter and would also hit businesses.

He said: “In the short term, people will ration their energy use. That means they’ll be living in households that aren't warm enough, sitting in the dark, having cold food, not having warm showers. It will just be a miserable state of affairs.

“People won’t be able to afford their energy bills, so face going into debt.

“Direct debits will go up, meaning people will be behind on their energy bills and start to build up debt. Neither of those are ideal.

“Both of those could be stopped by bringing in a policy that is focusing on households on lower incomes. It’s not a good approach to let a problem get really bad and then try and solve it.

“This isn’t something that is coming out of the blue, the best approach is stopping it happening.

“That is by making sure people can afford their energy bills rather than not doing anything until it’s already happening.”

The senior economist said people not being able to afford bills would only cost the UK Government more in the long run.

He said: “If a big energy company, that has say five million customers, if a few million of those can’t pay, that company could go bankrupt.

“Bulb went bankrupt about year ago, and that’s going to cost £2 billion so far, and that had one million customers. A bigger one going bust will cost even more.”

Mr Marshall also criticised the plans for tax cuts, saying they favoured the highest earners.

He said: “Social levies go towards insulating households, paying for wind turbines, people’s energy bills.

“The Truss line is she's going to scrap these, but that means paying for them out of taxation instead, which costs £4bn.

“It gives everyone £150 off their energy bill, which works out about £85 over the winter due to higher use of energy, but that’s not enough in terms of bills going up £3,500 a year.

“Clearly more is going to be needed on top of that. The big issues with tax cuts is the impact of high energy costs is most acute on people on low incomes. The people who benefit the most will be those who earn the most.

“The main danger of high energy bills is on households on lower incomes, energy takes up more of their spending.

“The NI tax cut will benefit people who earn more money, so it’s going to miss the crux of what is going to happen with those at risk.”

He added: “You could let all of the extra cost wash through to households, but if you look at those two ways of paying for stuff, going through the taxpayer is much more progressive and much fairer way of doing it.

“It’s all about deciding where these massive costs fall.”

The SCC has called for a temporary cut in VAT bills to 5 per cent to reduce spiralling energy costs for businesses and introduction of an SME energy price cap by the UK Government.

Dr Cameron said: “Since the start of 2021, businesses could see this crisis coming and have been consistently telling us that they are facing unsustainable rises in costs. The impact of these challenges on businesses, consumers and our communities must be tackled with immediate action.”

She added: “The Scottish Government must also take action within its powers to alleviate the cost burden on businesses and households, including pausing burdensome regulations and providing direct financial support.”

Households are bracing for a forecast 80 per cent increase in bills to be announced today going into the winter period, with analysts Cornwall Insight now predicting average costs will increase to £3,554 in October and £4,650 in January.

Citizens Advice Scotland chief executive Derek Mitchell said: “There should be no further increases in the price cap. People will be awaiting today’s announcement with a feeling of dread in the pit of their stomach.

“CABs [Citizen Advice Bureaus] are on the frontline of this cost-of-living crisis and what they are seeing is increasing amounts of people hanging on by their fingertips. They cannot afford another huge increase in bills.”

The Institute for Fiscal Studies (IFS) argued the main case for acting was not economic, but rather just to avoid hardship for households through the winter.

IFS deputy director Carl Emmerson said: “The main case for doing something is not we’ll be better off in ten years, the main case is what will happen to people on fixed incomes or benefits who won’t have their benefits go up to April.

"It’s much more about in large part which households are we really worried about, what levers can we support and how do we help them?

“Pensioners, disabled, low incomes, [we] might also be worried about people on average incomes who we don’t consider rich, but will still struggle with their energy bills. It’s about having a better winter.

“Within two weeks of a new Prime Minister, I think they are going to have to have something in place very quickly, and probably much larger than either Ms Truss or Mr Sunak have promised.

“The Government did have a big package in May. It’s just that the problem has got so much bigger.”

Mr Emmerson claimed failing to act on the cost-of-living could hit households, businesses and also Government spending elsewhere.

He said: “If you don’t act, there may well be an intervention not just to help households, there may be a case to help some businesses and it could introduce long-running scars.

"If you’ve got public services struggling with energy bills, that can have long-term consequences.

“It’s not tackling the NHS backlog or getting the quality of education in the school system that you hoped for that will have long-term consequences now.”