Another £12bn needed to keep UK energy bills support at same level, says IFS
Mark Sweney
The government needs to spend another £12bn to maintain the scale of support pledged to help families cope with the cost of living crisis as the energy prices continue to soar, according to analysis by the Institute for Fiscal Studies (IFS).
The economics thinktank said that the additional funding will be needed to achieve the £24bn package of aid announced in May, largely because the forecast increase in energy prices over the next year has jumped from 95% to 141%.
This means that working age benefit claimants are now on course to see their real income fall by £620 over the year.
The IFS says that the government would need to double the current £650 grant to those on benefits to protect them, as well as help low income pensioners and families in work, at a cost of £5.5bn.
Similarly, the cost of maintaining the £150 council tax rebate and £400 energy discount will now cost the government another £7bn if it wants to continue to cover around half the increase in costs a typical family will be hit by over the year.
Paul Johnson, director of the IFS, said:
As prices of essentials including food, heating and fuel continues to rise, families on low-incomes are facing more uncertainty and pressures. The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12bn, and a package on that scale will still leave many households much worse off.
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Today’s commodity price sell-off is giving a good case study of the importance of mining and oil companies to the FTSE 100.
London’s benchmark index is the only one of Europe’s main markets to have dipped into the red this morning. Europe may have its fair share of old economy stalwarts (compared to the US’s tech-heavy stock benchmarks), but the FTSE 100 is uniquely exposed to commodities among its peers (and that’s even after a giant steel company, Evraz, was suspended because it was owned by Russian oligarch Roman Abramovich, who is under UK sanctions).
Oil isn’t the only commodity under pressure. The benchmark LME nickel contract dropped more than 3% this morning, silver is down 2.3%, platinum has fallen 2.6%.
That commodity sell-off has dragged back the FTSE 100. It is just about in the red, with miners Antofagasta, Anglo American and Rio Tinto plus supermajor oil companies Shell and BP among the 10 biggest fallers.
Craig Erlam, senior market analyst at trading platform OANDA, said:
The figures from China really are a concern and the authorities have a big job on their hands arresting flagging domestic demand. That doesn’t bode well for oil demand especially when the country remains so committed to zero-Covid. And with cases continuing to rise, the downward pressure on oil prices could intensify.
Throw in a deal between the US and Iran and we may be able to wave goodbye to triple-digit oil prices for a while. Of course, it doesn’t matter how close the two are, a deal can never be assumed to be done until it’s signed. If it does get over the line, we could see oil slip below $90 and perhaps even stay there.
And just like that Brent crude oil prices have dropped by more than a dollar: as I write it’s at $94.67. That’s a $3.40 drop for today, or 3.6%.
The most obvious cause appears to be jitters caused by China’s weak economic data. A major slowdown would likely drag back demand for oil.
And here is a reminder of what an energy crisis can do: Kosovo is starting intermittent power cuts because it is too expensive to import energy.
“Consumers will have six hours on and two hours off,” a spokesman for Kosovo’s energy distribution company, KEDS, told Reuters.
Kosovo relies almost exclusively on coal (which is also very polluting) but consumption of up to 800 megawatts (MW) is far outstripping supply of 500MW. Reuters reports:
In a statement on Sunday, KEDS said that it and the country’s transmission system operator, KOSTT, could not afford to import electricity and must rely on domestic production.
About 90% of the country’s electricity production is from coal, and the power utility KEK has said it had shut down almost half of its generators for regular maintenance to prepare them for winter.
Oil prices have dipped further: the price of a barrel of Brent crude for October delivery is now at $96.07 – $2 down for the day.
Prices are near their lowest level since markets reacted to Russia ratcheting up tension with Ukraine ahead of its invasion. The lowest point this month on 5 August was below $93, a level not seen since 21 February, three days before Vladimir Putin ordered the start of the invasion.
The price of West Texas Intermediate, the North American benchmark, has also fallen further: futures prices are down 2.3%, or $2.11, to just under $90 per barrel.
The then UK chancellor Rishi Sunak (now in the race to be prime minister against Liz Truss) told MPs in February that the government’s aim was to make up for half the cost of energy price increases to households.
In May, the government updated the support to be worth £24bn. The Institute for Fiscal Studies (IFS) lays out the “five main strands”:
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£400 to all households labelled as an “energy discount” that will be subtracted from energy bills.
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£150 for all households in council tax bands A-D (around 80% of households).
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£650 for any family on means-tested benefits.
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£300 for pensioners on means-tested benefits.
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£150 for those on a disability benefit.
That meant that the government was covering about three-quarters of the £33bn increase in energy bills that was expected then, in May.
The problem is that costs have continued to surge since then, to the point that bills are expected to more than double from already elevated levels come the winter.
The consultancy Cornwall Insights forecasts that bills could rise to £4,266 in January and £4,426 in April before easing somewhat – but will remain elevated until we see a proper decline in wholesale prices. Given the cap is currently £1,971, it is easy to see how the price of keeping support at the same level starts to stack up.
Another £12bn needed to keep UK energy bills support at same level, says IFS
Mark Sweney
The government needs to spend another £12bn to maintain the scale of support pledged to help families cope with the cost of living crisis as the energy prices continue to soar, according to analysis by the Institute for Fiscal Studies (IFS).
The economics thinktank said that the additional funding will be needed to achieve the £24bn package of aid announced in May, largely because the forecast increase in energy prices over the next year has jumped from 95% to 141%.
This means that working age benefit claimants are now on course to see their real income fall by £620 over the year.
The IFS says that the government would need to double the current £650 grant to those on benefits to protect them, as well as help low income pensioners and families in work, at a cost of £5.5bn.
Similarly, the cost of maintaining the £150 council tax rebate and £400 energy discount will now cost the government another £7bn if it wants to continue to cover around half the increase in costs a typical family will be hit by over the year.
Paul Johnson, director of the IFS, said:
As prices of essentials including food, heating and fuel continues to rise, families on low-incomes are facing more uncertainty and pressures. The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12bn, and a package on that scale will still leave many households much worse off.
The FTSE 100 has gained 0.3% in the first minutes of trading in this mid-August week, hitting its highest point since early June.
The top gainer is RS Group, formerly known as Electrocomponents, amid speculation that it could be in line for a takeover bid.
Pharma group AstraZeneca has gained 2.5% after it said that its breast cancer drug Enhertu had shown positive trial results.
Elsewhere in Europe stocks are looking positive. Here are the snaps from Reuters:
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EUROPE’S STOXX 600 UP 0.4%
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FRANCE’S CAC 40 UP 0.4%
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SPAIN’S IBEX UP 0.2%
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EURO ZONE BLUE CHIPS UP 0.4%
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GERMANY’S DAX UP 0.4%
China lockdown recovery boost ‘fizzled out’ amid signs of economy slowing
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
China’s economy is showing signs of slowing activity as a series of economic indicators suggested industrial output and retail sales growth were below economists’ expectations.
Oil prices dropped on Monday morning after the data were published; slower economic activity in the world’s second-largest economy would likely lead to less demand for oil. The price of a barrel of Brent crude for October delivery dropped by 0.8% to $97.36, while North American benchmark West Texas Intermediate dropped by 0.9% to $91.13.
Chinese industrial production still grew, but it was up by only 3.8% on a year-on-year basis (slower than the 4.3% growth expected), whilst retail sales were up 2.7% year-on-year, significantly slower than the 4.9% expected rate. The data suggest that both industry and consumers may be reining in spending, while there were also signs that China’s property market is also struggling. Property has long been a source of growth, but economists have been questioning its sustainability.
It was a “sharper loss of momentum than expected”, said Craig Botham, chief China+ economist at Pantheon Macroeconomics, a consultancy. He said:
The slowdown in Chinese industrial production supports the narrative that stronger performances in May and June were primarily the result of a reopening rebound, and that with order backlogs now cleared, China’s factories will increasingly run idle once more.
Shock July data out of China as economy battles Covid Zero, weakening demand, housing slump. Yoy:
Retail sales 2.7%; est. 4.9%
Industrial output 3.8%, est. 4.3%
Home sales -28.6%
Property investment -12.3%
Crude steel output -6.4%Youth unemployment rises to record 19.9%
— Richard Frost (@frostyhk) August 15, 2022
The People’s Bank of China, the country’s central bank, quickly responded by cutting borrowing costs over one week and one year, in a bid to get more money into the economy.
The cut was “a surprise move” to cut interest rates to support the economy following “weak” economic data, according to Mohit Kumar, a managing director for interest rate strategy at Jefferies, an investment bank.
Julian Evans-Pritchard, senior China economist at Capital Economics, a consultancy, said:
The July data suggest that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector. We think the outlook will remain challenging in the coming months as exports turn from tailwind to headwind, the property downturn deepens, and virus disruptions remain a recurring drag.
You can read more on the China data here:
In the UK the big news driving the day is Labour leader Keir Starmer, who has returned from holiday with a £29bn plan to freeze energy bills.
The Guardian’s Andrew Sparrow and Phillip Inman report:
Starmer said the plan would cost £29bn over the winter and that it could be funded by extending the scope of the windfall tax on energy companies (raising £8bn), halting the proposed £400 payments for all households offered by the government to compensate for the price cap rise scheduled for October (saving £14bn), and lowering government interest payments on debt (saving £7bn), which Labour said would be possible because its plan would reduce inflation.
Whether it would reduce inflation in the longer term is open to debate, but the move will certainly put clear water between Labour and the two Conservative leadership candidates, Rishi Sunak and Liz Truss. Sunak has pledged to spend about £10bn on the crisis, while Truss has not revealed costings of how she will support households. Truss is seen as the frontrunner in the race because of her poll lead among Conservative party members.
Remember, how the government responds is seen as the key variable in how the UK economy will perform in the coming months. The Bank of England’s forecasts of a long recession and 13% inflation are predicated on fiscal policy staying the same. That seems unlikely, given the huge scale of energy price increases expected in the winter if wholesale oil and gas prices remain high.
