UK Sidelines Budget Watchdog in Assessing Cost of Energy Bailout


The UK Treasury will draw up its own estimate of the cost of the government’s energy bill rescue package, temporarily sidelining the official budget watchdog, a person familiar with the decision said.

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(Bloomberg) — The UK Treasury will draw up its own estimate of the cost of the government’s energy bill rescue package, temporarily sidelining the official budget watchdog, a person familiar with the decision said.

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Prime Minister Liz Truss unveiled plans to freeze annual natural gas and electricity bills at an average of £2,500 per household for two years from October and introduce a similar cap to protect businesses for at least six months.

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“There will be a cost to this,” Truss said. “The chancellor will set out the costs as part of a fiscal statement later this month.” 

The decision to move ahead with a program that will costs more than £100 billion without oversight triggered criticism from the Institute for Fiscal Studies, whose director Paul Johnson called the move “extraordinary, and deeply disappointing.”

“This is a huge policy intervention which could easily cost over £100 billion in the next year alone,” Johnson said. “This is clearly not sustainable in the long-term.”

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According to documents seen by Bloomberg, the gross cost could be as much as £200 billion, but some of that would be offset in the short term by savings elsewhere due to stronger growth and lower inflation. The package is expected to be bigger than the cost of near £80 billion of income support for workers during the pandemic. 

The OBR will be not be asked to produce a forecast alongside the chancellor’s statement this month despite recently saying it can do so at short notice. It provided the Treasury with a forecast over the summer, which could be updated. Instead, it will produce one later in the year.

However, it would not be the first time the government makes a big fiscal intervention without independent oversight. During the pandemic, the Treasury made emergency fiscal statements that included tax changes which were not accompanied by an OBR forecast.

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“It would certainly be preferable if they would ask the OBR to do one and put it in the public domain,” Johnson said. “The big issue is what the macroeconomic forecasts are and how they impact the public finances.”

He added that asking the Treasury to produce the macroeconomic estimates would be “like going back to Gordon Brown before the OBR.” The watchdog was established in 2010 to check the Treasury’s costing and keep the public finances honest after relentless criticism of Brown when he was chancellor.

The energy rescue has an especially complex impact on the public finances. The net expense to the state will be lower than the headline cost of the emergency package because freezing bills will mechanically lower inflation and the boost to incomes will protect growth.

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The government estimates the program will cut inflation by 4 to 5 percentage points below the 15% peak forecast by economists surveyed by the Treasury. As a result inflation may have already peaked at 10.1% in July. 

Lower inflation will reduce the cost of servicing index linked gilts, saving around £10 billion over six months. It also reduces welfare payments, which are linked to rising prices. Gross domestic product will be stronger than expected because the package supports growth, which would protect tax revenues. 

Truss said that such indirect effects of the policy package “will significantly reduce the cost to government of this intervention.”

The program announced on Thursday adds to an existing £37 billion support package to help households cope with soaring gas prices this winter and next. 

Truss also unveiled a separate package to protect businesses for six months, which will be followed by more targeted help, alongside a raft of energy reforms to ensure greater security of supply in future. 



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