Money expert Martin Lewis has criticised Prime Minister Andy Burnham's move to abolish VAT on electricity bills, claiming people "won't feel a change". The newly appointed PM announced an £850 million tax cut on energy bills to ease the cost-of-living crisis.
Labour estimated the measure will cut electricity bills by 4.8 per cent from October 1.
Lewis warns of Price Cap rise
Lewis described the measure as "very welcomed" but "not enough" for people to see a significant decrease in their finances. He warned that a projected 3.1 per cent increase in the energy Price Cap from October 1 would cancel out the promised £45 annual saving. On a yearly basis, the anticipated Price Cap rise amounts to more than £50 on a typical household bill, meaning the VAT saving would be "mostly eaten up".
He also pointed out further price hikes forecast for January and wholesale energy costs rising amid continued instability in the Middle East.
In a video on X, Lewis said analysts were already well into the assessment period used to calculate the price cap increase, making the current 3.1 per cent forecast a likely estimate.
Context of the cut
"Another way to put it in context of what '4.8 per cent' means," he said. "Ten days ago the cheapest fix was 14 per cent less than the Price Cap, now it is eight per cent less as wholesale rates have jumped due to the Middle East conflict."
Discussing Burnham's legislation, he added: "Now we need to be straight. You are still saving compared to what you would've been if this cut hadn't been made - but no-one is really going to feel very much change in their pocket from this. It isn't a huge amount. So while I think it's a good totem in practical terms, it isn't enough to make you feel a change in energy bills."
Funding the tax cuts
The tax cuts will be funded in part by scrapping Sir Keir Starmer's digital ID project, which had been estimated to cost around £600 million a year over three years. Funding for that scheme was due to have come from savings within existing departmental budgets, which will now be reprioritised to fund the VAT cut.
The energy price cap set by Ofgem is forecast by industry analysts to be £1,849 for a typical household, although the resumption of military action in the US-Iran war could push prices higher because of the disruption to global oil and gas markets.
Burnham said: "I said I wanted to give people breathing space, and that's what I'm announcing on my second day as Prime Minister. We're taking immediate action to cut taxes on energy bills, put more money in people's pockets and bring back hope."
