Chancellor looking at cutting energy bills in budget

Rachel Reeves will tell Cabinet colleagues she is considering measures to reduce household energy bills as part of her budget response to rising inflation, expected to reach 4% when official figures are announced on Wednesday.

Economists forecast that consumer price inflation (CPI) will have reached double the Bank of England’s target in September, driven up from the 3.8% recorded in August by rising fuel and food inflation.

Speaking ahead of publication of the figures by the Office for National Statistics, a Treasury spokesman said that bringing down inflation was a priority, and the chancellor would convene a meeting of key cabinet colleagues on Thursday to stress its importance across government.

The spokesman specified that action to bring down energy prices was among the options being considered, the strongest indication yet that action on soaring consumer bills will feature in next month’s budget.

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The chancellor is understood to be considering cutting the 5% VAT rate on bills to zero, a move that would save billpayers around £80 a year and cost £2.5bn to implement.

Labour’s manifesto promised it would cut bills by £300 a year, but the last Ofgem price review saw a small increase driven by policy costs, leaving the government under pressure to reduce the impact of domestic energy rates that are the second-highest in Europe.

The spokesman said: “The chancellor’s view is that tackling the cost of living is urgent, and everything is on the table – including measures to bring down energy bills. She’s getting the whole of government to play its part, it’s her number one focus.”

The chancellor’s actions are a tacit acknowledgement that Wednesday’s inflation figures will be a difficult moment for a government that came to power promising to bring down the cost of living.

After peaking at more than 11% in October 2022, CPI returned to the Bank’s target of 2% in May last year, two months before Labour took office.

After briefly falling below 2% in September 2024 as higher energy prices from a year earlier dropped out of the calculation, it has marched steadily upwards, largely driven by energy and food prices.

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The Bank of England has forecast that this September’s figures will mark the peak of this inflation cycle for the same reason, with the Ofgem energy cap rising less this October than a year ago.

That underlines the importance of gas and electricity bills to household finances, the official figures and the government’s energy policy.

Campaigners and some energy companies have urged the government to bring down electricity bills by shifting levies for renewables and funding for social programs to general taxation, a move estimated to cost £6bn.

The Conservatives have said they would cut levies that currently pay for carbon taxes and older forms of renewable power subsidy, cutting bills by £165 a year.