Extend UK energy price cap to hold back inflation, thinktank says | UK cost of living difficulties | Whuff News

Jeremy Hunt should allow the energy price cap to run beyond the six-month deadline to act as a “shock absorber” that would reduce inflation and give consumers £90bn of extra energy spending, a leading thinktank has argued.

The left-leaning IPPR said an energy price cap could return the exchequer to the demands of low wages and low interest rates, boosting economic growth and boosting tax receipts.

In a report before the chancellor of November 17 in the fall, the IPPR said that the funds released to prevent a major recession can be used to support public services and increase welfare and pension payments.

But the thinktank warned tax increases would be needed to give Hunt a chance to support households and businesses, particularly in a broader wind tax on additional revenue generated by energy companies.

The report of the Decision Foundation asked the ministers to use the report of November 17 in the fall to take into account the increase in taxes for households and businesses that have prospered due to the pandemic and are protected from the cost of living crisis.

The foundation said the chancellor should avoid attacks on public services and welfare benefits, which have suffered 12 years of hardship.

He warned Hunt that cuts to public infrastructure spending would save money in the short term but depress growth for the rest of the decade.

Hunt was due to introduce an update to the government’s financial plans on Monday but this was pushed back to November 17 last week, after Rishi Sunak replaced Liz Truss as prime minister.

The Office for Budget Responsibility, which produces independent forecasts of economic growth and public finances for the Treasury, is expected to say on 17 November that the £39bn shortfall predicted in March for public spending this year has grown to £89bn.

James Smith, director of research at the Decision Foundation, said the weak economic outlook, high interest rates and the remaining legacy of “Trussonomics” – the £17bn of unfunded tax cuts announced in Chancellor Kwasi Kwarteng’s mini-budget in September – “mean the government is on its way to violate these principles unless further policy measures are taken”.

The OBR is predicting a rise in unemployment of around half a million, taking it above levels seen during the pandemic.

This weak economic outlook is set to raise government borrowing by around £23bn a year by 2026-27. The addition of £20bn to cover the government’s higher borrowing costs – including an extra £10bn since the small budget – and the cost of inflation takes the total to around £50bn.

“The government has more than two weeks to finalize its plans to address economic integrity and public financial stability,” Smith said.

“While the recent focus has been on improving post-Trussonomics conditions, the main picture remains one of weak growth, high borrowing costs and expensive tax cuts that have left a fiscal hole.”

Carsten Young, an economist at the IPPR, said the Treasury could abandon its goal of reducing debt as a share of GDP to maintain government spending during tough economic times.

“We propose an alternative approach, which we call the ‘shock absorption approach’.

“The main idea is that if governments support households and businesses significantly and adequately in response to energy shocks, they should have less need to raise their incomes and prices to make up for the energy shock,” he said.

“The more we moderate high energy prices, the more we can avoid unsustainable inflation.”

He said the money could be repatriated through air tax to profitable companies.

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