UK chancellor Rishi Sunak made energy efficiency and helping families with the rising cost of living the key factors of today’s Spring Statement, but ESG investment commentators are disappointed with the lack of windfall tax and said household support measures do not go far enough.
Sunak (pictured) started off this March’s economic update detailing the UK’s support for Ukraine following Russia’s invasion – which he called a “dangerous calculation” – highlighting the military and humanitarian aid supplied to the Ukraine, the Homes for Ukraine scheme and increasing sanctions for individuals and businesses associated with Putin’s regime.
The Spring Statement 2022 document said: “Spring Statement 2022 takes place following the unprovoked, premeditated attack Vladimir Putin launched on Ukraine. The invasion has created significant uncertainty in the global economy, particularly in energy markets. The sanctions and strong response by the UK and its allies are vital in supporting the Ukrainian people, but these decisions will inevitably have an adverse effect on the UK economy and other economies too.”
The chancellor added part of the response is strengthening the UK economy and helping Brits that are seeing their cost of living surge as Russian sanctions constrain supplies pushing up prices from other sources at a time when energy prices were also on the rise and inflation is tipping above 7%.
To help families with the cost of living, the UK government has committed to:
- Cut fuel duty by 5p per litre, effective 6pm tonight and in place for a year.
- Household Support Fund doubled to £1bn with local authorities able to distribute to those in need from April.
- The threshold for paying National Insurance will increase by £3,00 by July so people earning £12,570 a year will not pay income tax or national insurance. Chancellor says this is worth £6bn to 30 million people.
- The basic rate of income tax will be cut from 20 to 19 pence in the pound… but this change will not take place until 2024.
Sunak also combined reducing household costs with the energy transition by announcing the following:
- Over the next five years, no VAT will be applied to energy-saving materials including solar panels, heat pumps and insulation for five years as energy bills surge. Northern Ireland currently not eligible but the chancellor said UK government is working with EU on this.
- This could cut cost of solar panels being installed by £1,000.
- Wind and water turbines also added to the list of energy saving materials (ESMs).
- The government will also increase green relief further by introducing a time-limited zero rate for the installation of ESMs. Changes will take effect from April 2022.
- In the supporting document to the Spring Statement, the government also said it will be setting out an energy security plan including measures across hydrocarbons, nuclear and renewables to support energy resilience and security while delivering affordable energy to consumers. As part of this and the Prime Minister’s 10-point Green Industrial Revolution, the government is raising its delivery ambitions across energy technologies to end the UK’s dependency on hydrocarbons from Russia.
Sunak said small and medium-sized enterprises (SMEs) are also affected by rising costs, and in terms of technology and innovation, he noted the “productivity gap” in the UK and lack of tech leadership. The following was announced to support SMEs and spur innovation:
- A reform of the Research and Development tax credits.
- A green relief for business rates was announced at the Autumn Budget 2021, allowing targeted business rate exemptions from for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible low-carbon heat networks with their own rates bill, to support the decarbonisation of non-domestic building. The government is bringing forward the implementation of these measures from April 2023 to April 2022.
The government also announced a further £10bn of green gilt issuance with a transaction scheduled for each quarter.
“In 2022-23, the government plans to issue £10bn of green gilts, subject to demand and market conditions, with the current expectation that this will be issued across both medium and long maturities,” the Debt Management Office (DMO) stated.
In September 2021, the DMO issued the UK’s inaugural green gilt, maturing in 2033, raising £10bn and in October 2021 a second green gilt issuance raised a further £6.1bn.
Reaction
News of the green gilts issuance drew enthusiasm from Rob Gall, head of market strategy at Insight Investment who said it should meet with high demand.
“We anticipate a repeat of the significant demand seen for the inaugural issuance last year, given the focus on climate change and impact investing, subject to appropriate pricing. Insight supported the government’s two green gilt issuances in September and October, purchasing on behalf of its liability driven investments and other clients.”
However, on the whole there was a lot of disappointment following this afternoon’s statement but this was mainly centred around the lack of plans that would really scratch the surface of the cost of living crisis and the omission of a windfall tax on profits of oil and gas companies – something Green MP, Caroline Lucas described as “obscene”. Rob Marchant, partner at audit, tax, risk and advisory firm Crowe, said the policy was “conspicuous by its absence.”
Myron Jobson, senior personal finance analyst at interactive investor, said the cost of living crisis is “squeezing many household budgets to breaking point” at them when oil companies and their investors are off the hook.
“A 5p per litre reduction in fuel duty could cut the cost of filling an average family car by around £2.75, which is small change compared to the recent hikes in the cost of fuel and would barely cover a cappuccino.
“Despite a slight decrease in wholesale cost recently, fuel prices continue to rise. The oil companies are still sitting and happy: no windfall tax for them, so investors will be happy – as long as they are not green – as consumers take the pain,” said Jobson.
Euan Graham, senior researcher on oil and gas at E3G, agreed: “A windfall tax on oil and gas companies would give more support to the millions of households having to choose between heating and eating. The UK already offers some of the most generous tax breaks in the world for oil and gas companies, who are making unexpected record profits. More drilling won’t help families reduce their bills. These companies are not the ones in need of help this year.”
Renewables out of reach
Another contrast drawn by commentators was the benefit of cutting VAT on renewable and green initiatives versus the decreasing chance a household could invest in these in the first place due – again, to the spiralling cost of living.
Crowe partner, Simon Crookston, said: “It is encouraging the chancellor has provided VAT cuts for solar, wind and water turbines and other green initiatives, particularly in relation to renewable energy.
“However, this does not help families that are struggling to pay their fuel bills today. They won’t be able to afford the capital investment, be able to fund personal solar panels and therefore will not benefit from these energy incentives.”
Richard Smith, partner at Sandstone law, commented the policy appeared to be a “wink at trying to boost green energy in homes” but warned the devil was in the detail.
“Bear in mind that it is already a reduced VAT rate of 5% for those installations, so it’s a 5% drop.
“The chancellor’s claim that families who have solar panels installed could see tax savings worth £1,000 is a bit steep given that the average cost is less than £10,000 so the 5% reduction is at most worth £500, and you still need to have the £10,000 spare cash in the first place.
“There is talk of a new energy home grant, but it doesn’t look any less misguided and ungenerous than the last grant system that failed miserably after two years,” said Smith.
He concluded: “The government’s commitment to backing its COP26 climate change promises through legislative and economic measures seems to be waning already.”
Not enough
While commentators conceded some measures such as cutting basic rate income tax were welcome, the general consensus was that the plans go nowhere near far enough, as Quilter Cheviot, head of fixed interest research, Richard Carter, put it: “While Rishi Sunak announced a number of welcome measures to help households cope with the cost of living crisis, these measures most likely will not go far enough to protect the consumer from a very challenging outlook.
“The rise in the National Insurance threshold and the cut in basic rate income tax at the end of this parliament will go some way to put more pounds in the pockets of voters ahead of the next general election, but it doesn’t necessarily help people with the here and now.
“With the war in Ukraine continuing to push up the oil price and utility bills due to rise sharply in the spring, and later in the year, inflation is beginning to bite for businesses and households.”
Looking ahead at what might be included in the government’s energy security plan, Heather McKay, policy advisor on sustainable finance at E3G, said net-zero strategy is key: “Energy security and cheaper bills will not be achieved without large scale investment in the net-zero transition.
“However, today’s Spring Statement shows that we’re still falling short. The upcoming Energy Security Strategy must be accompanied with a clear and coherent net-zero financing plan. Otherwise, the next crisis will soon be on the horizon – and will hit the most vulnerable hardest.”
McKay’s colleague Ed Matthew, E3G campaigns director, encouraged the government to focus on home insulation for an easy win.
“The UK has the most energy inefficient housing stock in western Europe and action to cut energy demand is the most effective way to bring down energy bills. The cut in VAT for retrofitting homes is welcome, it will boost the industry and make action to decarbonise homes more affordable.
“What is missing is more financial support for low-income households to insulate their homes. One in three households could be in fuel poverty by the autumn and eliminating energy waste must be the government’s number one priority in the energy security plan to be announced in the coming days,” said Matthew.
