Forget cutting VAT: social tariffs would help tackle the cost-of-living crisis

The cost-of-living crisis should be the number one priority for all political parties this summer. With the energy price cap due to rise by an eye watering 70%, on top of the 54% rise earlier this year, a cruel winter beckons, one that for some, make no mistake, will be fatal.

Martin Lewis, the Money Saving Expert, has spent the summer pleading fruitlessly for solutions from government. Meanwhile, Labour has chosen to squander their time arguing about whether the Shadow Cabinet should join the picket lines of those on strike.

There is a huge space for the Liberal Democrats to propose powerful, radical policy that will make a real difference to those that need it most.

A temporary cut in VAT, to be debated at Autumn Conference as our headline solution, is not that policy.

I’m no great fan of VAT, but timing is everything and the timing of this cut is wrong. On straightforward grounds of fairness, to give away the most to those who already have the most – as cutting a tax on spending would boil down to – is simply perverse right now. Moreover, both the Institute for Fiscal Studies and the Institute for Government warn strongly against the policy, citing the prolonged inflation and interest rate rises that will likely result as serious long-term risks for the economy and households.

As a party, we already have a strong set of policies aimed at tackling the cost-of-living crisis. Scrapping the National Insurance rise and the freeze of the Income Tax personal allowance, as well as reinstating the uplift in Universal Credit are all policies much better targeted towards low earners and those most in need of support than the VAT cut. They are frustratingly under-promoted.

But we could and should be even bolder. I believe it is time for social tariffs on energy.

A social tariff is a low, affordable price for a utility or service set by government and made available to low-income households. Regulating for social tariffs on energy would hold back extreme price rises in gas and electricity and keep bills at manageable levels for those most in need. It could quite literally save lives this winter.

Yes, this approach would almost certainly require the government to provide financial support to the industry. But surely, just as in the pandemic, we should not be overly concerned about the impact on public finances when lives are at stake?

Furthermore, this would not need to be a straightforward government bailout. As we confront the climate emergency, the leverage gained in supplying financial support to parts of the energy industry would be a valuable tool that could be used by the government to help accelerate the energy transition, directing investment for the public good.

Social tariffs, then, could become a first, radical step in restructuring and regulating markets that have not functioned sufficiently in the public interest since privatisation – an issue that is only going to become more pressing in pursuit of Net Zero.

We will not switch Conservative voters alienated by that party’s fantasy economics to voting Lib Dem by touting our own version of populist economic recklessness. A cut to VAT would do little to help those that need it most and much more to help those that need it least. Social tariffs on energy are both a more sensible and more radical way to avoid the immediate pain and suffering the cost-of-living crisis and this winter will inevitably bring. It’s the policy we should be championing.

* Ian Sollom was the South Cambridgeshire candidate in the 2019 general election

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24 Comments

  • Jenny Barnes 8th Aug '22 - 4:52pm

    I posted this on another thread, but I think relevant:
    the first (say) 2 thousand kWh of electric are charged at 10p, the first 6 thousand kWh of gas at 5p. No standing charge, and charge whatever you like after the capped chunk. Competition that the Tories love, and a basic supply of energy for all, and let the market get on with it.
    Average UK energy usage is 3 MWh electric and 12 MWh of gas, so this proposal gives the average user 2/3 of their electric and 1/2 their gas at cheap rates.

  • Brad Barrows 8th Aug '22 - 5:19pm

    A much needed article. Fully agree that a cut in VAT is not the solution to the problems we face for precisely the reasons set out in the article – I just hope Party Conference has the good sense to see this and make their views clear to a leadership which seems determined to pursue this policy.

  • Some good ideas there, Jenny.
    I lived in Tokyo for a few years. Most Japanese homes don’t have central heating or insulation, but air conditioning is quite common. Japanese people usually heat their homes one room at a time. Along with wearing warm clothes at home during winter, a Kotatsu table was quite common. It is a small table with a heater underneath that is covered with a blanket to trap the warmth inside that a family sits around. There was also, of course, the customary hot bath before retiring for the night and on very cold nights use of electric blankets.
    There might be a run on hot water bottles in the UK this year like the toilet paper scramble when Covid broke out.

  • Peter Watson 8th Aug '22 - 8:03pm

    “A cut to VAT would do little to help those that need it most and much more to help those that need it least.”
    Funnily enough, when justifying the increase in VAT to 20% while in Coalition, some senior Lib Dems were keen to depict the rise as “mildly progressive” (https://www.libdemvoice.org/the-vat-rise-a-refresher-course-for-labour-22639.html), and back in 2008, the party opposed Labour’s temporary VAT reduction.
    Then, before the 2010 election Nick Clegg warned that Tory plans to increase VAT from 17.5% to 20.5% would cost families £389 p.a. while now, Ed Davey calls for a reduction from 20% to 17.5% would save families £600 p.a.
    It all seems a bit inconsistent (and the £600 figure sounds dubious).

  • Peter Martin 8th Aug '22 - 8:09pm

    “A social tariff is a low, affordable price for a utility or service set by government and made available to low-income households.”

    Sounds a good idea at first look but it needs more explanation. Is the income of all occupants to be aggregated or will it, perhaps, be some kind of average. For example, will a single occupant earning £60k p.a. be treated the same way as six occupants averaging £10k p.a?

    Will it be a hard threshold? Will households which are £1 over it be paying full commercial tariff, whereas those which are £1 under be benefitting from a social tariff? If so many could end up asking their boss to reduce their pay!

    The devil, as always is in the detail.

  • William Francis 8th Aug '22 - 8:15pm

    We need to unveil a working UBI plan. It’s already party policy, now is the time to promote it.

  • Ed The Snapper 8th Aug '22 - 8:38pm

    Terrific to see that thread about VAT from 2011, again, with my prescient contributions. It shows how the leaders and cheerleaders of the Liberal Democrat party steered a once progressive political party to dire disaster by attacking that party’s supporters and sympathisers instead of considering that the coalition was making bad decisions. I did try to warn them…

  • Peter Watson 8th Aug '22 - 8:45pm

    @Peter Watson (talking to myself!) “the £600 figure sounds dubious”
    The OBR states, “In 2021-22 VAT is forecast to raise £131.9 billion … equivalent to around £4,700 per household” (https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/vat/). Assuming (wrongly) that £4700 is all VAT at 20%, a reduction of 1/8 (i.e. to 17.5%) is £588: less than £600 and based on a very bad assumption.
    Furthermore, to benefit by £600, a household would currently have to be spending £28800 p.a. (inc. VAT) on items attracting 20% VAT. With the median household income in 2021 of £31,400 (and a mean of £37600) (https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2021), the Lib Dem idea of an “average” household might be somewhat different from many others’!
    And the “analysis” linked to in this article (https://wokinglibdems.org.uk/en/article/2022/1426571/lib-dems-propose-vat-cut-to-save-families-600-each) is simply outrageous, assuming an equal distribution of benefit per household in all constituencies, regardless of very different levels of affluence.

  • Peter Watson 8th Aug '22 - 8:48pm

    @Ed The Snapper “Terrific to see that thread about VAT from 2011”
    I was just relieved not to see my name in the thread. It makes me feel very old – and depressed about the party – when that happens! 🙁

  • Brenda smith 8th Aug '22 - 9:41pm

    Years ago, probably at a fti ge meeting, and in relation to energy conservation, I asked the question why gas and electricity were cheaper per unit, the more the consumer uses. It made no sense then. And for several reasons, it makes no sense now. At least, not to me. Someone at the time gave an explanation, in terms of privatised businesses, but I still would like a reasoned answer, if there is one.

  • Ed Davey has called for a cancellation of the increase in the energy price cap ‘Cancel the energy price cap increase’, Lib Dem leader Ed Davey tells the Tories
    “The Liberal Democrats say the estimated £36 billion cost should be met by expanding the windfall tax on oil and gas company profits, and using the Government’s higher-than-expected VAT revenues as a result of soaring inflation”.

  • Tristan Ward 9th Aug '22 - 8:35am

    Everyone knows energy produced from hydrocarbons needs to be expensive to help discourage its use and associated CO2 production and dependence on the srab States and Russia. Costs of energy from renewable should be cheap right now, but if it is, a mechanism needs to be found to get as much built/installed as quickly as possible, along with the necessary infrastructure structure.

    On the whole I prefer to keep energy costs high and relieve the poverty anotherway in the interests of reducing CO2 output. CO2 output is the biggest problem of all.

  • I’m not convinced that scrapping the price cap rise for everyone is the wisest policy either. True, it will make more of a difference to those that need help than the VAT cut, but it is still a big giveaway to those that can afford the rises and weakens the price signal to them to invest in alternatives and efficiencies. There’s also the difficult question of how you exit the policy – or are we just hoping for wholesale prices to come down?

    Regardless, the VAT cut is still the headline policy motion at autumn conference for dealing with the cost of living crisis. It’s not a good one.

  • @Peter Martin: You’re point on thresholds is absolutely valid and an earlier draft of this piece did have a reference to the need for some sort of taper (edited out for brevity here). I don’t think this is beyond the ability of government agencies to administer, though would require better information sharing.

  • Nonconformistradical 9th Aug '22 - 9:08am

    “On the whole I prefer to keep energy costs high and relieve the poverty anotherway ”

    Such as ensuring the homes of the less well-off are insulated properly so they use less energy..?

  • Jenny Barnes 9th Aug '22 - 9:50am

    The Uk has installed 12 GW of wind capacity. Unfortunately, the wind doesn’t blow at the optimum speed all the time, and right now on gridwatch the wind power is 3GW – roughly 10% of our demand. 16 GW is coming from gas – 50%. If we’re going to run on wind power, we’ll need green hydrogen generation as backup, so we’ll need maybe 5 – 10 times as many wind turbines as now.

  • Duncan Brack 9th Aug '22 - 9:55am

    Ian – good idea, worth debating. Can you submit an amendment to the motion?

  • Laurence Cox 9th Aug '22 - 11:04am

    While a social tariff is a good idea, it fails to recognise the other half of the problem; that those in fuel poverty are also likely to be living in poorly-insulated houses and flats because they are all that they can afford. We also need a major state-funded insulation programme to bring all housing in the UK up to a high insulation standard. Here’s a BBC article from five years’ ago: https://www.bbc.co.uk/news/business-39107973 based on a report to Parliament that says we need to insulate 25 million homes by 2050 to meet our net zero commitments. Since then, almost nothing has happened.

  • I agree with the comments on insulation – we really need a massive national program of insulation (something the government has consistently made a mess of). I do believe it is already Lib Dem policy though – and to prioritise those in fuel poverty (maybe someone can correct me if I’m wrong on that?)

    Possibly we could have advocated for an even more accelerated ‘emergency’ home insulation program, but I wonder if it is too late to make much of a difference this year given the scale up and roll out required? We could certainly more actively promote / press for our existing policy on insulation though.

  • Adrian Sanders 9th Aug '22 - 2:33pm

    Personally, I don’t need to save £600, but many of the people in the town where I live do. Can we not come up with a policy that helps those who need it, not those who don’t. As Ian rightly comments: “We will not switch Conservative voters alienated by that party’s fantasy economics to voting Lib Dem by touting our own version of populist economic recklessness.”

  • Peter Watson 9th Aug '22 - 3:38pm

    @Ian Sollom “we really need a massive national program of insulation”
    I agree with the idea, but those in most need might be paying the energy bills without owning the property that requires insulation, so any such scheme would have to ensure that private landlords insulate for the benefit of their tenants, and ideally, I suppose, without appearing to be too much of a subsidy for those landlords.

  • Nigel Quinton 9th Aug '22 - 4:12pm

    A couple of thoughts from the above discussion.

    1. Glad to see Duncan Brack encouraging the debate at conference to look at this.
    2. Whilst not up to speed on the mechanics of how this would work in practise, it seems to me that a social tariff is the right intervention. Targeting individuals versus households and tapering to avoid subsidising those who don’t need it are the details that need resolution but do not mean the idea is without merit.
    3. Insulate insulate insulate. 110% grants, whatever it takes. It also keeps you cooler.
    4. Stop building substandard houses. All planning should maximise energy generation and minimise energy consumption, not just tick boxes. We can all reel off examples of developments facing the wrong way, PV erected in the shade, building standards (such as they are) being flouted or checked by the industry. All this must change.

  • Scrapping the National Insurance rise and the freeze of the Income Tax personal allowance, … are all policies much better targeted towards low earners

    So the rise in the threshold for paying NI and the structuring of the changes mean that those earning less than circa £32K pa will pay less NI, doesn’t help “low earners”…

    Interestingly, as someone who will be paying more because of this change, whilst it is an increase I could do without, it is one I’m willing to accept as in 2023/2024 the increase is broken out as separate levy for the NHS.

  • @Laurence Cox – Here’s a BBC article from five years’ ago …based on a report to Parliament that says we need to insulate 25 million homes by 2050 to meet our net zero commitments. Since then, almost nothing has happened.

    Not quite nothing, we’ve built probably just under a million new substandard homes, since that report was compiled, fortunately we haven’t been building them as fast as some would like as otherwise that could be over 2 million substandard homes…

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