UK Aid for Energy Bills Could Pay for Itself, Deutsche Bank Says

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(Bloomberg) — Properly designed UK support to cut household energy bills could help reduce both inflation and government debt service costs, potentially resulting in an aid package that pays for itself, Deutsche Bank said. 

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Expenditure of around £4 billion ($5.3 billion) to offset the price shock caused by the US-Israeli war on Iran could bring the consumer price index down by 0.4 percentage points, Sanjay Raja, the bank’s chief UK economist, wrote in a note on Friday. That would be the projected result of extending a freeze in fuel duty until the end of the fiscal year next March as well as trimming government-mandated charges embedded in a typical household’s energy bill for nine months, he said.

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“Energy support designed to reduce household bills could ultimately be self-financing,” Raja wrote. “Fiscal support that would actively reduce CPI inflation could end up paying for itself – even adding to the fiscal headroom.”

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Chancellor of the Exchequer Rachel Reeves is coming under increasing pressure to set out how she plans to shelter ordinary Britons from surging energy prices resulting from the conflict in the Middle East. Earlier this week, she said the government is planning to target any support it rolls out at the neediest. 

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Raja said conventional thinking means the case for targeted support is “strong” because “every pound of aid will have a greater positive impact on low-income households.” But he said financial markets had “created a contradictory incentive for broad-based support” because of the effect that would likely have in reducing inflation.

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In the Deutsche Bank scenario, lower CPI resulting from broad-based energy support would ease pressure on the Bank of England to raise its base rate, and lead rates down across the yield curve, Raja wrote. That would cut net government borrowing by an estimated £3.6 billion by the end of the 2030-2031 fiscal year by saving debt service costs, he said. Factoring in a boost to growth resulting from the lower rates and inflation could see the reduction in borrowing climb further to nearly £5 billion, he added.

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For now, ministers have said most households are protected until the end of June by the country’s quarterly system of energy price caps, which means the unit cost of gas and power bills will actually decrease next month and stay there for three months. Meanwhile fuel duty levied on motoring fuel remains frozen until September, although the total cost of fuel at the pump this week rose above 150 pence per liter for the first time since the Iran crisis began, according to data from the RAC motoring services company.

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—With assistance from Joe Mayes.

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