It’s basic economics Chancellor

1st Nov 2021


A few weeks ago, I argued that to help with the rising cost of energy bills, the Chancellor could scrap VAT on energy bills. For average users on the Price Cap of £1277 for dual-fuel bills, it would save consumers £65 a year – not a huge amount, but it would help. The Daily Express took up our cause and joined in the chorus. The point was also made that during the Brexit referendum campaign, both Boris Johnson and Michael Gove argued that VAT on energy bills could be scrapped if we left the EU.

The responses to my call were interesting. Several suggested that making energy bills cheaper would be the wrong call because it dissuaded people from making their homes more energy efficient, as if high prices were a price worth paying. I suggest these people are wholly mistaken in their worldview. The misery faced by millions who struggle to pay more; those who will now live in colder homes to keep bills down; those who will go into debt with the consequences this brings for them; it is not a price worth paying.

There was another argument, interestingly made by former civil servants and energy pundits, who argued that scrapping VAT on energy bills would benefit the most well off and therefore should be avoided. Commentating on his budget, the Chancellor made the very same point (referencing these so-called experts).

But such thinking is lazy. It’s shoddy. It’s also wrong.

As my former A level students will tell you, VAT is a proportional tax. It is levied at the same rate, 5 per cent, regardless of income. And while it might be true that some higher earning consumers spend more on energy, not all do and vice versa. Some of the worst cases of fuel poverty are experienced by those on limited incomes but living in inefficient homes, with expensive heating (direct electric). These would be the biggest beneficiaries of a VAT cut. Energy is a basic commodity and VAT impacts differently compared to purchase of a luxury yacht.

And on a wider point, the £65 a year tax cut matters more for someone earning £15,000 a year compared to someone using more energy (say 50 per cent more), having a tax cut of £97 but whose earnings are £150,000 a year.

It is the very point that Johnson and Gove eloquently made in 2016 but argued against by Rishi Sunak last week. It’s basic economics.

Best wishes

Mike Foster, CEO

Mike Foster

EUA's Chief Executive


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