Chancellor concerned support package may drive up inflation

Giving evidence yesterday to the Treasury Select Committee over the government’s cost-of-living package, he said the government cannot fully insulate people from the crisis. He also told MPs he had been careful “to make sure fiscal policy was responsible in that context”. 

He went on to explain the measure he announced would be “minimal” because he made the support “temporary, timely and targeted”, and said his package was “very comparable” to what other countries are offering. 

Sunak also told the committee it’s not possible for the government “to fully insulate people from increases in the cost of living and inflation”.

Commenting on the government’s energy profits levy, Sunak reiterated the fact that its “urgently considering” the case to extend that levy to the electricity generation sector where, the government believes, there are extraordinary profits being made. 

He added: “Many other countries in Europe have taken steps to address the fact that we have a longer-term plan to reform the market. But we need to make sure that actually in the shorter term, have we got the right policy in place, but we are urgently undertaking that work as well.” 

Sunak’s appearance at the Treasury Select Committee comes off the back of the fiscal measures he introduced last month designed to support people through the cost-of-living crisis. 

As part of this, he confirmed the government will introduce a 25% levy on oil and gas companies. Built into the so-called “energy profits levy” will be a new investment allowance, designed to incentivise oil and gas companies to reinvest their profits. 

In addition to this, all UK households will get £400 of support with their energy bills through the expansion of the Energy Bills Support Scheme. This measure will be brought in when the winter energy price cap kicks in - with Ofgem boss Jonathan Brearley saying last month that the cap is expected to rise by about £800, increasing the cap to £2,800 a year. 

Explaining why the fiscal support wasn’t introduced earlier, Sunak said: “The way the price cap works, there’s an observation window, which runs from February to August from memory. 

“So actually, until you’re through that observation window, you don’t know what the price cap is going to be - that’s how it’s calculated. So whilst people might have estimates and all the rest of it back in February, what you don’t have is any actual data that informs how the price cap works. 

“We are now about two-thirds of the way through that observation window, so the data actually will set the price cap, we have a lot more of it in and back then we had close to zero.” 

He also explained the treasury has been in a “constant dialogue” with the energy regulator Ofgem on a weekly basis to get constant estimates. He added: “And obviously, the further along you go through the observation window, the more confidence you have in that estimate being a reflection of what will actually happen.”