I have a fairly strong suspicion I will not be getting what I want from the Spring Statement today.
I set out my concerns in a Twitter thread posted at the weekend, also posted here. In this I showed, using ONS data, that it is likely that most households earning the median wage or less will face cost of living price increases within a year which will, after allowing for likely pay increases, exceed £3,000 a year. Higher income households will actually face potentially bigger costs, but from the eighth decile onwards are likely to have the flexibility to manage the resulting choices without hardship resulting, even if they will be very angry. We are, in other words, facing a systemic crisis.
Without virtually any prior warning an inflation crisis has emerged that is wholly down to profiteering in the supply chains for food, oil and domestic energy. Since the actual costs of production for these items has not changed in any material way, exploitation can be the only explanation for what is happening in the face of shortages caused by Covid, war and, in our case, Brexit.
No one under the age of 60 has witnessed anything like this. Almost no one has experience in managing it. And unlike, say, the 70s where the issue built over time and so experience was built on all sides, on this occasion the crisis is hitting with no preparation.
This is resulting, in my opinion, in a massive misreading of what is happening. This crisis is being treated by politicians and the media alike as a ‘cost of living crisis' for the poor. It is that, of course, but it is also so much more.
First, it is a cost of living crisis for most households in the UK. Not just those at the bottom, but most of them, and politically that matters.
Second, this is not just a cost of living crisis. As people without money stop spending (and they will do that, right across the spectrum of incomes) then this turns into a viability crisis for businesses in the leisure and travel sector. That then turns into a jobs crisis. The result is rising debt, and risk of default. Then there is a rent and eviction crisis. Mortgage defaults follow. Then we have a banking crisis.
That is what we actually face. This is not a crisis for only low income households. This is a potential economic meltdown.
Right now it seems almost no politician gets this. Sunak does not, I am sure. Rumour has it he will not even rebate all the tax gains he is making from inflation.
But he is not alone. Labour and the Greens (and I debated with Caroline Lucas on Radio 4 yesterday) do not get it either. They all want measures targeted at ‘the poorest'. Road fuel changes do not meet their criteria then, even though 40% of road fuel duty is paid by business and as a result hits those on low incomes hard when passed on in prices. That point is being entirely missed by these politicians who in the face of a systemic crisis are thinking anything but systemically.
You cannot solve this crisis by increasing universal credit for example, even if it goes up by £60 a week (which it won't) because UC will not reach all those impacted.
And wages cannot change enough. And even if they do, they are taxed, so the required increases will only compound the inflationary pressure in due course.
A sudden onset inflation crisis can only be tackled by hitting the cause hard. That does require significant windfall taxes, because politics demands these. There is no way those exploiting this situation can be seen to get away with this without consequence with the peace also being maintained.
But the reaction has also to hit prices unless the contagion is to spread. The government can cut fuel prices by 58p a litre with fuel duty cuts and by a bit less with VAT cuts, if it wants. Of course that is expensive. The cost would exceed £40 billion. Recession would cost very much more.
And to shelter all consumers of average domestic fuel consumption from price rises might cost another £30 billion. But poverty would be prevented, and recession avoided.
For £70 billion this crisis can be avoided in that case. The money is available - from savers and QE, if need be. There is no question about that.
And for the record, if this action halved the rate of inflation maybe £20 billion in government interest costs would be saved as an initial indication of all the savings that would flow from this.
But, and I cannot stress the point enough, this is only possible by hitting prices and not by changing benefits or tax rates, except on oil and energy tariffs. Nothing less will do.
Will any politician appreciate this in time? I am not sure.
What I am certain about is that radical thinking of this sort is required, now. It is the only way to stop a crisis from which millions will suffer. This is not a moment for small thinking. Only big thinking will do.
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You rightly mention that higher income households potentially face bigger costs but have the ability to manage them.
And then wrongly advocate that their cost of consumption is subsidised.
I don’t get it.
I suggest doing so because I can’t help those in need unless I do
In the face of a crisis I do what is overall best and you play class at
Why?
I’m not sure the government can do enough to stop the storm that has been brewing since arguably 2008.
* QE created massive asset price inflation and soaring inequality with inadequate taxation to recapture and redistribute the gains.
* Brexit has imposed all manner of additional costs on the economy and even its advocates admit that any benefits will only appear in the medium (if ever, we might add).
* Covid has crunched “just in time” supply chains in ways that have not been fully worked out yet. To some extent, globalisation is in retreat as a result, reflecting previously unrecognised risks inherent with relying on suppliers on the other side of the world.
* We now see the mistake from relying on importing much of our oil and gas from one authoritarian regime, and the failure to make a fast enough green transition away from fossil fuels (insulation, renewables, more nuclear) again since 2008. We appear to want to source the same fossil fuels from equally authoritarian regimes in the Middle East. We’ll see how much of a mistake that is in due course.
* Ukraine will have repercussions for years. Wheat, sunflower oil, refugees, we’ve barely seen the start. Pressure from climate change is going to create this sort of catastrophic event again within a decade. Famine and drought will create war, pestilence and death. And millions of refugees.
We had almost two generations of Cold War after 1945, and now a generation of globalisation since 1989. Quite where the cards land for the next three decades remains to be seen.
But that is the big picture. At home, Sunak can do an awful lot right now to make things less bad. Will he? Previous experience suggests he will badly underestimate what is required, and be forced to come back to the table in a few weeks or months to do more.
I agree with you
“Without virtually any prior warning an inflation crisis has emerged that is wholly down to profiteering in the supply chains for food, oil and domestic energy.”
Well done for calling it for what it is.
There is a simple inevitability about this for most people. The more we have to spend on essentials, the things we have no choice but to pay for, the less we will spend elsewhere. As the saying goes, it’s not rocket science.
The Tories will argue it’s a free market and there is only so much they can do. It’s a lie. The truth is that doing something goes against everything that Tories stand for. It’s why it is always the equivalent of sticking plaster economics for the Tories. They want to be seen to be doing something because they want votes, but there is no conviction in actually doing anything that gives the impression that Government intervention is a good thing. That’s totally against everything that the Tory Party stands for,
Anything that Sunak does today will be a sticking plaster over what is the gaping wound of the British economy when it is major surgery that is needed to save the patient. I hope the opposition are taking note and find the balls to offer something radically different for once.
Remember the guy who argued for a progressive consumption tax on use of fossil fuels on the grounds of fairness, polluter pays, bigger polluters should pay not just more but proportionately more.
What happened to him?
I still would in normal times
But, I have the capacity to manage more than one issue at a time
You are instead clearly just trolling
One thing I would query with your analysis here. You say that Sunak doesn’t get it.
What if he does ‘get it’ – and the trajectory is no accident.
You may be right
If this is the Senior Management Team of the country, did you know that ‘SMT’ can also mean ‘Small Minded Thinkers’?
You do now.
I agree with Paul D – this is deliberate. Only by creating crises can you really bring about change.
What was it the the Nazi intellectual Karl Schmitt said:’ Sovereign is he who decides the state of emergency’.
There you go.
Naomi Klein’s “Shock Doctrine” is perhaps a little bit heavy on the theoreticals, but there are plenty of concrete examples to go on some that she cites. It’s a must-read (with a pinch of salt.)
Nothing is off the table with this gov.
We know escalating fear during the pandemic was a policy.
I can’t help feeling that ‘The economic consequences of Mr Sunak’ might be a good title for your next posting.
🙂