Huge rises in energy prices through much of 2022 sparked a cost of living crisis with
recession-level hits to family (as inflation soared) and public finances (as the state
partially protected us from bill rises). But there has finally been some good news with
wholesale gas prices for 2023-24 down more than 70 per cent from their peak in August.
So, while the extreme volatility in energy markets over the past year means that the
outlook is still very uncertain, in this Spotlight we look at what the big fall in energy
prices might mean for household and government finances.
There is good news for households who benefit from smaller-than-feared rises in energy
costs if prices remain at current levels. Typical annual energy bills are now forecast to
be £2,400 next year (2023-24), down from the forecast of £3,000 at the time of the
Autumn Budget (the level of the 2023-24 EPG). But 2023-24 will still feel difficult. The
first thing families will notice is a rise in energy bills in April, as Government support is
reduced and the Energy Price Guarantee (EPG) is raised to £3,000 (from £2,500), and
overall, energy bills are set to be 20 per cent (or £400) higher in 2023-24 than in 2022-23.
Falling gas prices are not a panacea for families already struggling with the high cost of
living.
The public finances will benefit from lower wholesale energy prices more swiftly. Based
on current futures prices, the cost of the EPG in 2023-24 is estimated to be around 90
per cent below the Office for Budget Responsibility’s costing made in November (£1.5
billion compared with £12.8 billion). Lower energy prices, however, also mean lower
receipts from windfall taxes. These are highly uncertain, but a back-of-the-envelope
calculation suggests revenues could be as much as £7 billion lower. Nonetheless, the
fall in energy prices is likely to materially reduce borrowing once the lower cost of
support for firms and the smaller hit to household incomes than feared are considered.
Overall, lower energy prices – if sustained – should provide a much-needed economic
boost. And while the outlook is still a very difficult one for living standards, some of the
pressure on household and government finances have been reduced.
Authors
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- United Kingdom