The nightmare has begun. I think I realised that when on the Jeremy Vine Show on BBC Radio 2 yesterday, debating with Mark Littlewood of the Institute of Economic Affairs. I have done this countless times before on that show, but Mark was undoubtedly different. After all his years of disappointment with governments, both Tory and Labour, Mark was finally a happy man. He had an ally in Number 10.
This was apparent in the madness of what he had to say. Whilst acknowledging that Truss would have to help people with energy bills, he was also clear that he now believed he had an exponent of small government in office, and went on to say what he wanted.
Apparently, we should cut business rates, altogether. That costs at least £25 billion a year, whilst VAT should be halved, with a likely cost of £75 billion. And this was only for starters.
So I challenged Littlewood, saying what services he would also cut given that he wanted the government to ‘balance its books'. Was it the NHS, schools, defence, pensions and care or something else that should take the blow? He did not, of course, say. Such details that imply joined-up thinking do not bother people like Littlewood.
My suggestion on air was that what people actually want is not cuts to any of these services - that are already massively underfunded and stretched to their limits - but more of them. I am certain that this is true.
What is more, as I explained on air, if growth is the Truss aim then more government spending is just about the only way to deliver it right now. But rather than deliver the one thing she can guarantee in this area, Truss will instead be planning to reduce government spending and so growth instead. A policy quite so contrary to that she says she wants is very hard to imagine.
This then brings me to the plan for helping households. According to the Guardian, and others, the plan put forward by the energy industry, and already adopted by Labour, is the one that Truss backs. Bills will be capped for four months (which makes no sense when the problem is clearly going to last for a lot longer) during which period energy companies will be lent money by commercial banks to make up their revenue shortfalls. They will then be able to charge excessive emergency prices for the following ten to fifteen years to recover the cost of these loans (plus interest, of course) to repay the banks. The estimated cost is £130 billion, which is absurd when my plan for assistance for households would cost no more than £45 billion a year.
There is in this a quadruple bonanza for Truss. First, the government is little involved. That will appeal to her enormously.
Second, banks will profit, a lot, and that is always Tory policy.
Third, the energy companies will not have to change their behaviour, although how they will be contractually able to treat the receipt of loans as income that will maintain profits is an accounting issue that few seem to have thought through. Given that they will have to create a liability on their balance sheets to record the repayment of these loans that they will owe, and this is a credit balance, they cannot also create another credit balance as sales revenues at the same time unless they create a new debt to match it: which is the sum we will all owe them over the next decade or more. I do wonder if anyone suggesting these loans actually thought the double entry through and what its consequences might be
Fourth, and most especially, Truss will say that she saved the country from bankruptcy (although how this scheme will help business and schools is far from clear) but the price will be the cuts to public services that she must then impose as a result, even though the scheme she is planning should have little or no influence on the public finances, meaning that any link between it and the need for cuts would be tenuous, in the extreme.
How to appraise this? First, people rumbled Sunak's first go at dealing with this crisis by forcing loans on people and rated it very badly. I see no reason at all why anyone should celebrate high energy prices in perpetuity with any more enthusiasm. I am sure that they will not.
Second, unfortunately Labour will have to vote for this, having already proposed it. Yet again they will be enabling Truss.
Third, the political cover will evaporate when the process has to be repeated time and again in 2023 without any sign that the scheme will be doing anything for the country at all, bar supporting bank and energy company profits.
And fourth, the plan is going to have curious impacts on measures of inflation and its persistence. How the ONS will react when measuring inflation to energy companies finding ways to record income that does not apparently get reflected in prices to consumers is going to be interesting to see.
Fifth, and more certainly, the Bank of England is going to interpret the scheme as guaranteeing long-term higher prices and so will keep increasing interest rates to try to eliminate the impact of government policy. The conflicts created by non-joined-up economic thinking will be considerable. More relevantly, the impact on households will be considerable. As I mentioned recently, a Bank of England rate increase from the current 1.75% to 4% will increase average mortgage costs by maybe £600 a month - or more than £7,000 a year. Energy price increases are going to look modest as a result. Truss will have capped energy costs to bring the economy down as a result of interest rate rises instead.
So where does this lead us? If she delivers her energy plan Truss might get through Christmas without as much difficulty as I expected. But by early 2023 the Bank of England will have set her government, and the rest of us, on the path to economic ruin as a consequence. The chance that 2023 will be the first year in history when a major economic power becomes a failed state remains very high. It's not a pretty prospect.
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Typical examples of failed states are Chad, Syria, Somalia, Yemen and Sudan..given we have a General Election in 2024 don’t you think your labelling is a bit off? (to say the least)..
No
To Robin Reid: you need to remember that a failed state doesn’t look like a failed state to everyone inside it. To those with a great deal of money, to carpetbaggers (Venture Capitalists, asset strippers, Big Pharma, etc etc), and others – it looks great! It’s like Christmas. To almost all the rest of us – it looks disastrous.
Robin
It depends on what is meant by a failed state dear chap.
A failed state to me is a state that has become a place where only a minority of people benefits from there being a state.
That includes all the countries you mention above.
And increasingly ours too by all accounts.
We’re well on the way I can tell you.
A good summary of what amounts to a total failure of the UK’s political class. They don’t know enough to make good policy (are advised by imbeciles @ BEIS and Ofgem) and thus make profoundly bad policy.
I am sorry to say that it is no better in the EU. Germany has decided what is good for the EU (price caps) and is determined to get its way. The Head of the Commission, Von Der Leyen, seems to be as ill-informed as the Uk political class (and in fairness DG Energy is equally as doctrinaire as BEIS & Ofgem to the point of actually lying to its political masters) & arguably is taking orders from Berlin. If this sounds like the meanderings of a Brexiter – well I ain’t . The energy crisis has highlighted the utter vacuity of politicians of all stripes in most countries. The demonstrations in Prague @ the weekend are the start, EU citizens and Uk serfs deserve better & the only way to get better is to mobilise, get ride of the political imbeciles that pretend to run things and put into place citizens that do (& no I would never ever stand for any sort of political office, ever).
Mike says “The energy crisis has highlighted the utter vacuity of politicians of all stripes in most countries.”
Pretty much any crisis would have done that. Muddled and out of touch voters have been voting in muddled and out of touch politicians for decades. Collapse has been inevitable for some time.
Another crisis turned by this government into a massive payday for the usual vested interests.
why people give house room to head bangers like Littlewood when what they have espoused has failed across the board in terms of growth and fairness over the last 40 years is incredible .
Even if energy prices are capped at today’s prices my bills are still 90% higher than they were a year ago and for many people even that is unaffordable
True
Don’t forget that if Truss adopts the plan of the energy companies we will be paying back for years the difference between what the price would have been and the capped price. The easy way for Truss to get that back is to stick it on the Standing Charge Poll Tax element of our bill, probably for the next 15-20 years. The alternative is to just hide it in our energy bills as some kind of surcharge.
It will mean higher energy bills for evermore, but I think Truss is planning this, alongside income and VAT cuts, followed by calling an election in the next year. She will then claim that she has solved the energy crisis – she will have done no such thing – and she will try to fight the next election on whether Labour will honour her tax cuts.
Middle England probably won’t want to give back any tax cuts, so the opposition will find it difficult to win. Once Truss gets back in, that is when the brown stuff will probably hit the fan, but by then she will have five years to sort out any mess or at least buy off people again in year four. Rinse, repeat. It’s how Tories always do things.
Good post.
What is bizarre is that the mooted cuts to business rates and taxes will only increase profits for the utility companies whom people know are already raking it in!
I’ve heard one Tory politician say openly that reduced taxes on business do not contribute to growth.
And the salient point for me is that contracting the public sector output into the economy is pure stupidity but also inevitable because of course they will rob Peter to pay Paul with their uninformed opinions about money.
There is no doubt that we have got perhaps one of the most ideological leaders we could do without at the moment – a leader dedicated to doing the ‘wrong thing better’.
Let’s hope that she doesn’t realise that she’s making an enemy of her and her party’s future. Perhaps this how bad it will really need to be before the penny drops.
Having said that though I am this morning more angry with the fact this inferior Maggie Thatcher mini clone is going to see the Queen of all people on the basis of an internal vote by the Tory party membership.
A vote that came about because of the offensive behaviour of the previous Tory leader.
I don’t agree with the Lib Dems on much, but their point about there actually needing to be to be a general election on this issue is quite correct.
And you assertion that this is the behaviour of a failed state is irrefutable to me.
An appalling day for this country, appalling. We have indulged privilege on these islands for far too long. It’s got to stop.
If Truss does cap the energy price rises, what happens to those who over the past few weeks of Tory leadership dithering and the threat of the 80% cap rise in October (and further predicted rises in January and April next year) have bitten the bullet and signed up to a horrendous fixed deal over the next year or two ?
Will they be allowed to cancel ?
Martin Lewis has been advising that if you are offered a deal at no more than 145% above the current price cap, it’s worth considering
https://www.moneysavingexpert.com/utilities/-are-there-any-cheap–fixed-energy-deals-currently-worth-it–/
Who knows?
Just FYI
BBC reporting that ‘the government plans to freeze household bills at their current level for roughly 18 months’ – so its not 4 months
https://www.bbc.co.uk/news/business-62801913
That suggests the level of support is grossly insufficient for business and public services in that case
You get this all the time, but thanks Richard. I’ve been reading your blog for a long time and when someone as sensible as you predicts such doom I take note. I’m 32 and will be fleeing to the continent shortly, in Sweden. Maybe I’ll be back home if we finally get our independence up north, but honestly I doubt it will ever come soon enough anymore.
Can you explain the arithmetic please on the statement that “a Bank of England rate increase from the current 1.75% to 4% will increase average mortgage costs by maybe £600 a month”?
My arithmetic says it would mean the repayment part of the mortgage is £320,000
Assuming the ‘average’ is at the mid-point of the repayment of the mortgage, so 320k repaid, and 320k to go, then you’re claiming the average mortgage at initial date is 640k.
If the bank thinks or thought you are good for that, and you’ve got a deposit on the line to boot, then good for you. But to think public policy should be built around you, as some kind of Mr or Mrs average mortgage dude. No thanks.
It sounds like a policy for the few and not the many.
The average mortgage is £239,000
I used the Money Exoert website mortgage calculator assuming both interest only and repayment mortgages and a twenty year term
Aren’t most UK mortgages a 25-year term? Mine’s 30 years. At the last rate increase my payments went up £35 per month.
They’re not all new though
And I was doing an example