Ministers are looking at expanding a £150 discount on energy bills to more low-income households under plans to means test any extra support required if the Iran war sends prices soaring even higher.
Chancellor of the Exchequer Rachel Reeves said the UK government is contingency planning for “every eventuality” over the economic impact of the Iran crisis, reaffirming that any potential help would be targeted at the most vulnerable.
Planning is taking place “so that we can keep costs down for everyone and provide support for those who need it most,” Reeves told Parliament on Tuesday, arguing she would act “within our iron-clad fiscal rules to keep inflation and interest rates as low as possible.”
The i Paper understands ministers are looking at expanding the number of people eligible for existing schemes such as the Warm Homes Discount, or possibly even pensioner tax credits, to allow higher numbers to benefit from targeted support.
But challenges remain in getting the data needed to deliver such schemes, with the Government said to be hamstrung by multiple data sources. For example, HMRC holds information on what households earn, while energy companies understand what they spend on energy.
It is understood that the Treasury is working with energy companies to best decide where any help with bills can be directed.
The i Paper reported last week that ministers are set to fast-track a project to target energy bill support at lower-income households in response to rising prices driven by war in the Middle East.
What is the Warm Homes Discount?
The Warm Home Discount gives eligible households a £150 discount off their electricity bills, with more than six million households across England, Scotland and Wales currently qualifying for the scheme.
The discount is available for households who receive a range of means-tested benefits including housing benefit, income-related employment and support allowance, income-based jobseeker’s allowance, income support, pension credit and universal credit.
At the start of the year, the Government announced it would be extending the scheme until the winter of 2030-31.
Meanwhile, the Government is concerned about the long-term economic “scarring” from the US and Israel’s attacks on Iran to date, notwithstanding the effects of a longer-term closure of the Straits of Hormuz, one Cabinet minister told The i Paper.
UK government bonds – the cost of borrowing on the international money markets – are already headed for their worst month since the 2022 rout which saw former Prime Minister Liz Truss driven from office. The performance of UK gilts is down nearly 5 percent this month, its largest fall since an 8 per cent tumble under Truss. Higher gilt yields make it more expensive for the UK to both borrow and service interest payments on its debts.
“There may be some economic ‘scarring’ from a longer-term halt to shipping in the Strait of Hormuz, which will lead to gilt yields staying higher for longer,” the Cabinet minister said.
While government borrowing around the world has been hit by the crisis in the Middle East means, the UK’s dependency on imported energy makes it particularly vulnerable to supply disruptions.
urging energy prices have fuelled fears that the UK could be facing a period of stagflation, where high inflation prevents the central bank from cutting interest rates to support a stagnant economy.
While the rise in borrowing costs is already making it harder for the government to meet its self-imposed fiscal rules, Prime Minister Sir Keir Starmer and Reeves are also under political pressure, including from a minority of voices within their own Cabinet, to borrow more to soften the blow on households. Petrol prices are already rising and energy bills are due to rise by 20 per cent from July.
Culture Secretary Lisa Nandy is understood to be one senior minister making the case for increased borrowing at a Cabinet meeting last week. “The Cabinet went round the houses on tax and borrowing,” one Cabinet source familiar with the discussions said. “But there is no appetite for more borrowing.”
The source added there is no appetite in Cabinet to increase taxes either, adding, “It’s too early to know if there will be tax rises.”
The Chancellor told MPs on Tuesday that the Government would “learn the mistakes of the past”, saying Truss’s “unfunded, untargeted package of support” for energy bills had pushed up borrowing, interest rates and mortgage rates – a cost she said could not be repeated.
Truss’s package, which was introduced following Russia’s invasion of Ukraine in 2022, had capped typical household energy bills at £2,500 annually to combat surging costs.
Meg Hillier, Labour chair of the Commons Treasury Committee, quizzed Reeves on whether the Government had the data it needed to operate a successful targeted energy support programme.
Reeves said: “What we have been doing is working with the Department for Work and Pensions, with local government and others to ensure that we will be able to target support at those who need it most.”
Her remarks followed an emergency Cobra meeting on Monday evening, which included senior ministers and the Governor of the Bank of England, focused on responding to the impact of the current crisis.
She said the “full economic impact of the war remains uncertain”, but argued that it made the Government’s economic plan “even more important – to build prosperity that is secure and resilient, and to bear down on the cost of living”.
Concern is growing over the impact the closure of the Strait of Hormuz, a crucial passage for oil and liquefied natural gas, could have on energy bills.
Prices have already begun to climb, with forecaster Cornwall Insight predicting Ofgem’s July price cap will rise from £1,807 to £1,973 a year for an average household.
However, other estimates suggest the price cap could climb as high as £2,500 if wholesale prices do not fall.
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