I have posted this thread to Twitter this morning:
Truss apparently has an energy plan. What is more we are to hear about it today. It sounds expensive, because it will subsidise those who do not need support. But it will also, apparently, be funded by borrowing, and that is bizarre (to be polite). A thread….
I will discuss the strengths and weaknesses of whatever plan Truss announces today when we know more details of who it will support. The one thing we do apparently know for sure is that the £130 billion (or more) cost will be paid for with borrowing. That's not necessary.
When it comes to funding its spending there are three choices available to any government. It can tax. It can seek to persuade savers to deposit their money with it, which is usually and incorrectly called borrowing. And it can create new money to pay for the spending.
It seems that Truss is planning to ‘borrow' the funds that she needs to deliver this plan. What that in effect means is that she is planning to push up the interest rate the government offers to savers to lure money from institutional funds into government bonds, or gilts.
Let's be clear what those institutional funds are. They are pension funds, banks, insurance companies and others who manage money on behalf of others. The higher interest rate will be required to persuade them to reallocate funds to gilts, as government bonds are called.
The current interest rate on government savings varies depending on what precisely is on offer, but is around 3%. If Truss wants £150 billion more that will increase: 4% is quite likely. That, for the UK government, is very expensive money in terms of recent history.
So, the question is why is Truss going for this very expensive option when there are alternatives?
Tax is one such alternative. The current UK windfall tax is absurd: it will raise £5 billion when excess energy company profits might easily exceed £150 billion as a result of this crisis. But inexplicably Truss is refusing to tax this money.
No doubt Truss could also do a windfall tax on bank profits, which I expect to increase by around £40 billion or more as a result of increasing bank interest rates, which they have done nothing to earn. But again, I am not expecting action there either.
Give or take, there may be £200 billion of such excess profits in the economy soon (which will represent the cost she will be paying out from the government) and right now the tax take on this at ordinary rates will be less than £45 billion.
If the overall rate were increased to, say 60%, that take would rise to £120 billion. Could any company object? Well, of course they would. But my argument is let them: these are windfall gains arising through no entrepreneurial action of their own.
At a time of national crisis the companies should be grateful for the chance to keep 40% of their ill-gotten riches. They won't see it that way. I don't care. My concern is that £120 billion of borrowing could be prevented as a result.
What else could be done? The next alternative is to simply borrow the money required to pay for this energy package from the Bank of England. It can do this.
There is a facility called the Ways and Means Account that could simply let the Bank of England provide the government with an overdraft of the required sum.
And it need not charge interest on the loan either, because the Bank of England is owned by the government anyway, making charging interest on the loan irrelevant.
I know that to do this would be unconventional, to say the least. It would also have contravened EU requirements but I would have thought the government should have noticed we are no longer in the EU, and so can do this.
The advantage is very clear: it is that the pressure to increase interest rates on government borrowing would not then exist, and that means rates will not be forced up in the market more generally.
Right now the last thing we need is an increase in interest rates, forcing people with mortgages to default on their debts. If direct lending from the BoE to the government could prevent that it would be a very good thing.
Then there is the last alternative, which is Bank of England lending to the government disguised as quantitative easing. The net effect of this is the same as the BoE lending direct to the government. QE is only done to get around the EU rule that such lending should not be done.
In a QE deal the Treasury could issue a £150 billion bond to the financial markets tomorrow, making it clear that the Bank of England will buy it back in a week's time. The financial markets will then get a risk free cut on the arrangement to make them happy.
In effect though, there would be no new net borrowing from the financial markets, excepting a one week period. In effect the BoE lends direct to the government under QE, and pretends it is not, which is a stupid game but one that has been played.
Is direct lending by the BoE to the government better than QE? Of course it is: no bung is given to the finance markets for partaking in a wholly unnecessary arrangement. That's the win.
But let me address the problem in both these schemes involving the BoE creating new money for the government to spend, which is what the BoE lending to the government really involves, however it is disguised.
That new money that the BoE creates as a rule of this lending has to get from the government into the real economy, which is you, me, businesses and everyone else. It moves from the government to the economy via our commercial banks.
In effect, the BoE puts money into a special type of deposit account that only the commercial banks can have with the BoE. There is over £900 billion in those accounts right now. And interest is paid on them at the BoE base rate.
There is no law requiring that interest be paid on these accounts at the BoE base rate. Before 2008 nothing was paid on the balances. But since QE happened and the balances have risen this interest rate has been paid.
This was not a problem when the interest rates were as low as 0.1%. The cost to the government was next to nothing and the issue was ignored.
Now the interest rate is 1.75% and by Christmas it may well be 3%, and by next year 4% is thought possible. The cost is rising rapidly: it could be £40 billion next year, paid on money gifted to the commercial banks.
This is unnecessary and a complete waste of money. To avoid this charge, the new money needed to tackle the crisis should not be injected into the economy via those accounts but via new accounts where the rate paid should be fixed at 0.1%, forever.
This would be legal. And it would be better than a windfall tax on these profits because it would simply stop the banks profiting in the first place.
So, of the four options (tax; inducing savers to deposit funds with the government or borrowing; direct lending by the BoE; and QE) which is the best?
Not taxing windfall profits is inexcusable. There is no other word for it. Truss will not do it because she believes in making the rich richer. That is the only explanation I can offer for her refusal. Anything else she says makes no sense.
Increasing government deposit taking, or borrowing, requires interest rate rises and the effect of this on mortgage holders and on renters, where rents tend to increase in line with mortgage costs, will be as bad as the energy crisis for many households, so it has to be wrong.
Then we come to the Bank of England lending the money to the government either directly or using QE. Direct is best because it is honest, and cheapest. And it is legal. And if the BoE governors would not do it they should be sacked.
If, however, international niceties are to be honoured even though we are not in the EU, QE could be used instead. And if in both the last two cases the interest rate to banks was limited the cost could be minimal.
What is clear is that of all the available options Truss will be taking the worst. The question is, why is she doing that? Could it be that this is the one that maximises the return to energy companies, banks and the wealthy? I have no other explanation.
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The BBC reporting of PMQ was really bad yesterday but did Starmer stand up and come back at Truss when she accused Labour of just wanting to raise taxes? Note that she did not say taxes on the energy companies but used it as a broad brush for society. A blatant lie.
Already we are hearing that the energy regulation used by the Government is to blame – the same argument that was used when Enron fleeced California.
Your conclusion is correct. The whole policy is ideologically in-keeping with Thatcherite Neo-liberalism and what is worse is that it has got traction because of all things the policy was put forward and won voter brownie points for Thatcherite Labour!
A rentier state indeed is what we are under the banner of ‘market led solutions’.
I even heard the Bloomberg reference to £170Bn ($199Bn) of principally windfall profit for the UK fossil fuel sector over the next two years at last being taken up and repeated, almost with incredulity, in Parliament. For the avoidance of doubt, and spite of Truss’s foolish remarks, the UK fossil fuel majors are not primarily focused on investing heavily in the UK, or in UK renewables; in fact at this very moment they have been operating £1Bn+ share buyback schemes. This means they are so profitable, and have found so little interesting to invest in, they are eating themselves – literally returning their obscene profits in capital to shareholders, to do with as they will – for the very small shareholders – help pay for their fuel bills.
Truss said that windfall taxes damage investment in the UK; but her announcement compounded the fall in sterling in international currency markets. Since fossil fuel is a global commodity, its structural currency is the US$; so this is bad news for fossil fuel users in the UK. Truss’s flapping arm movements in support of her stilited idelology are therefore not signs of cheery wavingat the awe inspired; she is drowning in her own incomprehension. The world “markets” do not believe her; and for those who say this ‘tanking’ od Sterling is merely an inversion of the strength of the US$, the Euro€ is unfortunately also appreciating against Sterling£, in spite of its energy problems. Britian is the economic sick man of the G20 on almost any measure; we have a catastrophic domestic energy market that is rigged to serve a failed neoliberal ideology, and a deeply incompetent, incoherent Conservative Party that has been in power for far too long.
The chickens are coming home to roost. The Conservative Party knows not what it does – or rather, it knows only too well what it does, and it has nothing to do with the interests of the British people; nothing.
Agreed
With decades of experience in the Energy sector, I am absolutely dumbfounded at the reluctance of Truss to apply a windfall tax on the Energy companies. It is simply delusion if she believes it will it contribute to growth, investment, jobs, etc. It will NOT! It will simply contribute to the rentier economy that the Thatcher//Reagan/Mont Pelerin society acolytes foster in the interests of the powerful/extremely wealthy.
I had a laugh – a hollow, despairing laugh – at Truss’ comments about what she was going to do to address energy supply during her ‘conversation’ with Laura Keunssberg on Sunday. She seems to have forgotten that it was a Tory government that essentially closed down the vast majority of the UK’s gas storage facilities…allegedly justified on the basis of saving the UK £750m over 10 years (hence the hollow laugh at the costs we are facing now). Although estimates vary, they tend to agree that the UK has gas reserves for about 5 days of consumption in winter. She also seems to forget – or ignore/be unaware of – that our European neighbours have much greater relative storage (Netherlands circa 9 times the UK; Germany circa 16 times the UK).
As it is a waste of breath I won’t comment on why we tolerate the OPEC+ cartel and the profiteering of international oil companies.
The Tories claim to be the party of business…they certainly seem to be the party of bad business! I also despair at what economists seem to learn during their studies and, even worse, the negative influence some have on societies at large. I wish they would do some light reading on economics such as ‘Doughnut Economics’ by Kate Raworth, Joseph Stiglitz, et al.
There is simply no reason why they shouldn’t apply windfall taxes and, in the meantime, enact the necessary structural changes to energy distribution and pricing. If after all that it does not enable the energy companies (oil & gas producers through to electricity distributors) to function as effective ‘private’ businesses making a reasonable profit in what is referred to as a ‘free market’ then – as commented on many times in your excellent blog – they should be nationalised as it appears they cannot survive or provide the necessary services (at a price that is affordable) without government bailouts, i.e., if we have to bail them out then we should ‘own’ them.
Is there also a possibility that borrowing has been chosen so that, at some point in the near future, when it is reported that borrowing has increased and that interest costs are at ‘eye-popping’ levels that (Do Not) Truss or some other minister will say to the public ‘This is your fault, you wanted this, this is the result’ – in other words, further reinforcement of the myth that the government has no money of its own?
Craig
Of course..
Why aren’t these alternative ‘borrowing’/QE options widely understood and widely accepted and thoroughly explained by BBC / other media commentators? Obviously anything to do with public spending/tax/borrowing is bound to be wrapped around by politics, but in the last couple of days there have been numerous ‘experts’ offering throw-away remarks adding to confusion about borrowing/how it will be ‘paid back’ etc.
As things are now – it is not clear that even the experts agree with Richard’s options/definitions . It would be great to see this set out in some generally recognised authoriitative source – including any disagreements about definitions etc. Obviously it is difficult for people – to understand all these concepts – the different accounts govt/BoE/Banks etc , gilts , bonds, special deposit accounts, EU rules about lending to govts etc
If at least some of the basics could get implanted in the minds of the body politic/ general public, it could be a political revolution – in getting progressive political parties free of the ‘tax and spend’ mantra imposed by BBC, MSM and the Right.
Because that is not what is taught at school or undergrad level. Don’t just blame the BBC, 99% of the population believe that tax and borrowing fund government spending. The next election will be fought in this premise.
Those who understand/argue differently are a very, very tiny majority unfortunately
All coverage yesterday was set within the traditional (flawed) narrative of how government spending was funded.
Andrew, I think this is why Richard’s Twitter threads are so important – by using the restricted line length format he has been able to a) simplify the message into easy to read statements, b) get through to a much larger audience and c) because journalists are, from what I can see, major users of Twitter, get the message noticed by at least some of the them. I hope, over time, this will have a substantial, influencial effect with the commentators you mention.
That’s my aim
Using government borrowing to subsidise energy prices without structural reform is a reckless misuse of public money, and an exercise which may need to be repeated several times over.
To subsidise profits in this way, whilst ruling out any kind of windfall tax on the subsidised profits of the energy sector, is just bad business whichever way you look at it.
– There should be a windfall tax on excess profits whatever happens
– Structural changes in the energy distribution and pricing mechanism are essential
– Any firms receiving government subsidy for what are otherwise bad debts (energy bills people & businesses cannot otherwise pay) must be repaying that favour to some degree at some stage. Just doing it without a quid pro quo is reckless bad business
I agree with everything you have said in this thread, Richard, except –
“It would also have contravened EU requirements”.
Water under the bridge really, but it wouldn’t. The UK had a very valuable opt out, as I believe you are aware, from article 123 of the TFEU contained in the protocols that very specifically allowed it to use its Ways and Means account. All the more reason why we should never have left.
And I agree with your other correspondents that the Tories are out to protect the tiny number of the population who own most of the capital. They fund them.
But after 2008 it did not use it, so was it still operational?
A minor quibble…
Ways and Means was largely replenished
in 2009 actually (even more minor quibble) but there remains a balance of about £380 million. I would suggest that it is not used because the Treasury can just as easily use the Consolidated Fund, especially now we are not bound by EU agreements, and under the Withdrawal Agreement the Bank of England is not counted as a Central Bank. If we were still bound by the TFEU having remained, the Treasury might well use W & M as you say. In private correspondence you have argued that there are rules on state aid in other international agreements such as the WTO, and I bow in that case to your superior knowledge, and the fact that I don’t have the will to trawl through those treaties.
Apologies for my ignorance but how does money get from commercial banks to the energy suppliers?
Bank transfer
You could of course be cynical and deduce the Tories recognise they have no chance of winning the next election, so they are happy to leave the biggest possible economic mess for Labour to sort out.
‘Incorrectly’ called borrowing?
That’s what the whole world over calls it when someone takes money under an agreement to repay it with interest. What would you call it?
And why isn’t it borrowing?
What do you call it in a bank?
It’s a despise account
Reading this I was reminded of papers I had seen in the past from the BoE records covering the problems in raising funds to finance WW1.
War bonds were issued but there were difficulties in finding investors and quite severe steps were considered as this link describes:
https://bankunderground.co.uk/2021/01/18/how-britain-paid-for-war-bond-holders-in-the-great-war-1914-32/
In those days BoE operated on a private footing and in the end BoE secretly bought many of the bonds itself. We were told the bond sale had been a great success in order to maintain a positive spirit. Today we would call this QE, and perhaps this is what will happen in the next few months.
A further link on this subject.
https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/
One man bought the whole (vast) shortfall in 3% War Loan (1914), when Capital (the whole investing community) decided it didn’t care for the odds of success offered by Britian; at least on the books of the BofE, the shortfll was all held in the name of the Chief Cashier, Sir Gordon Nairne: but this was a closely held secret, and successfully sustained until the 21st century – when the BofE finally announced it. In 1914 Britain declared to the public at large an investing triumph for Britain, with Capital allegedly fulsomely supporting the issue. That was how they did it then.
It is worth noting that Economists (and Economic historians) appear to have bought the subterfuge, hook, line and sinker; for the last 100 years, and without a backward glance or any real reflection on the biggest bond issue in history, to that date. It was, after all carried out by the world’s leading financial power as a demonstration of its strength and irresistability, in all circumstances.
Not only do economists fail to predict (or ‘forecast’ effectively, to use their weasel term), but their historical methodology is clearly not much better than its predictive inadequacy (economics has a real problem with scepticism): and even now – they still struggle to understand the nature of money, borrowing and the national debt.