2022 could be economically turbulent

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As the Guardian reports this morning:

UK households face a hit of £1,200 next year as stalling wages and rising tax and energy bills cause a “cost of living catastrophe” in the spring, a leading thinktank has warned.

Government measures, including the new social care levy on national insurance and the freezing of the personal income tax allowance, will combine with high inflation to make 2022 the “year of the squeeze”, the Resolution Foundation said.

With fuel prices expected to increase by an average of £800 per household and NI increasing by over £200 for an average earning household this is not a difficult forecast to make.

Three thoughts. First, the tax rise was not required. We know that because equivalent income tax cuts are now being considered. It could be cancelled. It won’t be.

Second, the cost of producing gas has not risen. All that has risen is the price, driven by fears of Russia, in the main. But by no means all the gas we use is Russian. There will be UK companies making a great deal of money from this increase in gas prices: the money does not all disappear into a bottomless pit. The government could take action to recover at least some of the excess profits that will be made to then subsidise the fuels bills of those needing help - as many will. But I very much doubt that will happen.

Third, knowing this, and now knowing that Covid remains a real threat from which the Westminster government will not protect them people will not be spending with abandon right now. The idea that we are doing to see major economic growth this coming year when the ‘animal spirits’ of people in this country will be suppressed is hard to believe at present.

Fourth, the good news from that is that inflation, excepting fuel prices,  may well fall - although the chance that the Bank of England will allow for that is low, meaning that they will probably add to the woes in 2022 by increasing interest rates.

Fifth, talking of rates, the government does now have some control over gas prices. VAT rates could be cut. So could green subsidies be so, temporarily. It has options to address the issue. Instead it is likely to just rake in the money in the way of additional taxes that these price rises will deliver so that Sunak can balance the books. Don’t believe a word they say on this issue until they show that they will help share the cost of the crisis to come.

Sixth, this cannot be without political repercussion. People are already fed up with the Tories. If very large numbers of people feel considerably worse off this year - and a £1,200 cost increase will do that - then the swing against the Tories is going to be severe.

How will that express itself? I am not sure as yet. But this year could be turbulent and those who will be angry will have every right to be so, most especially of the Tories do not react to this. And if they will not react to Covid now the chance that they will react to fuel rice increases is low.  We are going to be living in interesting times, in the worst possible sense of that proverb.