Audacious plan gives us fighting chance to cut bills and inflation
In desperate times governments have no choice but to be audacious in their actions. Britain’s newly minted Prime Minister, Liz Truss, is certainly showing herself alive to the challenge.
There is nothing Truss can do immediately to end Russia’s barbaric war in Ukraine.
nor can she prevent President Vladimir Putin from doubling down on his decision to deny much of Europe gas through the vital nord Stream 1 pipeline this autumn until Western sanctions on his nation are lifted. Gas prices soared 30 per cent this week after the Kremlin announced the pipeline would not reopen following three days’ maintenance.
But in a momentous policy initiative to be unveiled tomorrow, Truss will junk the ruinous surge in the energy price caps in the months ahead by fixing tariffs at current levels both for hard pressed households and for businesses still struggling to recover from the impact of the pandemic.
The relief for consumers will be enormous. Instead of average energy bills more than doubling over the next six months, domestic prices will be frozen at £2,500 (actually £2,100 after the £400a-household subsidy promised by former chancellor Rishi Sunak is delivered).
It will also strike at soaring inflation as I shall explain.
By adopting these hugely expensive policies, at the start of her administration, Truss will doubtless be condemned for abandoning her early Tory leadership pledges of no ‘hand-outs’.
But that pronouncement was made long before anyone had any clue that in response to a 340 per cent rise in wholesale gas prices this year, the regulator Ofcom might be forced to lift the price cap for households to as much as £6,500 by April 2023.
Truss’s courageous and radical decision to go further than anyone expected to help householders will have the additional benefit of shooting the Labour and Lib Dem fox.
Opposition parties, supported by leftist think-tanks, spent much of the hottest summer of recent times whipping up fears of the elderly and vulnerable freezing in their homes this winter as inflation soared. Their action also emboldened the unions into disruptive strikes and spread gloom and despondency about the UK’s economic prospects compared to those of other G7 wealthy nations.
Of course, when it comes to opening up the Exchequer’s purse string there is no such thing as a free lunch. The staggering cost of the Truss rescue package for households and the most vulnerable businesses is estimated at £140billion or more. This is in addition to the £37billion of assistance already shelled out by the Tories, with £15billion of that targeted on the most vulnerable households.
Over the last 15 years or so, politicians have learned that it is by spending big and seeking to recover the cost over long periods that the mass unemployment of the Great Depression of the 1930s can be averted.
In October 2008, then Labour Prime Minister Gordon Brown recognised that if the banking system and capitalism itself were to survive he would need to use the government’s balance sheet to lead a £500billion bail-out operation. At the start of the Covid pandemic in March 2020, Boris Johnson and Sunak came up with a £300billion or so package of measures – including the revolutionary furlough scheme – which kept most jobs in the economy intact.
The plans were largely paid for through huge government borrowings leading the national debt – the accumulated deficits of generations – to swell to more than £2trillion or the size of a year’s national output.
The big and complex challenge for new Chancellor Kwasi Kwarteng is how the £140billion of extra borrowing to pay our energy bills will be financed. Details are still blurred but it is expected that the big energy suppliers will be required to take out long-term loans from the commercial banks, possibly with government guarantees.
Similar government-backed loan schemes for business were operated by the Bank of England (for the largest corporations) and the high street banks for the smaller companies during Covid. Encouragingly much of that money has already been paid back.
ONE of the immediate and colossal benefits to the broader economy of fixing energy prices is that it deals an enormous blow against the inflation bogey. It leaves the forecasters predicting that UK inflation could peak as high as 22 per cent somewhat red faced.
Some City analysts calculate that the big freeze on energy prices could knock as much as 4 percentage points off the peak inflation rate of 13.3 per cent projected by the Bank of England later this year. Indeed, the high street banks are now saying that consumer prices may already have peaked at 10.1 per cent.
That should be really encouraging for the incoming Truss government since it might restore some discipline to labour markets where public service unions are seeking inflation-matching pay.
There is, however, a potential danger in that the government could be accused of encouraging consumers to keep their homes warmer rather than turning down the thermostat, improving insulation and conserving energy supplies. In a cold winter, such measures could prove the difference between keeping the lights on – and the wheels of commerce turning – and perilous blackouts.
no one will dispute that Liz Truss is off to a flying, if costly, start. She is giving the UK a fighting chance at least of curbing the cost of living crisis and so avoiding the deep recession that so many of the Tories’ political enemies gleefully have been projecting.