Economic Insider

UK and EU Pours in $500 Billion to Subsidize Energy Among Households, Businesses

The United Kingdom confirmed that it had plans to provide subsidies to households and businesses so they could cope with the soaring energy prices. The country is following suit with other European countries that have pledged to protect their economies after the cutbacks on Russian energy supply strained power grids.

According to analysts, the plan laid out by the UK could cost the country £150 billion or $172 billion. In total, in European nations, including Austria, and Germany, the planned subsidy of the respective governments, reached over $500 billion.

The plan will start in October when households will only pay as much as £2,500 ($2,880) and nothing more in the next two years. The program will also allocate ample funds to corporations, charities, and other public organizations so they can keep up with energy costs. For these sectors, the UK has enough funds to pay for costs of up to 6 months. However, depending on the situation, the period can increase.

“Because the program does not specifically target the most needy but is rather broad-based, it will be relatively expensive,” Salomon Fiedler, a Berenberg bank analyst, said.

“The support package for households may cost around £100 billion (over 4% of UK GDP). Further measures for businesses may take the total price tag to around £150 billion,” he added.

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The country needs the support

Capping the prices of energy is the correct step, says analysts, as households and businesses have seen a steady increase in energy costs over the past months. At the current time, a household already pays an average of £1,971 or at least $2,263 for energy costs. This figure is a 54% increase since the beginning of the year.

Bills would have already soared above the £3,500 threshold if the subsidy did not exist. And this number should increase next year. Many businesses have already warned that most of them cannot survive the crisis if the current conditions continue. Thankfully, the intervention announced by the government eased the mood of stakeholders.

“The price of inaction would have been far greater than the cost of this intervention,” said Kwasi Kwarteng, the finance minister.

During a session in parliament, Prime Minister Liz Truss said they would not impose taxes on energy companies to use as funding for the subsidy. Instead, government borrowing will be utilized. However, investors are wary of Truss’s plan, saying that immense borrowing could only do damage to the UK in the long run.

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The intervention might not be enough

A Brussels-based think tank said that the EU and UK have already spent almost $280 billion to aid consumers in keeping up with skyrocketing bills. This includes the spending it incurred in September of last year when the energy prices started to hike.

However, the other part of the EU’s and UK’s investment was poured in this year when Russia invaded Ukraine. Subsequently, prices of goods and commodities increased aggressively.

Meanwhile, Germany told its constituents of a $65 billion subsidy to households and companies to pay for higher energy costs. Austria has also decided to freeze the prices of electricity starting December 2022 until June 2024. The total cost of the initiative would amount to $4 billion.

To sum up this spending, the UK and EU have already subsidized more than $500 billion to meet the energy crisis. But experts say that more needs to be done as Russia cut off its supply to Europe a couple of weeks ago.

Energy ministers from the Union held an emergency meeting to discuss matters related to the energy crisis currently troubling much of Europe. Among the issues to be discussed include the price cap on Russian gas, Links between gas and electricity prices, and other measures to be taken.

“We must cut Russia’s revenues, which Putin uses to finance this atrocious war against Ukraine,” said Ursula von der Leyen, EU Commission President.