By Paul Homewood
https://obr.uk/efo/economic-fiscal-outlook-october-2018/
Twice a year, the Office for Budget Responsibility (OBR) publish an Economic & Fiscal Outlook Report, which is intended to provide independent and authoritative analysis of the UK’s public finances.
One table lists the cost of Environmental Levies, essentially subsidies handed to low carbon generators and other costs associated, which are added to energy bills. The logic is that such costs imposed on consumers as a direct result of government policy is akin to tax and spend.
These costs are in theory limited by Levy Control Framework regulations, as DECC explained in 2013:
https://www.gov.uk/government/news/new-energy-infrastructure-investment-to-fuel-recovery
Up until March 2019, as the chart at the top shows, Environmental Levies quite properly included Feed in Tariffs (FITs), which are the subsidies handed out to small renewable generators.
It was therefore a surprise to find that FITs had been omitted from this year’s OBR report:
https://obr.uk/efo/economic-and-fiscal-outlook-march-2020/
After several attempts to get an explanation from OBR, one reader got his MP onto the job, and received this gobbledegook in reply:
We apologise for the delayed response to his original e-mail. This had been sent to a mailbox that was used for feedback to discussion papers and wasn’t monitored regularly. We have now put processes in place to ensure that e-mails to this mailbox won’t be missed. Any further queries should be directed to the obr.enquiries@obr.uk mailbox.
We explained why we dropped feed-in tariffs from the public finances numbers in our Restated March 2019 forecast (paragraphs 1:20 and 1.21)
https://obr.uk/docs/dlm_uploads/Restated_March_2019_forecast.pdfhttps://obr.uk/docs/dlm_uploads/Restated_March_2019_forecast.pdf
1.20 Our March forecast included several environmental levies that in the real world add to customers’ energy bills. The ONS has decided that some of these schemes, such as the renewables obligation, should be treated as an imputed tax that pays for imputed spending of an equal amount. This treatment derives from the fact that the charges would not exist without the policy that established them, so in statistical terms they are treated as equivalent to a normal tax and spending policy. But the ONS has not reached a classification decision for all the schemes. Two – the warm home discount and feed-in tariffs – were included in the Treasury’s March 2010 forecast and in all our forecasts subsequently. We were content to anticipate the ONS classifying them in this way because they were similar to other environmental levies already included in the ONS data – such as the renewables obligation.
1.21 In its May 2019 Looking ahead article on future classification plans, the ONS indicated that decisions regarding ‘rearranged transactions’ like these will only be taken over the long term – beyond three years from now. It also noted that “Guidance in the area of rearranged transactions continues to evolve and elements that can be applied to energy schemes resembling tax and expenditure are still limited.” Since these schemes are neutral for borrowing, but drive a wedge between our forecast for receipts and spending growth and the ONS outturns that our forecasts are monitored against, we have decided to stop anticipating their future classification in the public finances.
Effectively our forecast for the public finances is based on the methodology and classification decisions from the Office for National Statistics. Despite this change, feed-in tariffs will continue to add to energy bills and provide subsidies for those with solar panels eligible for the scheme.
Apologies again for the delayed response.
Jon
Jon Riley : Team Leader, Receipts and Fiscal Forecast : Office for Budget Responsibility : Level 14T, 102 Petty France, London : Telephone 0203 334 6209
In simple terms, the ONS/OBR had decided on a whim that FITs should no longer be included, even though they admit that feed-in tariffs will continue to add to energy bills and provide subsidies for those with solar panels eligible for the scheme.
What is also interesting though is that the pot of £7.6bn (at 2012 prices) has already been exceeded, with costs this year projected at £9.6bn plus FITs of about £1.6bn. Even allowing for inflation, the LCF pot would only be around £9bn.
I am not aware that the LCF has been legally increased, which I understand would need to be approved by Parliament. I am asking BEIS about this. One wonder though whether the exclusion of FITs might allow the government to cheat.