Rising energy prices will give Treasury £3.1bn windfall, says Labour

Rising energy prices will hand Rishi Sunak a “windfall” of £3.1bn since October’s budget, a Labour analysis has claimed, which the party has urged the chancellor to spend on cutting household bills.

Labour said the receipts would cover the projected £2.4bn cost of removing VAT from gas and electricity bills over the winter months .

The figures come from House of Commons library research, commissioned by Labour, which projects £3.1bn extra in VAT receipts in 2021-22, making a total of £135bn.

Labour’s figures were reached using the Office for Budget Responsibility’s (OBR) projections that 42.2% of VAT receipts will come from November to March. This suggests that, with £78bn raised to October 2021, a little under £57bn may be expected over the rest of the year. This would bring total VAT receipts to about £135bn. At the budget in October, the OBR forecast £131.9bn for 2021-22.

However, the Treasury said those increases would not come close to meeting pre-pandemic forecasts. A government spokesperson said: “There has been no VAT windfall. VAT receipts this year are forecast to be below the pre-Covid level, with the OBR forecasting nearly £2bn less will be received this year compared with directly before the pandemic.”

But the shadow chancellor, Rachel Reeves, said the additional cash compared with pre-budget forecasts meant the chancellor could give some relief on energy bills.

“Right now people are being hit by a cost of living crisis which has seen energy bills soar, food costs increase and the weekly budget stretched. That’s why Labour is calling on the government to immediately remove VAT on household heating bills over the winter months.”

Reeves said further action was needed to protect households from escalating bills after the next review of the energy price cap, which some experts have predicted could rise by as much as 40% when Ofgem sets it again in February. The energy regulator is also expected to enact a series of changes after the collapse of so many small providers.

The cap for the average household is £1,277 a year, but the Tony Blair Institute for Global Change estimated it could rise to almost £1,800.

“We need a sustainable and ambitious approach to energy, which is why Labour would also ramp up ambition with our plan to retrofit 19m homes, making our energy supply chain more secure without hitting household savings,” Reeves said.

“On top of the biggest tax burden in 70 years, Conservative complacency is making the cost of living crisis worse and storing up long-term problems, with working people paying the price.”

A Treasury spokesperson said it had concluded that high energy prices would reduce VAT revenues due to the 5% VAT rate on the supply of domestic fuel and power. Higher prices overall meant if people spent more on energy, where VAT was lower, they would spend less on goods and services that on average had a much higher VAT rate, thereby reducing VAT revenue overall.

“We are supporting vulnerable households with the cost of energy through initiatives such as the warm home discount, which is being increased to £150 and extended to cover an extra 750,000 households, winter fuel payments, and cold weather payments,” the spokesperson said.


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