I tweeted this thread this morning:
As I made clear yesterday, the package of measures introduced yesterday by Chancellor Rishi Sunak failed to address the inflation issues he needed to address at this moment. What I did not address was whether it was inflationary in itself.
There are suggestions being made, e.g. by Sky economist Ed Conway, that putting money in people's pockets is inherently inflationary by giving people money. I have to suggest that this is to misunderstand the current situation and what these measures do.
Whilst it is true that the £400 paid to be paid to every household this year looks as if it will increase available disposable incomes in some cases, the simple fact is that the current fuel price inflation is not going to matched by handouts in any case.
The reality is nothing the Chancellor has done will do more than help people settle bills. I suggest that's inadequate because it does nothing to tackle the cause of the problem, which is exploitation by energy companies, which is what is creating the already existing inflation.
What is more, since the cash to be provided only helps settle the excessive and exploitative demands that they have made, and does not in any case provide an excess of funds to then be spent on other goods, it is hard to see how this package is inherently inflationary in itself.
What this package does is let people pay the prices set by energy companies and regulators. Since millions of households could not have done so at all without this aid, and others could only have done so by crushing other spending, inflation is not the economic consequence.
Instead the economic consequences are threefold. First, the debt leverage that would have gone onto private households is reduced, being replaced by government money creation, which is the right alternative. Households are saved by the government as a result.
Second, to some degree other spending that would have had to be eliminated to pay energy bills is maintained as a result. More people will be able to eat properly as a result. And some parts of the economy that might have been crushed e.g. hospitality, might survive.
To this extent, this whole package can be seen as anti-recessionary in tone. It's not a stimulus though, it's merely holding the line.
Third, the funding is a direct subsidy to the energy companies, who even get a quite extraordinary climate change defeating package of oil and gas subsidies thrown in for good measure. They are the only real winners from this - because literally all the money paid out will end up with them.
So the economic impact is not measured at the household level - where at best debt, poverty and homelessness is avoided, but the opportunity for new inflation driving consumption is not created as the subsidy is less than the fuel price increase.
Instead the consequence has to be measured by looking at what the energy companies do with the subsidy they are now effectively picking up from consumers now able to reward them for the exploitative prices they are imposing.
There are three things energy companies can do. They can invest more. I actually think that very unlikely to happen. Oil majors don't really do green whatever they say, and the North Sea has no long term future.
Or they can sit in the cash, but why would they do that? Or they can pay it out as dividends and share buy backs, which we know is what is happening. That inflates their share price, rewards their executives for their assault in society and increases inequality.
And please don't tell me this is good for pensions because even pension funds have decidedly skewed ownership with bias to the wealthy.
In other words, when this logic works through what we get is the government subsidy working straight through the economy to benefit the already wealthy whilst those hard up continue to just get by, at best. That's the net result of this.
The question then is whether or not that is inflationary and the answer is that of course it is. It fuels the prices of the goods only the wealthy, in the main, but but which are in inflation indices, like second hand cars, and fripperies. And those prices do trickle down.
What should the answer to that be? Glaringly obviously it would be to tax wealth more. That was the necessary part of yesterday's package that was not there. Well, that, and the missing excess profits tax on banks as they gain from interest rate rises.
Sunak helped his friends in the energy traders, energy companies and banks yesterday, and most missed any additional tax charge.
What he did not do was help small business. They will remain badly hit by energy costs for which they will get no help at all. That will drive inflation, because his failure to cut energy costs themselves will mean businesses passing on excess prices to consumers, or go bust.
So, Sunak did fuel inflation yesterday but not by the subsidies given, but by giving them in the wrong way, and by allowing all the gains to flow to energy companies, who will increase inequality as a result.
Economically this was in that case a very poor package. It leaves too much inflation in place. The benefit of the subsidy to households flows straight to those creating this crisis, and the risk of recession driven by small business failure was not addressed.
Sunak needs to do better. As in 2020, I think we will be seeing him back at the Despatch Box again soon.
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Isn’t one of the biggest drivers of inflation the soaring price of petrol / diesel, and nothing has been done to address this. The high costs of transport is feeding through into increased price of everything. It surely must also be a major problem for any ow income person who needs to travel to / for their work.
I haven’t read everything in detail, so I might have missed something but whilst this package helps some individuals it hasn’t done anything for businesses – so at best it is a very small sticking plaster that will do nothing to address the major problems facing the UK economy.
From out-right climate change denialism to the current hopelessly inadequate “official” plan that hopes to get something done by 2050, the twin primary drivers of Tory Energy policy have been set since 2010.
To work with the Energy sector to keep the current highly lucrative fossil fuel economy going as long as possible and to ensure that any moves to Renewable sources of power will be controlled by exactly the same rent-seeking players that currently dominate the energy markets.
None of this insulation, or household solar panels and heat pumps, or nationalised energy companies providing secure, cheap energy nonsense, rather, if we manage to survive, just business and the same problems as usual.
Indeed- given the absence of support for small businesses and manufacturers who will have to still suffer increased energy costs it is just a Tory pre election bribe to voters
Massive bung. Quite.
BP’s shares did well – with the market providing all the info you need on the impact of “Sunak-the-imbecile_and-fascist” action’s. Shares put on circa 20 pence & will probably do more (not a recommend to buy btw). In other news, the Uk has a glut of natural gas (not that you would know it) such that the Uk is exporting gas-as-electricity via the various interconnectors with the one to Norway often running flat out (UK – Norway) elec then being re-branded as green and heading south to Denmark & Germany. (I have all the numbers) (hat tip to Sky News for the explanation on gas glut).
In the UK, gas over the last 24hrs accounted for between 15 to 30% of overall elec production & 100% of price which wobbled between Euro85 and Euro160/MWh. Basket pricing would have cut this (and the wobbles) to something around Euro60 – 70/MWh. But why help UK serfs/peasants eh!
If it is any consolation, the European Commission published a Communication on Market Reform. It can be summarised in one word: trash. Some short term measures, some actions for companies and….. that’s it. Clearly, the UK does not have a monopoly either on imbeciles in positions of responsibility or, given Hungary, fascists.
Thanks Mike
To be accurate, Mike, BP shares (of which I sheepishly admit to owning a tiny number, which is why I keep an eye on them) rose 7.4p yesterday but have fallen back 5.4 this morning as of 10:28. At, today, 429.85 GBX per share that’s pretty insignificant.
But I agree with your overall argument.
Yesterday our Attorney General, Suella Braverman, boasted of her admiration for Winston Churchill. As war-time Prime Minster, he presided over rationing of clothing, many foods and other items as well as petrol. In 1942, his government reduced the petrol ration to ZERO for all motoring that was not essential for the war effort.
For large scale survival of our species, the situation is far more serious than it was then.
At a scale that most of us dare not consider, burning fossil fuels is killing people NOW. By and large, current policy will kill OUR children.
When we realise that we care, fossil fuel use will be cut to zero – as near as possible – in the shortest possible time. Putting this another way, global overheating requires high – and ever higher – energy prices.
Poor people cannot manage high energy prices.
The necessary policy is: Minimum energy needs per family … LOW COST:
ESCALATING COSTS for high energy use.
Other possibilities include:
– Flying should be reduced drastically and rapidly.
– All types of fossil-fuel powered sport should be banned.
– Publicity campaigns to influence attitudes as well as practices will be necessary – based to some degree on the war-time thinking epitomised by ‘Is your journey really necessary?’ ‘Dig for victory’ etc.
The mode of behaviour you describe seems part of our DNA. Even though we can predict future disasters we are more likely to act on strong impulses for short term gain. We seem wired to do this. I think there are evolutionary factors that make societies behave in dangerous ways – e.g. the tendency for psychopaths to rise through the ranks and become leaders. You are right to assume that only climate disaster itself will force the changes necessary. Unless we can figure out ways of countering are inbuilt predilection for playing with fire.
Re a wealth tax..earned income is taxed at source, this forms savings..income from savings is taxed at your marginal rate (I agree NI should be paid also) and any investment gains are taxed at 28% (I agree could be taxed at marital income tax rate). Upon death inheritance tax is charged.
Don’t you think this is enough tax on what people earn and save?
But you have already made my case….
“But you have already made my case…
so NI on investment income and CGT at marginal rate? this is not a wealth tax as such ?
I am not asking for a wealth tax
I am asking for easier to deliver taxes on wealth and income from it
It appears that second home owners get the £400 for each property!
From The Guardian
As my colleague Graeme Wearden reports on his business live blog, Rachel Reeves, the shadow chancellor, has criticised the decision to allow second home owners to get the £400 energy bills rebate twice. She claimed on Sky News that this would not have been necessary if the Treasury had not “rushed through” its package. She said:
If the government hadn’t have been resisting Labour’s calls for a windfall tax and this additional support for months, the government could have taken the time to get this package right.
It is not right that if you own a second or a third home you should get this £400 payment multiple times. You can now get a situation where somebody who’s incredibly wealthy gets £400 on three or four occasions because they own so many properties.
This is only happening because this package has been rushed through because the government has been resisting this.
And this was the same Rschal Reeves who told us this morning, interviewed on Today, that under the next Labour government, daily spending would be paid funded from taxation.
This comes just a year after Richard’s Twitter thread “Tax does not fund government spending” posted on May 2nd 2021.
So really, no serious joy from Labour, then.
I fear that is the case
Rachel Reeves has been in the “We’ll be a bit like the Tories, but not quite as bad” camp for some time, as her previous jobs in the Shadow Cabinet have shown.
She doesn’t appear to have learned anything from the 2015 election result and I suspect she’ll be (unwittingly) working flat out for a repeat in a couple of years.
With regard to fuel inflation surely the changes in the rules for white diesel which add £0.48 pence per litre to vehicles used in construction, power generation, shipping, boats, barges, railways etc from 1st April 2022 will be inflationary?
Yes
The Guardian quotes what the Tory press are saying. It seems they prefer for the poor to suffer as long as the tax rate is down.
Quote “The Sun in its editorial congratulates Sunak on the announcement, which it says was “badly needed”. But it also warns about taxation and borrowing being too high. It says (bold in the original):
The highest burden in 70 years is suffocating the economy.
That IS un-Conservative.
Third, and worst, is the danger that a nation kept afloat by borrowing £400billion during Covid, and now bailed out again, starts to believe a Corbyn-style “magic money tree” really CAN cushion them from the harshness of reality.
That delusion leads to a bankrupt Britain. Mountainous debts must be repaid.”
Seems they don’t read your column, Richard.
Are you surprised?
The problem of relating inflation to pay demands, when according to the MPC (February, 2022): “Consumer price inflation has risen markedly in many countries including the UK. This mainly reflects the sharp increases in global energy and tradable goods prices, the latter due to global bottlenecks.” (quoted by the economist Jeremy Smith, ‘Inflation and pay – Doing the wrong Something’, 6th February, 2022). Smith goes on to state: “There is a lack of any persuasive evidence from the Governor [BofE] or MPC about the alleged causal contribution of ‘wage growth’ to future inflation.” I suggest Smith’s article is worh reading (https://www.primeeconomics.org/articles/inflation-and-pay-doing-the-wrong-something/)
Smith persuasively deconstructs the central banking haplessness revealed by Andrew Bailey recently; while at the same time evisceratiing the Neoliberal tradition of Hayek. Smith also quotes from a speech by Andy Haldane (26th February, 2021) in which Haldane concludes by arguing: “My judgement is that we might see a sharper and more sustained rise in UK inflation than expected, potentially overshooting its target for a more sustained period, as resurgent demand bumps up against constrained supply.” This is quite prophetic, but ironically Haldane seemed to think the BofE nevertheless had control over the tail of the tiger (read the Smith article to understand the Hayekian metaphor and its context).
It is important to detail some context to the energy question:
– OPEC is a cartel that is maximising its revenues
– USA is self sufficient in oil and gas
– USA is building pipelines and LNG installations to export LNG to Europe
– UK Russian gas imports total 5%
– UK has failed to invest in gas storage
– UK has failed to invest in electricity generation over 12 years+
– UK has an ageing electricity transmission infrastructure requiring billions of investment
and the list goes on and on.
The market has failed this inept government and UK plc is heading in a downward direction.
Agreed
That’s the wonder of leaving it all to markets
Sunak presented his spending into the economy in a way that suggested that it was being financed, at least partially, by the windfall tax. But he then introduced an uplift on capital investments which somewhat gives the game away. If you spend £100 in investment you will get a tax allowance of £190. If this investment allowance is taken up by the oil companies then Sunak will get very little extra tax revenue. Which of course completely undermines the idea that it is the windfall tax that is financing the cost of living payments.
It is doubtful that Labour will pick up on this nonsense since Rachel Reeves, like Sunak, believes that the money that the government spends into the economy comes from taxation.