Categories: Economy

Removing the energy price guarantee will worsen the recession

Markets like certainty, we’re told. But people also like certainty, which is why I can’t help but think that Jeremy Hunt made a mistake by tearing up the energy price guarantee.

The new Chancellor has tried to place a very large expanse of clear blue water between him and his predecessor: to show that he is very different from that nice Kwasi man who wanted to give us all the money and much rather took it from us.

And so, after three of the most amazing economic weeks I’ve seen in my time at This is Money – a period that has spanned the credit crunch, financial crisis, eurozone debt crisis, Brexit and Covid lockdowns – Hunt has thrown almost everyone out of Kwarteng’s fateful tax cuts.

Heavy drug: New Chancellor Jeremy Hunt tore up Kwasi Kwarteng’s tax cuts, then also scrapped the two-year energy price guarantee for good measure

But that wasn’t enough for our tough medicine chancellor.

He also decided to go a step further and announce the energy price guarantee that keeps the price cap at £2,500 for the average household would not last for two years, as we were all assured, but would end in April.

This was an added bonus measure meant to please those pesky markets, but it came with the kicker that the average household’s energy bill is now expected to rise to around £4,300, according to figures from Cornwall Insight.

To put this in context, that’s a 73 percent increase over the already very high energy bill.

Take into account what households actually pay and in April people’s annual bills are expected to be 105 percent higher than now

In addition, bear in mind the abolition of the £400 all-energy discount from Rishi Sunak, which also expires in April, and the annual cost of the energy price guarantee is £2,100.

Take into account what households actually pay, and in April people’s annual bills are expected to be 105 percent higher than they are today.

That would also make gas and electricity prices 3.4 times higher than in September 2021.

The average energy price cap rate, if forecasts are correct, will be around £360 per month from April.

For any unfortunate household that, between now and then, stares down the course of a fixed-rate mortgage for renewal, there will be a double whammy to their finances.

With an average fixed rate of two and five years of around 6.4 percent, a borrower with a £200,000 mortgage over 25 years with a two-year term will see monthly payments increase by around £450.

This is a huge strain on household budgets and one that most people cannot afford.

Of course, even if key rates continue to rise, mortgage rates could fall in April next year — it feels like we’re at the height of the storm right now.

Likewise, if gas and electricity prices fall, those energy price cap predictions may prove too pessimistic and bills will be cheaper.

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But many people are unlikely to count on that glass half-full scenario.

Even among those I speak to whose mortgage solutions aren’t ending for a year or more, a common thread running through the conversation is concern about how much their monthly costs will increase when it’s finally time to move to refinancing.

The exact same fears were voiced about utility bills through the end of the summer, about the looming price cap to £3,549 in October and forecasts of even higher bills ahead.

For many people it was an ominous statement… they know what targeted support means: it means they won’t get it

Until Hunt dropped his energy price guarantee bomb this week, the only good news was that at least we didn’t have to worry too much about energy bills thanks to Liz Truss’s two-year lock-in.

That has now been swept away and we have only the vague promise of new aid with a ‘Treasury-led review’ to find a way to target aid that ‘costs the taxpayer significantly less’.

For many people, that was an ominous statement.

They know what targeted support means: it means they’re not getting it.

It’s completely understandable why Jeremy Hunt felt the need to limit the energy price guarantee, predicted it would be hugely expensive, amounted to a blank check and did little to promote energy efficiency.

Yet it is not the fault of British households that their energy bills have skyrocketed and that they needed help across the board.

They are not responsible for years of government mismanagement of the energy market, a switch to renewable energy that somehow left us still paying fossil fuel prices, and a shift towards over-reliance on foreign gas when closing storage facilities. .

Vladmir Putin has weaponized energy prices in his war against Ukraine and one might also wonder whether the impact of that should really be put on ordinary people’s energy bills.

The energy price guarantee was an imperfect stopgap, but the general response was that for lack of better ideas, it at least helped everyone – avoiding tricky cliff edges and winning the support of the higher-earning taxpayers who will eventually pay the most for – and gave people security.

The markets had no problem with it either, gold yields didn’t even budge when it was announced, despite immediate forecasts of eye-watering costs.

But now the security of household energy bills has been blown out of the water and people are crouching even further.

This is likely to lead to a more painful recession and unless a fix is ​​found soon, we will spend the next six months discussing what it could be and how bad the bills are going to get.

Even if the new Chancellor wanted to limit the energy price guarantee, I think it would have been wise to sit still until a replacement is found, otherwise energy prices seemed to fall, and save British households another dose of energy. to be worried.

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