Keir Starmer has pledged to freeze fuel bills by extending windfall tax, but would his cost-of-living plan work?

Labour has unveiled its plans to freeze fuel bills by extending the windfall tax, but there are concerns over whether it will work.

Sir Keir Starmer claimed on Monday he was setting out a “very strong, robust, costed plan” to stop energy bills rising over the winter, paid for in part by an extension of the windfall levy on the profits of oil and gas companies.

The Labour leader claimed scrapping the planned increases in the price cap would keep inflation down, seeing it peak at about 9 per cent rather than the 13 per cent the Bank of England is forecasting.

Costing £29 billion, the plan to address the “national emergency” would freeze the energy price cap at its current level of £1,971 for six months from October, saving the average household £1,000.

Sir Keir Starmer during a visit to ParkLife Heavitree in Exeter to discuss the cost of living. Picture date: Monday August 15, 2022.

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This would only last six months, prompting economists and think-tanks to warn the plan could cost as much as the Covid furlough scheme if extended, and also wouldn't actually fix the crisis, just delay it.

Conservative former chancellor Philip Hammond described Labour’s plan as “a populist response that is untargeted”, adding: “I’m sure everybody would like to have their energy bills frozen this winter, but not everybody needs that support from the taxpayer in the same way.”

It comes with the public facing soaring bills in October, prompting 70 charities and community organisations to sign an open letter urging the Tory leadership candidates to act.

In the letter, co-ordinated by the Joseph Rowntree Foundation (JRF), Liz Truss and Rishi Sunak were warned families on benefits face a £1,600 shortfall over coming months despite receiving £1,200 in the last Government support package.

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Institute for Fiscal Studies

The Institute for Fiscal Studies (IFS) questioned the cost of the package and suggested inflation would still be a problem after six months.

Senior research economist at the IFS Tom Waters explained: “It just delays the point at which energy prices rise, so then inflation will rise, and Government debt interest payments will therefore also rise.

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"Their plan is to do it for six months, so under that plan you’ll still get inflation, it’s just delayed by six months.

“They will fund a quarter of it by reducing the interest that the Government pays on some of its debt, linked to inflation.

“The interest payments are linked to inflation, so you don’t avoid them entirely. It’s a fiscal illusion.”

Mr Waters said a “key advantage” of the policy was that it would “directly compensate” households that use a lot of energy, so those most affected by the pay rise.

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However, he pointed out poorer households use less energy, so will get less benefit from it.

Mr Waters said: “Under the Government grant scheme people can spend it on the energy price rise or food.

“Labour’s plan is specifically subsidising energy.”

The economist also pointed out it was “unlikely” the pressures of inflation would be gone in six months.

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He said: “If the Government actually did Labour’s proposal, it would come under a lot of pressure to extend this from six months to a year, and then it doesn’t cost £30 billion, it’s £60bn.

"It’s very costly. A year is getting on to what furlough cost.”

Centre for Policy Studies

The Centre for Policy Studies (CPS) claimed the plans could help people through the winter, but warned the issue was more about supply.

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Think-tank senior researcher Karl Williams said: “Labour’s call for an energy bill freeze funded by a punitive tax on oil and gas producers is highly risky and would ultimately prove self-defeating.

"Even if the sums raised through a damaging windfall tax are enough to fund Labour’s plans through this winter, energy prices could well remained elevated for the next few years, at which point the Government would be trapped propping up utility companies out of general taxation – nationalisation in all but name.

“We must allow price signals to do their work, rebalancing markets by curbing demand and incentivising investment in bringing more energy supplies onstream, including in the North Sea.

"We must also target support to the most vulnerable in what is likely to be a very difficult winter.”

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The CPS has previously called for green levies to be scrapped from energy bills and shifted on to general taxation to reduce the burden on households.

Energy Action Scotland

Energy Action Scotland praised the proposals and labelled the new tax “fair and just”.

Frazer Scott, chief executive of Energy Action Scotland, said: “Labour’s proposed action would increase the affordability of energy bills in comparison to where they are headed.

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"Households' energy bills should not be allowed to reach the forecasted levels, but held at no more than April levels. The April level needs a full financial support package to ensure that those in the most vulnerable circumstances are protected.

"Accelerating energy efficiency is an absolute must and should not be held back under any circumstances. The cheapest energy is the energy that you don’t consume.

"We welcome a further windfall tax on companies in energy market who have made exceptional excessive profits which would be fair and could be used to support the households most in need. This is fair and just.

"Any and all support to low-income houses is to be encouraged as it these people who will suffer most this winter with their health, threatening the lives and wellbeing of tens of thousands.”

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Offshore Energies UK

OEUK, the leading trade body for the UK's offshore energy industries, claimed the move would deter investment and put more cost on consumers.

Representing those who would be hit by the tax, the industry body claimed the policy would not raise enough funds, and would damage the sector and production could plummet.

OEUK’s sustainability director Mike Tholen said: “The Government has a duty to both protect consumers and to ensure national energy security. Labour’s proposals to hit our own producers with further taxes will discourage investment and so risk a rapid decline in UK production.

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"That would mean buying more energy from abroad, increasing the UK’s trade deficit and further risking UK energy security.

"It comes at the worst possible time for the UK offshore sector, which is still reeling from the introduction of the windfall tax in May.”

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