Rachel Reeves should not be rushed into action on energy bills

A mere week ago, the chancellor was lauding the success of her economic plan. Unveiling the spring forecast to MPs, Rachel Reeves trumpeted the government’s success in getting inflation down, in contrast to the spike for which she blamed her Conservative predecessors rather than the disruption to international energy markets caused by Russia’s 2022 invasion of Ukraine.

At the time she was looking forward to further falls in inflation and more interest rate cuts from the Bank of England, and she will have been hoping that the latter, combined with a growth upside, might strengthen her fiscal position when she came to the autumn budget. By the end of the day, Reeves’s optimism already looked out of date.

A week is a long-time in economics

A week ago, the Office for Budget Responsibility (OBR) had already warned that its forecast was done in calmer times and issued a note of caution by stating that “conflict in the Middle East, which escalated as we were finalising this document, could have very significant impacts on the global and UK economies”. While Reeves only nodded to those risks, six days on she returned to the Commons with a Middle East update to explain how those risks were already materialising. She should be relieved that her commitment to only a single fiscal event a year meant that she had not committed to any new policies last week that needed to be reversed instantly. 

In the Commons, Reeves faced pressure from two quarters. The first was to help people with the impacts of soaring energy prices, the second was on speeding up defence spending. The potential cost of both to the Exchequer is very sizeable.

Reeves needs to develop a much more targeted approach to help when necessary

Immediate action is rightly focussed on people who depend on heating oil where the oil price spike seems to be being translated into rapid price rises. Reeves has already said she will ask the Competition and Markets Authority (CMA) to investigate price gouging, but it is clear that these households – predominantly rural or in Northern Ireland – are most exposed. In the long run, many of these households should be prime candidates to switch to heat pumps and/or solar panels which will reduce their vulnerability, but that will not help with a bill that has escalated overnight.

Other households are – for now – protected by the price cap and many may have taken advantage of the fixed price deals which have only just been withdrawn by energy suppliers. It is arguable that people who did not switch to fixed deals are clearly more willing to bear the risk of price volatility and should not be protected – but there will also be people whose fixes expire, and many of the people relying on the cap will turn out to be less savvy consumers rather than price risk takers. But the current price cap runs to the end of June, and the new one will be set at the end of May. The Treasury needs to use that time to develop a very targeted scheme for deployment either when this cap expires or in the autumn if – and only if – high prices are sustained. Meanwhile, the more urgent problem is with heavy industrial users who feel the price impacts immediately. The chancellor pointed to the help already coming, but she may need to do more to help businesses weather a temporary shock.

The calls Reeves should resist are those arguing she should immediately cancel the restoration of the 5p cut in fuel excise duty that Rishi Sunak introduced in his first response to the Ukraine spike. That is not due to take effect until September. It may be that pump prices are then so high this is a non-starter politically, but if prices have come back down then Reeves would regret backing down too soon. Instead, she should simply commit to keeping under review.

Reeves will face a hard time meeting her twin objectives of protecting households and the public finances

Unless the latest price shock fades very rapidly, the chancellor will probably have to act.

Her last big economic idea was what she called “securonomics”, which was a recognition of the debilitating impact of financial precariousness. She has talked much less about it recently, but it has become painfully relevant again. Indeed, since the money-no-object responses to the Covid crisis under Boris Johnson and Rishi Sunak and the blunderbuss energy price guarantee under Liz Truss, expectations of state protection against unwelcome external shocks have risen.

The chancellor’s problem is that those two massive interventions have driven UK public sector net debt higher. Government debt has gone from 79% of GDP in 2018/19 to 94.8% in 2026/27 (the pre-2007 median was 36.6%), and the OBR is already forecasting that the UK will be paying almost £110bn in debt interest next year. That is a more difficult starting point for offering help than any of her recent predecessors have faced and shows that if repeat crises are becoming more commonplace, and there is a rising expectation of government protection, we will need stronger underlying public finances to be able meet them.