Cut £175 from energy bills for low-income homes, says thinktank

Labour should draw up an emergency plan to cut energy prices for low-income families by up to £175 this winter, the Resolution Foundation has said.

One of Andy Burnham’s first policy announcements as prime minister was to remove VAT temporarily from electricity bills, saving households about £45 a year.

But with wholesale gas prices higher since the resumption of hostilities in the Middle East, the thinktank says costs are likely to rise through the winter.

In a report, the Resolution Foundation recommends a scheme that would cut annual bills by up to £175 for poorer consumers, at a cost of £2bn to the taxpayer. Support would be restricted to households where the highest earner is taking home £24,000 a year or less.

By helping 40% of households, the proposal would be more generous – but harder to implement – than one that targeted only those in receipt of means-tested benefits.

Jonathan Marshall, principal economist at the foundation and co-author of the report, said: “The government can get ahead of this, if it acts now. A targeted energy discount could save eligible households £175 a year and reach more than four-fifths of the poorest families, while expanding support beyond just those on means-tested benefits.”

He suggested ministers should have a plan ready to be “switched on” in January next year, when the quarterly energy cap is adjusted. It could either offer a flat rate £175 discount or additional help to the lowest-income households.

Burnham begins a tour of Britain on Monday, pledging to provide “everyday fixes” for rising bills. Officials say he intends to spend much of the rest of August travelling the country asking the public how the government can improve their lives with a focus on weekly bills and the decline of high streets.

A survey by the charity Carnegie UK has found that 28% of UK households say they cannot afford an emergency £850 payment. Another 6% say they cannot afford enough food for everyone in their home and 12% say they cannot afford to socialise at least once a month.

Thinktanks have long called for better coordination between Whitehall and energy companies to deliver targeted help with energy costs. “Successive governments have failed to build a robust system for dealing with household energy prices,” Marshall said.

The government spent £44bn during the 2022 energy crisis on subsidising bills for all households, including the wealthiest.

The foundation’s report shows that households in the poorest areas cut back on their energy use by 15% more than those in wealthier postcodes over that period. It says that only one-sixth of this fall in consumption had been reversed, suggesting that these households are still heating their homes less than is comfortable.

A spokesperson for the Department for Energy Security and Net Zero said: “The energy secretary’s focus is bringing bills down for good. We will tackle the cost of living to make life’s essentials affordable again and bring back hope.”

The chancellor, John Healey, has said tackling the cost of living would be a priority ahead of his first budget, scheduled for 25 October.

As well as setting out how the government plans to fund Burnham’s policies, including cutting VAT on energy, the budget is expected to detail how tax revenues will be distributed to regional mayors.

Healey resigned as defence secretary in June in protest at the failure of Keir Starmer and his chancellor, Rachel Reeves, to fund a significant uplift in his department’s budget.

He is likely to face pressure to explain how he hopes to fund a promise to spend 3% of GDP on defence over the next parliament – let alone the Nato target of 3.5%, which Starmer said would be reached by 2035.

Burnham has suggested he would like to exploit “flexibilities” in the fiscal rules set out by Reeves, to allow for additional borrowing to invest in infrastructure projects, to pursue his goal of “good growth in every postcode”.

Reeves, who was Britain’s first female chancellor, returned to the backbenches last month when Burnham arrived in No 10.

Reporting from The Guardian contributed to this story.