METRO - does the energy package from Truss go far enough?

Truss's plan just about goes far enough to avert an economic catastrophe, but leaves future generations of taxpayers on the hook for the cost. And it still leaves millions of households struggling to heat their homes this winter. The decision to not implement a further windfall tax on North Sea Oil & Gas producers is baffling, and patently unfair. Saying it would deter investment is nonsense. Companies like Centrica and Shell were never expecting to make such excess profits, so would not have based their investment decisions on them. Once again it's the people who can afford it least, taking the economic pain.

Does the new energy price guarantee far enough? The energy cap package won’t make much of an impact in the economy since this is just a preliminary solution before the government introduces market-wide reforms while observing fiscal discipline. However, it will certainly reduce inflation but by how much and for how long remain in question. More so, a recession is likely on the way as Russia insists on cutting its gas supplies throughout Europe while the cost of living continues to spiral. However, the energy cap will make the recession less severe than anticipated prior to Truss’ successful bid. What about businesses? It’s not until December that we’ll come to know of the sectors that will be supported after April when the six-month energy assistance expires. Truss is confident that the hospitality sector would be included. We expect that tourism and transport sectors will be a part of the government’s consideration as well. Who are the people who really need help? Does this plan actually help them? The majority of households are already squeezed by the high cost of living. While the October price hike will be less than £1,000 had it not been for this immediate response, a typical household energy bill will still be higher by around £500, which will further accelerate the gap between household costs and incomes even with additional government support. What are the ways to pay for this £120bn deal? Who pays? Who should pay? The government will subsidies it through increased borrowing to finance the cost of Truss’ plan at £179 billion. Despite her confidence that her supply-side reforms will bring down inflation by “up to five percentage points” and help avoid a deep recession, it can be argued that a conflict between fiscal and monetary policies will ensue once the BOE decides to pursue a series of interest rate hikes in the coming months. This will impact around 2 million homeowners with variable rate mortgages and those whose fixed-rate loans will soon expire. It’s also likely that should the program be extended, it will be funded through windfall and wealth taxes although Truss has ruled this out during her speech. What are families facing this winter in reality? What’s the fallout on their broader household finances going to be? Heading into winter, more low-income households, especially those on prepaid energy metres, will be forced to prioritise energy spending over other necessities and thus continue to feel the pain of the energy shock. Housing market? Are we in for a fall? A slowdown is highly expected, but a market crash isn’t possible. Further interest rate hikes by Threadneedle Street will eventually slow down the surging growth in housing prices where affordability has worsened during the pandemic. The Office for National Statistics reports that house prices rose 7.8% year over year in June, with an average UK house already costing higher by £20,000. While the Treasury believes that the energy bill cap could curb inflation by up to 5 percentage points, this will likely force the BOE to raise interest rates next week, which we expect to be between 50 to 75 basis points. So, an imminent increase in interest rates will likely affect home prices and raise mortgage payments for those not locked into longer fixed-term contracts that shield them from interest rate hikes. We expect around £395 of additional payments to their mortgage bills each year. In addition, those who are planning to purchase homes must swiftly act now in anticipation of higher interest rates in the coming months.

"Damned if you do and damned if you don't. Liz Truss had to do something and I think this is a good policy. The government cannot provide free energy for everyone and so capping the bills should go some way to averting an all out catastrophe. Nevertheless, there are still going to be a lot of people who cannot afford to pay them. We could see an increase in defaults on energy bills which will stay on people's credit reports for six years. This then makes it much harder for those people to get affordable mortgages in the future. This could then have an impact on house prices."