Rishi Sunak has thrown a financial lifeline through lower energy costs

[ad_1]

Equally important for Sunak, lower rates should protect the Treasury from pouring out billions of pounds in handouts, giving the prime minister and chancellor Jeremy Hunt more breathing room as they try to fix Britain’s faltering finances.

“There may be some good news for Hunt,” says Carl Emerson of the Institute for Fiscal Studies.

“At the time of the Fall Manifesto, there was no room to rise against their desire to fall into debt. Things could be a little better than they looked at the time.”

Weather is down to sheer luck and can of course change. However, there are other, more sustainable factors at work.

Prices have also fallen due to the influx of liquefied natural gas (LNG) into Europe, thanks to slumping demand from Covid-hit China. Successful leadership in filling gas storage tanks across the continent has also relieved pressure.

Strong power generation from renewable sources, such as wind and solar power, in the UK has reduced gas demand as well. “Zero carbon” sources including nuclear power supplied a record 87.6 percent of Britain’s electricity needs on Wednesday.

Lower gas prices reduce the financial burden on the government due to the energy price guarantee, which was first introduced by Sunak’s predecessor Liz Trus.

Under the scheme, the government is on the hook for a portion of consumer gas and electricity bills above a certain threshold.

This means the typical household will pay no more than the equivalent of £2,500 a year for energy this winter, with the figure set to rise to £3,000 in April as subsidies become less generous.

By the second half of this year, analysts predict, the plan may not even be necessary.

That’s because an energy price cap — a separate limit on what suppliers can charge that is set by wholesale prices — is on its way to not guaranteeing a price.

Based on today’s wholesale gas prices, Martin Young, energy analyst at Investec, says the price ceiling is likely to be £2,640 in July before rising to £2,700 in October.

He estimates that more favorable conditions would mean the Treasury spends £3bn on price guarantee in the 2023/24 financial year, a £7bn saving compared to mid-December when market rates were close to £10bn.

“It’s definitely kind of a relief,” he adds.

Separate price ceiling forecasts published by advisers at Cornwall Insight on Wednesday were in a similar playing field to Investec’s, at £2,800 for July and £2,835 for October.

Samuel Tombs, an economist at Pantheon Macroeconomics, believes that the price guarantee likely won’t cost the government anything from the second half of this year, freeing up money for other uses.

“They could use the money to support families in other ways – such as reducing the guarantee back to £2,500, or by increasing the personal income tax allowance,” he adds.

However, before then, there will be some short-term pain for households and the closet. Between April and June, both Investec and Cornwall Insight believe the price ceiling will hover around £3,500, requiring the government to continue subsidizing bills.

Lower gas prices are also likely to slow the pace of inflation somewhat. James Smith, a market economist at ING, thinks it could cut about half a percentage point from price hikes. It may also indirectly lower inflation by allowing companies to raise prices less.

Slowing inflation puts less upward pressure on interest rates, and the government benefits from lower interest rates than markets expected in November, making debt less expensive to service.

Pantheon Macroeconomics expects interest payments to be around £10 billion lower than the Balance Sheet Office’s forecast for 2023/24 and £30 billion lower than its five-year forecast.

All of this means that some of the spending cuts announced in the Chancellor’s fall statement may “never need to see the light of day,” according to Paul Dales, chief UK economist at Capital Economics.

[ad_2]