Sunak announces £400 energy bill discount for all households and a windfall tax

The Chancellor set out a £15 billion emergency package to help ease the cost-of-living crisis.

26 May 2022

Every household will get a £400 energy bill discount under an emergency cost-of-living package that will be partly funded by a £5 billion windfall tax on oil and gas giants.

Chancellor Rishi Sunak bowed to pressure on Thursday to unveil £15 billion of measures to tackle the impact of soaring inflation, which has reached a 40-year high.

As well as the universal payment, there was targeted support for the poorest, the elderly and the disabled in the package that will be two-thirds funded by borrowing.

ECONOMY Inflation

The Chancellor acknowledged that high inflation is causing “acute distress” for people in the country, telling MPs: “I know they are worried, I know people are struggling.”

He said the Government “will not sit idly by while there is a risk that some in our country might be set so far back they might never recover”.

The £6 billion announcement of £400 in universal support from October will replace the initial plan for a £200 loan, with Mr Sunak scrapping the requirement to repay the money.

Mr Sunak and officials refused to use the term windfall tax to describe the levy on the soaring profits of energy firms, as he was accused by Labour of having been dragged “kicking and screaming” into a U-turn on the policy the Opposition has spent months calling for.

Other measures announced by the Chancellor included:

– A one-off £650 payment to more than eight million low-income households on benefits, paid in two instalments in July and the autumn at a cost of £5.4 billion.

– A £300 payment to pensioner households in November/December alongside the winter fuel payment, costing £2.5 billion.

– £150 to individuals receiving disability benefits, worth a total of £0.9 billion, paid by September.

The plans will be funded by around £10 billion of extra borrowing, but Mr Sunak insisted he had a “responsible fiscal policy”.

The package would mean that almost all of the eight million most vulnerable households would receive at least £1,200 of support, including a previously-announced £150 council tax rebate.

A further £500 million will be allocated to the fund administered by councils to help households facing extra hardship.

The Chancellor stressed the need to keep the public finances under control and set out how a tax on oil and gas firms – who have benefited from globally high prices driven by post-pandemic demand and the war in Ukraine – would raise around £5 billion to help meet the cost.

The idea of a windfall tax had faced resistance in Government, with Mr Sunak himself among ministers to warn about the impact it would have on future investment.

But the Chancellor said his plan for a 25% energy profits levy would be coupled with a new incentive, almost doubling the tax relief available on investment.

The timing of Mr Sunak’s announcement has been viewed with suspicion in Westminster, coming a day after the release of Sue Gray’s report detailing the lockdown-busting parties in No 10.

But the Chancellor denied it was a distraction tactic, insisting to reporters “the timing of today is because we now have more clarity” about energy bills.

Mr Sunak stopped short of also slapping the new levy on electricity generators, although he said the Treasury was evaluating the scale of the profits being made in the industry and what steps could be taken.

Consumer Prices Index inflation rose to 9% in April and consumers are braced for the energy price cap to rise by more than £800 to £2,800 in October as the squeeze on living standards continues.

The Chancellor told MPs: “The high inflation we are experiencing now is causing acute distress to the people of this country.”

He insisted “we can get inflation under control” after Bank of England governor Andrew Bailey admitted feeling helpless in the face of rising global inflation.

“It is not some abstract force outside our grasp. It may take time, but we have the tools we need and the resolve it will take to reduce inflation,” Mr Sunak added.

Shadow chancellor Rachel Reeves said Labour had been calling for a windfall tax since January and Mr Sunak had been dragged “kicking and screaming” into a U-turn.

“It feels like the Chancellor has finally realised the problems the country are facing,” she said.

Mr Sunak also faced questions about his claims to be helping families cope with the rising cost of living after imposing a series of tax increases.

Liberal Democrat leader Sir Ed Davey said: “It is the Sunak scam, promising you help but picking your pockets while you’re not looking.”

Tories also criticised Mr Sunak for announcing the new tax.

Backbencher Richard Drax told him: “Throwing red meat to socialists by raising taxes on businesses and telling them where to invest their money is not the Conservative way of encouraging those who create our prosperity and jobs to do just that.”

Former Cabinet minister David Davis said: “Is there not a risk that the Exchequer will lose more in growth than it will gain in a windfall tax?”

The Confederation of British Industry’s chief economist Rain Newton-Smith acknowledged the need to help households through “one of the worst cost-of-living crunches in recent memory” but the windfall tax “sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere”.

The Treasury said the tax would be phased out when energy profits returned to “historically more normal levels”.

Officials would not define what the level looked like but insisted the tax would expire in legislation by the end of 2025.

Torsten Bell, director of living standards at think tank the Resolution Foundation, said the package was “big and very welcome indeed”, filling the “huge gap in previous announcements with large targeted support for those hardest hit”.

Paul Johnson, director of the Institute for Fiscal Studies economic think tank, said the package announced by Mr Sunak means that “on average the poorest households will now be approximately compensated for the rising cost of living this year”.

Officials conceded there is a hidden £6 billion cost of the announcement over the next five years because the original £200 loans for energy bills will no longer be paid back over the period.

They also acknowledged that people who pay bills at multiple homes, such as those with holiday homes, will receive multiple discounts.

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