John Healey is unlikely to recommit to keeping VAT off household electricity bills beyond March in this month’s Budget – as the Chancellor prepares to push many of his biggest spending decisions into next year.
Sources familiar with the discussions have described the 28 October statement as a “see you next year” Budget, with major choices left to the spending review.
This is understood to include some of the time-limited measures introduced by Andy Burnham when he entered Downing Street to give families some “breathing space” – such as the removal of VAT on energy bills.
Announcing the cut on 21 July, days after taking office, Burnham said he was taking “immediate action to cut taxes on energy bills” as part of a cost-of-living package.
“I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister,” he said.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”
Sharp energy price rises
VAT on household electricity was cut from 5 per cent to zero from 1 October, but only until the end of the 2026-27 financial year on 31 March.
Gas bills were not included and still carry the 5 per cent VAT. The cut is being paid for by scrapping the £1.8bn digital ID programme, and ministers said at the time that any decision to extend it would be taken at the Budget, in line with the fiscal rules.
That decision is now likely to be put off to the spending review next year, which reports suggest could be delayed until as late as next autumn.
The Chancellor or Prime Minister could still announce plans to extend the cut between the end of October and April, and kick the problem of paying for it into the spending review, likely to be next autumn.
This buys time for bills to fall because of an improving outlook in the Middle East. The issue will also become less volatile as winter ends.
The cut was expected to take around £45 off the annual Ofgem price cap, on top of the £150 reduction announced in last November’s Budget.
It comes as households face a sharp rise in energy costs this winter, driven by the conflict in the Middle East. Ofgem’s price cap rose by 4 percent to £1,723 a year for a typical household on 1 October, and analysts and suppliers are forecasting a further rise of between 16 per cent and 21 per cent from January.
The regulator will confirm the January cap by November 25.
Alarm at forecasts of even higher bills
Rather than universal help on energy bills, the Chancellor is expected to focus on those on the lowest incomes.
The Guardian has reported that Healey is considering spending more than £1bn on support for poorer households in the Budget, with most of it likely to go on increasing the Warm Home Discount, a £150 reduction on bills for around six million households on means-tested benefits.
Ministers are said to be alarmed by forecasts that the price cap could rise by as much as £442 in January, wiping out the saving from the VAT cut.
Energy Secretary Miatta Fahnbulleh is reported to have pushed for wider help for all households, which the Chancellor has resisted.
In opposition in 2022, Healey backed Labour’s call to scrap VAT on home energy bills for a year alongside an expanded Warm Home Discount.
Speaking as as he attended the International Monetary Fund meeting in Bangkok, Thailand, on Thursday, Healey said the public should be prepared for a tough Budget which may not provide Government departments with extra cash to cover pay rises for doctors and nurses.
The Chancellor said the British people recognised the difficult nature of public finances due to ongoing global turmoil, and expected Government departments to “manage with the budgets we’ve got”.
In an interview with the BBC, Healey was asked if the coming fiscal statement to the Commons would be a tough, or even an austere Budget.
He replied: “Well, it’s a tough time. People can see the global economic conflicts, they know the pressure it’s putting on them, they understand it’s putting pressure on the Government.”
The Treasury has been approached for comment.