Reeves considers cut to green levies in effort to reduce cost of energy bills | Budget 2025

Rachel Reeves is considering slashing funding for more energy-efficient homes to fund a reduction in energy bills, sources have told the Guardian, as the chancellor looks for ways to ease the cost of living in this month’s Budget.

Reeves is finalizing a multi-billion pound energy support package which is expected to cut taxes and eco-levies on people’s bills, as she seeks to save up to £170 on the average bill.

The chancellor hopes the focus on cutting energy bills will help reinforce Labour’s slide in the polls, weaken the appeal of Britain’s Reform Party and blunt the impact of widely expected tax rises in the autumn budget.

In a rare pre-Budget speech on Tuesday, the chancellor signaled she was prepared to make controversial decisions, as she and the Prime Minister debated breaking a pre-manifesto pledge and raising income tax.

She said: “I could do what previous governments have done, which is sweep these challenges under the carpet, cut capital expenditure, drive up the numbers.

“But we would be back here in a year, in five years, with productivity still on its knees, growth underperforming and a national debt still rising. So I’m honest with people.”

But she added that reducing the cost of living would be one of her top three priorities, alongside reducing the national debt and protecting the NHS.

At the Downing Street morning event, Reeves hinted at tax rises, adding that “each of us must do our part” for the future of the country. “If we are to build Britain’s future together, we will all need to contribute to this effort.”

“I have to face the world as it is, not the world I want it to be. And when challenges come our way, the only question is how to respond, not whether to respond or not.”

The chancellor added that the economic challenges facing the UK – including global tariffs, persistent inflation, volatile supply chains and defense spending – had worsened since last year’s financial report.

Ministers, prepared for a big tax hike budget later this month, warned the public must feel the direct benefit of any increase.

“If we do this, we need to be absolutely clear about how we tie that to what it brings to the voters. What are we doing for them if we do this?” » declared a minister. “I’m not saying the stakes aren’t high. But there was a damn better job,” added another.

A third minister said they had come to the conclusion that voters wanted Labor to fix public services, even if they didn’t like the way they were paid. Several told the Guardian they felt the tax election pledge was “stupid” for an opposition party.

In a sign of the government’s internal concerns about a possible market reaction, Labor has in recent weeks held a series of pre-budget “economic analysis sessions” for Labor MPs with economists and former ministers.

Reeves and the Prime Minister have identified high energy bills as a major source of financial pressure for voters and are planning a relief package likely to cost around £3 billion a year.

Keir Starmer is said to be particularly concerned about the impact of an expected £100 rise in energy bills next spring, and wants to do enough to eliminate this and cut costs even further.

A large part of the plan, insiders say, will involve eliminating the 5% VAT rate on some or all domestic energy bills, a move which experts say would cost £2.5bn a year and cut bills by £86 on average.

Some economists warn that such a move could benefit those with larger homes and encourage people to use more energy, but the Treasury appears to favor the idea because it is quick and simple to implement.

Alongside the VAT cut, Reeves plans to reduce or eliminate some of the green levies on bills, which could reduce costs for households and undermine the Reform Party’s promise to do the same.

However, energy sector experts say it would be “disastrous” to dip into energy efficiency funds to help finance the project.

Those consulted on the plans say the Chancellor is particularly considering reducing or scrapping the Energy Company Bond, under which energy companies help fund home improvement measures such as insulation and new heating projects. Last year the National Audit Office warned of fraud and poor quality of some work undertaken under the scheme.

If the scheme is reduced or scrapped entirely, Energy Secretary Ed Miliband could choose to reallocate money from the £13bn Warm Homes Plan, much of which is intended to fund grants for electric heat pumps.

The government decided as recently as June to protect the scheme, but the chancellor appears willing to see it cut to help bring down bills now.

Reeves is also considering reducing other levies, such as the Revolving Bond Certificate program, which currently increases in line with retail price inflation but could instead be linked to the decline in the consumer price index.

The Treasury declined to comment on the budget speculation, but those in the energy sector believe the plans could backfire in the long term.

In her speech, the chancellor also accused previous governments of putting “political expediency” ahead of “economic imperative”, by raiding investment budgets intended to support public services to balance the books.

“The problem of the last 14 years is that political expediency has always trumped the national interest. And that’s why we find ourselves in the mess we find ourselves in today,” she added.

The cost of UK borrowing fell slightly as the Chancellor reiterated her “ironclad” commitment to her fiscal rules, reassuring bond markets.

After the speech, Starmer told his cabinet that the budget would not starve the state of cash or take “risks by borrowing more”, inferring that tax rises were the only option.

Government sources said the prime minister had accepted the need for the move. “Even though everything is blowing up around him, he has a plan and knows which direction we are going,” they added.

Dhara Vyas, chief executive of Energy UK, said: “Billions of pounds of investment have been put on hold pending the warm homes plan – all of which could be put at risk by any sudden change in direction. So diverting the budget from the plan and effectively abandoning its original objective would be a short-sighted and disastrous decision.”

“We have had plenty of previous experience demonstrating how knee-jerk reductions in investment in warmer homes have led to customers paying billions of pounds more on their energy bills, while also damaging supply chains and businesses, with knock-on effects on investment and job losses.