The Tories should look to the past if they want to solve the cost-of-living crisis

How can the government prevent the steep rise in energy bills that will take effect in the spring? The short answer is that it can’t, to any substantial degree, because it cannot afford to subsidise the domestic and industrial price of energy, which is rising at up to 50 per cent a year at current rates. The implications for the public finances are too gruesome to contemplate.

At the moment, the effects are being felt, but only partially, as the old cheap deals for gas and electricity have evaporated. The energy price cap is protecting millions of consumers from the huge rise in global energy costs, but it will run out on 1 April. What the increase will be then is anyone’s guess, but it might be 40 or 50 per cent – many hundreds of pounds a year.

The effect is especially amplified in the UK because of its unusually (by European standards) old, draughty and poorly insulated housing stock. The UK is also heavily (around 80 per cent) dependent on natural gas for domestic heating (and, until relatively recently, for electricity generation – a strategic move in the 1980s that may turn out to have been a mistake). Air and ground heat pumps are still a rare fitment in a British home.

The effect on household budgets will also be especially harsh, because the hikes in gas and electricity bills will roughly coincide with an increase in national insurance rates, frozen income-tax thresholds, and the continuing acceleration in general inflation. Wages in certain shortage areas have gone up, but, more broadly, they are not keeping pace with the rise in prices (and indeed, rising wage bills will add their own inflationary pressures to business costs). As the Bank of England nudges interest rates up, so will mortgage payments eventually rise. The electoral consequences are fairly predictable.

So what to do about gas and electricity bills? One answer comes from the history books – and a previous national debate about VAT on fuel. Back in 1993, when energy bills were relatively low and stable, the Tory government sought to fix the budget deficit by slapping VAT onto gas and electricity bills, which were previously zero-rated. So, just in terms of party political point-scoring, putting VAT on fuel in the first place was a Tory idea, and the plan was to take it all the way to the then standard VAT rate of 17.5 per cent. Labour and Tory rebels eventually pulled that back to 8 per cent in 1994, and when Labour came to power in 1997, Gordon Brown reduced it to 5 per cent, the minimum under EU harmonisation rules. And there it has stayed ever since.

But such a massive rise in bills – as a result of a conscious financial decision by the Treasury – has to be accompanied by a package of measures from the government to limit the damage to the poorest pensioners (then, as now, a potent political constituency). The government insisted that reducing or scrapping the planned increase in VAT on fuel wouldn’t be fair, because although VAT is usually regressive in impact, on heating bills it tends to hit richer people who live in bigger houses (a crude truth).

Nevertheless, the Tory chancellors of the time, Norman Lamont and Ken Clarke, sought to ease the squeeze with a package of measures Rishi Sunak could adopt now, even if he keeps VAT on at 5 per cent. Namely:

1. Uprating the old age pension by the equivalent of the rise in energy bills, or at least a part of it. This could be presented as the restoration of the “triple lock” guarantee on the buying power of the state pension. Sunak might even reinstate part of the £20 universal credit uplift scrapped last year;

2. Increasing pensioners’ severe winter weather payments – or, now, making more poor families eligible for them on a means-tested basis;

3. A larger budget for home heat efficiency schemes, which would also help the nation reach its ambitious CO2 targets.

Some or all of these measures could now be broadly linked to the wholesale cost of fuel, and thus be scaled back as the current shortages and spikes in prices subside, as they should when the distorting after-effects of Covid play themselves out, leading, for example, to moderating Chinese demand for liquified natural gas.

Sunak might also embrace (essentially steal) Labour’s idea (also proposed in the 1990s) of a windfall tax on North Sea activities and/or on the utilities – though their old monopoly profits are now greatly constrained by the energy price cap and greater competition.

Even so, there is no practical way that any government can completely protect consumers indefinitely from a world crisis, such as happened before in 1973 to 1974, 1979 to 1980 and 2007 to 2009. The only remotely good news to be gleaned from those previous spikes is that they subsided surprisingly rapidly, and tended to be a spur to more energy-efficient homes, cars, consumer appliances and industrial processes.

If nothing else, the present energy crisis is raising fundamental questions about our reliance on fossil fuels, the reliability of wind and solar power, inadequate storage of gas and renewable energy, the role of nuclear power, fracking, privatisation and competition, and the badly insulated state of the British housing stock. None of that, though, will help pay the gas bill next winter.