Sir Keir Starmer’s plan for a fully funded energy price freeze for UK households is based on an "illusion", the Institute for Fiscal Studies warned on Sunday night.
The Labour leader will on Monday say the cap on electricity and gas prices should be frozen at its current level of £1,971 for six months from October, in order to protect householders from the planned rise of up to £3,600 this autumn.
Sir Keir will claim the £29 billion cost could be funded by increasing the windfall tax on oil and gas companies to £8.1 billion, diverting £14 billion of planned spending by the Government and Tory leadership contenders and £7.2 billion from saving on debt interest payments from lower inflation.
But the IFS warned the £7.2 billion saving on interest payments on national debt was an “illusion” as inflation would increase unless the huge subsidies remained permanent beyond six months.
“It’s an illusion in the sense that it will reduce interest debt payments in the short term. But unless you maintain these kinds of subsidies permanently, it won’t reduce them in the long run. Inflation will be higher later on,” said Paul Johnson, the director of the IFS.
Sir Keir had faced criticism last week for being absent on holiday but will set his plans on Monday during a visit to Exeter. His proposal to save the average household £1,000 on their gas and electricity bills dwarfs the £400 announced in May by leadership contender Rishi Sunak when he was chancellor.
The IFS also warns on Monday that rising inflation and energy prices means the incoming Prime Minister will have to find an extra £12 billion simply to maintain the level of support that the Government promised in May.
This would mean an extra £620 for the poorest households on top of the £650 grant already promised, and a further £260 to cover the increase in energy costs for the typical family over the year in addition to the £400 already pledged.
Liz Truss, the front-runner in the Tory leadership race, has not ruled out further help for families despite focusing her economic package on immediate tax cuts rather than direct payments.
However, her allies on Sunday dismissed Sir Keir’s plans as a “sticking plaster”.
“Grabbing a headline is not a substitute for a more consistent policy,” said one ministerial ally.
“Any freeze has to come to an end. Remember the freezes of the 1970s and prices jumped immediately they ended. On their own, they are temporary sticking plasters that don’t solve the underlying infection.”
Government sources confirmed that Nadhim Zahawi, the Chancellor, is working on plans to cut an extra £400 from energy bills this winter that would be presented among options for the incoming prime minister.
He has asked officials to work on a multibillion-pound package which would lead to a reduction in the energy price cap from January.
It would alter how Ofcom determines the level at which the cap should be set by removing an allowance that suppliers can charge consumers. That cost would instead be paid for through financing facilitated by the Treasury and Bank of England.
Sir Keir's plans would 'lead to higher taxes'
Greg Hands, the energy minister and supporter of Mr Sunak, said the former chancellor would be prepared to commit “big numbers” to help with the cost of living crisis but warned Sir Keir’s plans would lead to higher taxes.
Asked about the Treasury’s plans for a £400 cut in energy bills, he told Times Radio: “Rishi, as you saw during the pandemic, is not afraid to commit big numbers to support the economy and support people at difficult times.”
In an interview with the BBC, Mr Hands said Mr Sunak would want to take “direct, immediate action” to help people pay their energy bills this winter but warned that Labour’s “magical solution” would have consequences.
‘We would have to find a way to compensate people for effectively trying to abolish that price rise, and that would inevitably lead to higher taxes,” he said.
Sir Keir’s intervention will increase the pressure on Ms Truss and Mr Sunak to spell out what they would do to help families struggling with soaring bills if they become Prime Minister.
In order to pay for the measures, Labour said it would close a "loophole" in the levy on the profits of the energy companies announced by Mr Sunak in May, and backdate the start to January, which would bring in £8 billion.
Labour said £14 billion would come from dropping the £400 energy rebate and abandoning pledges by Ms Truss to halt the "green levy" on fuel bills, or scrapping VAT on domestic fuel bills which Mr Sunak has promised.
And by keeping inflation down to nine per cent rather than the forecast 13 per cent, it would reduce the Government's debt interest payments by another £7 billion.