We expect government help in a crisis. Will Reeves intervene on energy bills this time?

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Laura KuenssbergSunday with Laura Kuenssberg

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How big is the blowback from the Iran conflict likely to be on us?

“Insanely profound,” answers one government source. “Huge,” says another.

Which begs the question: what are the prime minister and chancellor going to do about it?

This week Prime Minister Sir Keir Starmer vowed working families were always at the top of the list. It is possible that a crippling spike in energy costs is on the way.

So are we careering towards the government writing another enormous cheque to prop up families and firms in the name of a crisis?

When missiles started dropping a fortnight ago, Chancellor Rachel Reeves switched the focus of a weekend working on her planned Spring Statement to a weekend of starting to plot what the effect of a new conflict in the oil-rich Middle East might be, and what the government might consider doing in response.

Just as well, you might think, given the war rendered her planned statement out of date before it had even gone to the printers.

But Reeves soon asked her top official to create an Iran response board, staffed by ministers, advisers, and senior Treasury civil servants.

Its job is to pull together what the government could do to protect the economy from the worst possible effects of the war and spiralling oil prices - as well as families’ energy bills.

PA Media

There is acute concern about how the effects of the war could choke off a stumbling recovery in the economy.

The immediate focus, though, is on the cost of that most political of resources – energy.

The Treasury has already nudged competition authorities to make sure they are keeping a beady eye on the energy industry.

They’ve already talked to suppliers. Specific help is being planned for the many people who rely on heating oil to warm their homes.

And for good measure, there’s already been a very public tiff with the industry, after ministers started talking about price gouging and profiteering.

No one knows how long the war will last. No one can predict how long oil prices will stay high for. And remember, ironically, energy bills for many households are about to go down for at least three months due to a fall in the price cap.

But how does the government protect consumers and companies if the price of oil stays sky-high for a long time?

The country is still paying off the costs of Liz Truss’s energy bailout four years ago after prices shot up following the Ukraine war. Only a couple of years before that there was furlough – when the taxpayer paid more than 10 million people’s wages during the pandemic.

First, would they act? Starmer spelled it out in the Commons this week: “No matter the headwinds, supporting working people with the cost of living is always top of my mind.”

Reuters

The chances a Labour government, which promises to help everyone make ends meet, wouldn’t step in if bills go through the roof later this year are slim to none - especially given the Conservatives paid the nation’s bills not so long ago.

As one government source said: “If Truss and Kwarteng did it, then Starmer and Reeves will feel they need to as well.”

While government sources are tight-lipped about the details of what they might plan, in multiple conversations there was no dispute that if consumers are on track to get hammered by much higher bills later this year, ministers will feel compelled to step in.

Right on cue, Reeves told the Times this weekend the government was “working through different scenarios” it could take.

On Monday she’ll give the full details of specific help for people who rely on heating oil – tens of millions of pounds that will be distributed through local councils.

And as one source involved in discussions between government and industry this week said: “There was an acceptance there might have to be an intervention.”

But there’s also a sense that any support with energy bills should be granted in a different way to last time round. Another insider in the talks said there was an awareness of the rush of the 2022 energy bailout. “It really was very, very last minute. Now, rather than planning on putting anything in yet, they are creating contingency plans.”

Another source acknowledged: “It can’t be the same as last time.”

NurPhoto via Getty Images

Talks have been exploring whether there are ways to give financial support to only some families and households.

In the rush under Liz Truss, government concluded it was too hard to work out how to target extra cash, so everyone received help to pay their bills. As another source said: “The Treasury paid for the richest man in the country, and the poorest man in the country.”

But now I’m told government is looking at who might suffer most from prices going up and how to target just them.

That is not as straightforward as it might sound, as one former No 10 official described it. “There’s no good, clear correlation between wealth and energy bills.” An elderly person might live alone with a tiny income, in a draughty, big old family home that costs a fortune to heat, while a big family with a middle-sized income might live in a modern, well-insulated flat.

I’m told there’s consideration of how to help smaller and medium-sized businesses which get hit hard by energy costs - not necessarily by sending them cash, but perhaps tweaking some policy, to help them get better deals or energy contracts.

Then there is pressure from some to strip more of the costs from bills that don’t go directly to pay for energy itself – like paying to upgrade the grid.

But taking cash away from those schemes could impact the price of energy in the long term and are likely to meet resistance.

AFP via Getty Images

Ministers won’t be drawn on the detail of any of this yet.

One government source said there “could be a scenario where the price cap goes up by just a couple of pounds”, adding it wasn’t clear there was a “huge £50-a-month spike coming”.

It’s Ofgem’s job to watch what’s happening with energy prices and they won’t make a decision about the next energy cap until the end of May.

But how shocking would the price have to be before ministers decided they need to act?

The government, taxpayer, and economy are still paying for the huge costs of bailing out business and workers during the pandemic, and the dramatic spike in energy prices in the months after Putin’s tanks rolled into Ukraine.

When you speak to those who made those decisions, it is striking how much the weight of their choices still sits with them - those historic moves that propped up the economy, but cost tens of billions of pounds, now, weighing down the country’s balance sheet.

It’s not traditionally very conservative to pump billions of pounds into the economy. But talking to people who were in the room when those conclusions were reached, it’s obvious they felt they had no choice.

A senior former official who worked closely with Rishi Sunak recalled: “The alternative was in the space of about four weeks, northwards of ten million people losing their jobs. They couldn’t have found another one because we were telling them to stay at home.”

AFP via Getty Images

Another involved in the decisions remembers feeling the scale of the decisions “washed over me”, saying, “it was totally and utterly necessary and right at the time, but we knew there’d just be such a huge adjustment, nationalising a big part of the private sector for a long period of time”.

It was “uncertain and uncomfortable, you never want to be in government like that,” they added.

In the end, government spent about £70bn paying people’s wages under the furlough scheme. But research later calculated the net cost was £25bn because it preserved jobs and the economy in the longer run.

“It was a time of genuine and acute crisis, when people expect government to stand behind them,” one former official says now.

Two years later, with Liz Truss campaigning to become prime minister, one former No 10 official says while she was "out campaigning saying ‘no handouts’… I was being shown modelling of households earning £50-60,000 who’d fall into fuel poverty.

“It was very clear something was going to have to be done. Pubs, nail bars, lots of business would have ceased trading if we hadn’t.”

When Truss arrived in No 10 she promised to help pay household bills for a full two years - capping them at £2,500 - with six months’ support for businesses.

Just like furlough, ministers and officials had no idea how much it would ultimately cost taxpayers. One recalls: “We had no way of knowing what it cost. Treasury were giving me costs of £40-£150bn. I was like, ‘Guys, that’s not helpful.’ And we had no idea how we would do it.”

One of her team remembers: “I remember Liz saying if the market could swallow hundreds of billions of Covid loans because it felt like the right thing to do, then an energy bailout felt perfectly legitimate.”

The alternative was bills rocketing and the “potential for blackouts, tipping people in poverty into not being able to pay their bills, even dying, and a winter of discontent”.

Officials had no idea what the costs would be. The Office for Budget Responsibility (OBR) estimated they would hit nearly £80bn, but in the end, the National Audit Office reported the price to be £44bn. This shows not just how expensive the scheme was, but how officials really didn’t have a clue what the price would be.

The source says: “You had to do it big or not do it, and the half-arsed version just wasn’t going to cut it.”

Both those big moves were made in a time that felt like an emergency. During the pandemic, millions would have lost their jobs and income if the government hadn’t stepped in.

In autumn 2022, a typical household’s gas and electricity bill had been due to rise from £1,971 to £3,549 before Truss stepped in.

There is widespread assumption - openly acknowledged by the chancellor in that Times interview today - that if there are huge spikes ministers will act.

You can see why those governments took the decisions they did, but perhaps the long-term cost was not just loading up the national debt, but giving the public a new sense of how much they could rely on the government to help.

One of those involved in the furlough discussions told me: “The biggest thing was realising the expectation of the state had been reset.”

“If the public assume more of that, then there ought to be a conversation with the country about what they expect less of.”

In government there is chatter already about how they’d pay for any extra major support for households, beyond tens of millions coming soon for those who rely on oil for heating.

If the oil price stays high for months and hits everyone’s bills, one government source predicts: “Keir will have to decide if the Treasury takes it out of reserves or Ed Miliband will have to decide whether it comes from the companies. Or go round everyone with a begging bowl?”

It is government’s fundamental job to stand behind the public at moments of acute crisis.

But if those emergencies come along far more often than they used to, then perhaps our politicians will have to find a way of persuading us all to pay more so they can respond to them, or start a conversation about how it might be less possible to do other things.

As a former No 10 official says, “energy has become more expensive, but is it really up to the government to be liable for your bills? A ratchet only moves in one direction.”

But as one government insider said, if oil price spikes are followed by big rises in household bills, “it is inconceivable to imagine a Labour government not helping people out”.

But that could have a huge impact, not just to the public balance sheet, but again on the relationship between the public and government. Maybe the politics of emergencies has created a politics of expectation.

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_Top picture credits: PA and Reuters _

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