The UK faces multiple interconnected crises. In the medium term, we are suffering from mass impoverishment, failing public services and a climate emergency. In the short term, very acutely, the cost-of-living crisis threatens many people and businesses with costs they cannot bear – recent inflation, caused to a large degree by the rise in energy prices, threatens the worst fall in living standards since records began.
The UK’s new Prime Minister, Liz Truss has promised to act. Although she has not released all the details of her plan – such as how much she is proposing to spend – she has outlined the basic thrust.
This article explains the problem and analyses her solution.
Our conclusion is that the Truss plan is deeply flawed. We should push hard, now, for an alternative plan that works for people, for the environment and for the economy:
- Our challenge is complex, but not too complex to see that doing nothing would be a disaster
- The new PM’s plan is set to fail on (almost) all counts
- Alternative approaches would be better for people, better for the economy and better for the environment
- We need to apply pressure right now for a redesign
Doing Nothing Would Be a Disaster
The diagram below summarises two key elements of our current challenge: the Environmental Crisis around energy supply and the Economic Crisis; and it shows the linkage between them.
The UK (like many other countries) still depends on fossil fuels for a large proportion of its energy. In 2020, BEIS says, of 312 Terawatt hours of electricity generated, around 125 Terawatt hours were from renewable sources. In addition, most transport still uses fossil fuels, and most heating is fossil fuel based – domestic heating alone consumes almost 300 Terawatt hours’ worth of natural gas.
Renewables are now, however, cheaper than fossil fuels: one way to lower prices, as well as reduce environmental damage, is to invest in renewable energy generation capacity. Demand reduction measures like home insulation reduce the total demand for energy and therefore the total cost of energy to the economy (as well as having environmental benefits).
At the moment, we are suffering from high prices, not because the cost of production has risen, but because of Putin’s restriction of supply to the West. This has manifested in an eye-watering profit windfall to UK energy companies who seized the opportunity to push up their prices in response. The Treasury estimates these excess profits to be around £170 billion (that is equivalent to over £6,000 for every household in the UK):
“UK gas producers and electricity generators may make excess profits totalling as much as £170 billion ($199 billion) over the next two years, according to Treasury estimates that lay bare the revenue-raising potential of a windfall tax.”
These higher energy prices are contributing hugely to inflation and the cost-of-living crisis. We have previously written about the dangers of the Bank of England’s response – if inflation rises further, it will raise interest rates further. Households already very hard pressed by the fall in living standards, will see their mortgage payments rise too.
We risk seeing:
- Poor and medium-income households and many small businesses finding that, even being frugal, they cannot make their income cover their costs:
- Those who can will deplete their savings or go into debt
- Some will face the choice between heating and eating
- Some will go bankrupt
- Many households cutting back on all but strictly necessary expenditure and many being unable to pay their debts
- Many businesses shrinking or failing altogether
- An economic contraction worse than that caused by the Global Financial Crisis.
Here is the Bank of England’s forecast for the economy.
The only silver lining in this is for those with large amounts of spare capital looking to invest. This type of economic disaster reduces asset prices as sellers have no choice but to accept fire-sale prices. The share of total wealth held by the wealthiest tends to rise in such emergencies. As Andrew Mellon put it in relation to the Great Crash of 1929:
“liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people.”
The first diagram, showing the complex web of cause and effect that makes up the UK’s challenge, is therefore not showing one key factor – the extent to which the wealth of the richest is deployed to set policy (in relation to all the other issues) for their own benefit. If we added all these linkages, the diagram would be too complex to read.
In short, this crisis is a clear example of market failure: simply allowing market forces to determine the outcome would be ruinous for the UK economy as a whole, for many families and small businesses (and some large ones) and for the environment. We cannot afford to do nothing and rely on the ‘magic of market forces.’
The New PM’s Plan is Set to Fail
Our new Prime Minister is a Market Fundamentalist with strong links to extreme right-wing Tufton Street think tanks. Her natural tendency is to believe in the ‘magic of markets’ and the power of trickle-down economics, and she is reluctant to interfere with the market outcomes described above – it is for this reason that she has rejected the idea of a windfall tax. In this case, however, it is clear to many in her own party that doing nothing would be electoral suicide and she is under pressure to act.
Her selection of advisers is, however, extremely worrying for anyone hoping to have a sane (non-fundamentalist) voice at the table when the solution is created:
- Several are linked to CT Group – the consultancy set up by Australia’s answer to Steve Bannon, Lynton Crosby:
- Mark Fullbrook: the new Chief of Staff
- Reuben Soloman: Digital Adviser
- Bea Timpson: Deputy Press Secretary
- Iain Carter: Director of Strategy
- Several are graduates of the Tufton Street think tanks:
- Matt Sinclair: Chief Economic Adviser (ex-Taxpayers’ Alliance)
- Sophie Jarvis: Political Secretary (ex-Adam Smith Institute)
- Caroline Elsom: Health Advisor (ex-Centre for Policy Studies)
- And Michael Stott (External Management) is the former Head of Public Affairs at EDF energy.
The largest single donation (£100,000 out of a total of £420,000) to Truss’s leadership campaign was made by the wife of a former oil-company executive.
Given both Truss’s own predispositions (“Profit is not a dirty word”) – even these eye-watering excess profits which are imperilling the health of the UK economy – and the dispositions of her advisers and donors, it is not surprising that her plan addresses neither the needs of the UK population, nor the economy nor the environment.
She has called the key element of her plan a ‘price cap,’ but it is not really a price cap. Instead of saying, for example, that prices will be fixed at levels UK consumers can afford and the cost will be borne by a windfall tax on the energy companies’ super-profits, she is setting the cap higher and meeting the costs from the Exchequer (though she has so far refused to disclose what those costs will be).
Truss has set her ‘cap’ at £2,500. As the chart below shows, that is still far too high – for many people it will still be unaffordable, and it will still be inflationary.
Because the ‘cap’ is not set low and the prices will still be highly inflationary, the likelihood of the Bank of England increasing interest rates will still be high. There will still be damage to the wider economy. And there will still be rich pickings for the wealthy.
Meeting the costs from the Exchequer, rather than denting energy companies’ profits means that the government will borrow the money it needs to compensate the generators for the difference between the ‘cap’ and what they would charge to make up for the high prices being charged by the energy companies. And because the government still runs the UK economy as though we were on the gold standard and the government had to act like a normal household, this additional borrowing will then be paid back by UK households over many years.
In effect, Truss is loading UK households with debt in order to protect energy companies’ profits. Households will not avoid having to pay the higher prices needed to sustain super profits, they will merely pay for them more slowly. Independent estimates of the cost of her scheme are that it will be well over £100 billion.
In the longer term, of course, we should look at energy production. Truss’s answer to the problem is to encourage oil and gas extraction from the North Sea and to legalise fracking. Clearly these suggestions neither make economic sense (except to those heavily invested in fossil fuels) nor meet the increasingly vital needs of the environment.
This is a plan which will be good for shareholders in energy companies and for the wealthiest 0.01%, but bad for most households, bad for the economy as a whole and bad for the environment.
Alternatives would be Better for People, Economy and Environment
What could she have done instead? Two key elements would create a very different outcome:
- Short-term – serious, well designed price caps not funded out of taxpayers’ pockets
- Medium term – heavy investment in renewables and energy efficiency.
A cap set at around £2,000 would still be painful – current prices are painful – but far less so, and far less inflationary. The cap could also be better designed to target help on those who need it most, as both the IFS and NIESR have pointed out.
And if it were funded by a windfall tax on the energy companies, there would be a long-term boost to households and to the rest of the economy. The Bank of England would be more likely to restrain interest rates, and the cost-of-living crisis, though not completely resolved, would at least be addressed. Can this be done in practice? The EU has just announced that it will do so:
‘European Commission president Ursula von der Leyen said on Wednesday that, “in our social market economy, profits are good. But in these times it is wrong to receive extraordinary record profits benefiting from war and on the back of consumers. Profits must be shared and channelled to those who need it the most… Our proposal will raise more than €140bn for member states to cushion the blow directly.”’
Simultaneously, Truss could be driving heavy investment in both renewable energy generation and energy efficiency measures – grants to insulate homes in particular. In the short term, these would boost the economy and in the medium term they would reduce energy costs and environmental damage. There is a risk that the stimulus would, in the short term, increase inflation (though it would be significantly less inflationary than the Truss plan) but as we have argued before, we should not panic about short-term inflation, especially when it is likely to be self correcting – and boosting capacity is the surest way to reduce longer-term inflation.
There are far better ways of solving the problem, in other words, than Truss’s plan.
We Need to Apply Pressure Right Now for a Redesign
Truss’s scheme is, however, better than doing nothing, and time is of the essence. She should therefore implement her ‘cap’ now, and instantly convene an Energy Strategy Task Force including energy experts (not from fossil fuel providers), climate change experts, economists (not market fundamentalists) and strategists to redesign the scheme to be fit for the UK population, the UK economy and the environment.
To make this happen, we need to increase the pressure on this government to act in our interests rather than those of their donors. Writing to MPs can seem futile, but when they get letters in large numbers, not from ‘the usual suspects’ and written in their own words rather than following a template, they start to worry about their own election prospects. And many in her own party are already nervous about this plan, and about Truss as leader in general. If they get a lot of letters, they will listen.
If you would like to write, you will find these notes useful. And if, rather than doing it on your own, you think you might like to be part of a community of people addressing these issues, please do sign-up and join the 99% Organisation.