Energy bills: Top economist's warning over government's £150bn cost-of-living gamble

New British Prime Minister Liz Truss walks outside Number 10 Downing Street, in London, Britain September 7, 2022. REUTERS/John Sibley
Liz Truss has announced a multibillion energy bill package but has not explained how it will be paid for. (Reuters)

The government's decision not to explain how it will pay for its energy bills rescue package has been branded "extraordinary" by a top economist.

Liz Truss unveiled a multibillion pound 'Energy Price Guarantee' to deal with the UK's soaring energy bills last Thursday in her first major intervention as prime minister. Experts believe it could cost up to £150bn.

The package, which will see the government freeze energy bills for households, is designed to avoid an eruption of destitution this winter.

Under Truss's plan, the price cap – which was due to hit £3,549 – will now be set at £2,500 with the government subsidising the difference. Businesses will receive a similar support package for the next six months.

Read more: Liz Truss likely to visit US and hold mini-budget next week

In three months, the scheme will be reviewed to see how smaller businesses unable to take the impact of soaring costs can be best supported moving forward.

Truss has ruled out implementing a new windfall tax on energy producers with economists expressing concern that the plan has not been properly costed.

"It's extraordinary that they didn't publish a cost with the announcement," Paul Johnson, the director of the Institute for Fiscal Studies (IFS) told Times Radio.

"This could actually turn out to be the biggest fiscal announcement of my lifetime, because this could cost £150 billion.

"I can't think of anything else... [even] through COVID, or even through the financial crisis, that cost that kind of money."

Energy prices will be capped for the next two years. (Ofgem)

He added: "I really hope they've got teams of people working for the next year on thinking of something better for next winter – because, whilst this might be necessary this year, it's incredibly expensive, it's totally untargeted, it gives larges amounts of money to people who don't need it."

Speaking in parliament on Thursday, the prime minister said the move would "curb inflation and boost growth" as well as protect consumers from soaring costs.

“This will save a typical household £1,000 a year. It comes in addition to the £400 energy bills support scheme," Truss said.

While Truss hasn't provided details on who will foot the bill, chancellor Kwasi Kwarteng last week said there would be "fiscal loosening" to cover the cost, suggesting the government would borrow to cover the scheme.

Read more: Martin Lewis seeking 'urgent clarification' of energy bills for people on fixed rates

Labour leader Sir Keir Starmer claimed Truss expected taxpayers to foot the bill for the support package.

"Ask voters whether they think that it is fair that they pick up the bill, or those companies that make profits they didn’t expect to make, and there is only one answer to that question," Starmer said on Thursday.

"It is a very simply question of whose side are you on?"

MPs are expected to debate the plans next week after the period of national mourning ends on Monday following the death of the Queen.

Watch: Liz Truss's energy plan is a momentous intervention but there's a lot we don't know