Chancellor Rachel Reeves is reportedly considering scrapping the 5% VAT on household electricity bills to ease the cost of living crisis and fulfill her pre-election pledge to reduce average energy costs by £300. However, economic and environmental experts warn that the move could backfire, disproportionately benefiting wealthier households and undermining the UK’s climate goals.
Analysts argue that the measure would favor those living in larger homes with higher electricity consumption, offering minimal relief to lower-income families. Experts also caution that cheaper electricity could lead to increased energy use, resulting in higher carbon emissions and setbacks in the transition toward clean energy.
The proposal, estimated to cost the Treasury around £2.5 billion annually, could also complicate relations with the EU, which mandates a minimum 5% VAT rate on domestic energy. Critics suggest that instead of a blanket VAT cut, the government should explore fairer alternatives—such as shifting green levies from electricity to gas bills or funding renewable subsidies through income-based taxation—to maintain fiscal balance while promoting sustainability.
Reeves faces a critical test with her upcoming 26 November budget, as she seeks to fill a projected £30 billion fiscal gap without worsening the cost-of-living strain on households.