Middle-class families were warned on Tuesday they face subsidising an energy bailout for those on benefits.
Rachel Reeves has pledged support for ‘those who need it most’, amid fears the Iran conflict will trigger a crippling hike in energy bills this winter.
But the Chancellor appeared to rule out the type of blanket support provided on energy bills in 2022, saying it had been a ‘mistake’.
Government sources said she was looking at a package of ‘targeted’ support to help those on benefits and low incomes.
Tory leader Kemi Badenoch urged ministers to scrap taxes on energy instead – and warned that Labour’s approach would force middle-class families to subsidise those on lower incomes, either through higher taxes or bills.
She said: ‘What we see with targeted support is taxes on other people to pay for support to others. This is Labour’s playbook. They keep raising taxes on everyone else to give benefits.
‘There is a much better thing that they could do, which is to scrap the taxes on household energy bills.
‘These are the green taxes which Ed Miliband put on all our energy bills, both households and business and industry.’
Chancellor of the Exchequer Rachel Reeves (pictured on March 24) pledged support for ‘those who need it most’, amid fears the Iran conflict will trigger a hike in energy bills this winter
A plume of smoke rises after an explosion in Tehran, Iran on March 2. 2026 – as the conflict brings warnings surrounding the impact the war will have on the cost of living
Ms Reeves played down the prospect of increasing government borrowing to pay for any bailout, saying she would not break her ‘ironclad’ fiscal rules.
It means that any help for households on low incomes is likely to be funded by either higher bills or taxes on middle-class families.
Around six million families already receive £150 off their bills via the Warm Home Discount, which was expanded last year. The scheme is funded by a levy on the bills of others, averaging around £40 a year.
Expanding the scheme further is among the options being considered by the Treasury as it draws up plans for an energy support scheme this winter.
Other options include a subsidised ‘social tariff’, put forward by the Resolution Foundation, which would require about £4billion a year in taxpayer support.
The Conservatives claimed that scrapping green taxes on energy bills could cut them by 20 per cent – around £165 a year.
The row came amid growing warnings about the impact of the Iran war on the cost of living.
Official figures today are expected to show that inflation remained at around 3 per cent in February. But energy prices have risen sharply since the US and Israeli attacks on Iran, with signs of knock-on impacts in other markets.
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Analysts Cornwall Insight have forecast that the energy price cap could jump by £332 in the summer.
Petrol and diesel hit their highest level on Tuesday since the start of the war, with diesel up by 25p a litre this month – equal to almost £14 extra on the cost of a tankful.
And the Institute for Grocery says food inflation could hit 8 per cent by the summer, piling pressure on family budgets. A rise on this scale could add almost £500 to the average household grocery bill if it was sustained for a year.
Institute economist James Walton said price rises were likely to be temporary but warned that ‘even in the best-case scenario, the conflict is likely to prolong the timeline for recovery from the cost of living crisis’.
A major survey on Tuesday also found that factory production costs are rising at the fastest pace since Black Wednesday in 1992.
And hundreds of mortgage deals have been pulled from the market in recent weeks amid fears that expected interest rate cuts will be replaced by rate rises if the Bank of England has to deal with a new wave of inflation.
Addressing MPs on Tuesday, Ms Reeves warned that the fallout from the Iran war would pose ‘significant’ challenges to the British economy this year.
But she offered no immediate help for struggling families.
She said energy bills are due to fall next month because of a cut in the price cap, which will then be frozen until July.
And she gave no commitment to extend the 5p cut in fuel duty, which is due to be phased out from September.
Soaring fuel bills are set to deliver a hefty windfall for the Chancellor. One analysis estimated that the Treasury will pocket an extra £3billion as a result of VAT on fuel and petrol and the windfall tax on energy firms.
If inflation rises to 5 per cent, as some analysts are predicting, the Exchequer is likely to receive billions more.
Tory MP Simon Hoare said the Chancellor was ‘unwittingly profiteering through a massive hike in VAT and duty take’ and urged her to ring-fence the cash to help struggling families.
The Conservative government imposed a blanket energy price freeze after Russia’s full-scale invasion of Ukraine in 2022. It cost a staggering £40billion and Ms Reeves suggested that the Government could not afford to repeat it.
The Chancellor championed the idea at the time, but on Tuesday said it had been ‘a mistake’.
Shadow Chancellor Sir Mel Stride urged Ms Reeves to slash the welfare budget instead of increasing taxes again.
He said her economic policies had ‘left us weak, weak, weak, and in the face of this energy shock, millions are about to suffer as a result.’
Sir Mel added: ‘Where is the control of public spending?
‘Where is the renewed resolve to grasp the welfare bill to get people off benefits and into work? It is nowhere, because the Chancellor is a captive of her own backbenchers and has brought our economy one step from its knees.’
Ms Reeves warned businesses against profiteering from the crisis and said she was giving new powers to the Competition and Markets Authority to ‘detect and crack down on price-gouging’.
