As the Guardian notes this morning:
Jacob Rees-Mogg has asked Rishi Sunak to reconsider impending tax rises as the chancellor and the prime minister came under sustained pressure from Conservative MPs to tackle rising costs of living.
They add:
Ministers are examining further targeted measures to mitigate soaring energy costs for vulnerable households including potentially extending the warm homes discount – but are set to reject a VAT cut.
Such disputes do, of course, matter because of their implications for the leadership of Boris Johnson, as well as for the aspirations of Rishi Sunak. However, there is more to this issue than mere politics on this occasion. The question that has to be asked is if the right-wing of the Conservative Party does not wish to tackle inflation through the use of fiscal policy, as this demand implies, where does it stand on inflation when we know that monetary policy is so constrained the date to cannot work?
The Tories have always made inflation one of their big issues. They are against it. It is rare that such a simplistic policy assumption is credible, but on this occasion, I think it is. The problem for them is that inflation can arise for a number of reasons and in most cases the measures available to tackle it have decidedly little impact.
It would seem that the usual Tory view is that inflation almost invariably arises from excess money creation resulting in government deficits as a consequence of excess government spending. Broadly speaking this equates to their belief in the quantity theory of money which suggests that if too much money is created it will pursue a finite supply of goods and services, inevitably increasing their prices as a result. There are, of course, numerous problems with this claim. Firstly, the deficit may arise because of insufficient taxation, and not because of excess spending. Secondly, there is no reason to think that the supply of goods and services is fixed. Whether because more money attracts more activity into the marketplace, or encourages more people to work, or incentivises increases in productivity, this claim may be false. Third, there is no reason why the excess money supply needs to come as a consequence of government activity: banks can also create money and excess private debt can have the same consequence. The theory ignores this, although eventually when full employment is reached (which is not something with which we are familiar) it is true that this theory might have some credibility. However, my caveat is appropriate: I would suggest that we really do not know what this looks like, and therefore we do not need to worry about it.
In that case other causes of inflation may well be more significant. This is the case at present. For example, it is numerous supply chain disruptions arising after a period of enforced low consumption that have given rise to many of the increases in current prices including those related to secondhand cars, some parts of construction and in consumer durables. This type of inflation is inherently short-term so long as the causes of disruption can be eliminated from the market. Active policy to constrain the impact of Covid - which the Tory Party is all too keen to object to - would in this instance be by far the most effective anti-inflation measure that could be put in place. I think we can safely say that Jacob Rees-Mogg has not noticed that this is the case.
An alternative form of inflation is cost-push inflation, where labour power, in particular, can perpetuate short-term inflationary trends by demanding compensatory pay rises that then result in a cycle of inflationary pay increases. Let me be clear, I have no problem with labour power. In fact, I would like rather more of it because the very clear evidence is that at present real wages are declining and that this trend is likely to continue, whatever the government says. We are short of labour power in the current economy, and this is most certainly not the cause of current inflationary trends and nor is it likely to perpetuate them.
Thirdly, we can simply import inflation. This happens when a price entirely beyond our control is altered and we have no choice but to continue to buy the product that has this inflationary pressure built into it. This is what is happening with gas and other fuel prices present. Worldwide pressure is increasing prices and there is literally nothing that the UK can do to prevent this happening.
Fourth, political actions can result in inflationary pressure. The obvious example is Brexit. Not only did this reduce the value of sterling, for entirely reasonable reasons, which move has inflationary consequences, but is also at present having two further consequences. The first is that it is simply increasing the cost of many goods and services because of the amount of additional bureaucracy that is required to now import and export goods from the UK, excluding Northern Ireland, to and from the EU. The second is that this does inevitably reduce the quantity of goods available for sale in the UK because the impediments to trade are so significant. As already noted, restricting the supply of goods and services is inflationary. Jacob Rees-Mogg should take note: this inflationary pressure is entirely created by the Tory party.
What Jacob Rees-Mogg wants is that the government deficit be increased to tackle current inflation. I have to admit that I can understand the opposition demanding this: I think that they appreciate that the inflationary pressure that we are facing is of the first, third and fourth alternative types that I mention. They can appreciate that the first of these alternative types is only of short-term significance, and could justify a tax cut. They can also appreciate that measures to tackle both Covid and the consequences of Brexit could also have greater impact upon inflation control than any other policy measure. What they would also understand is that taking action on these issues would compensate for any temporary tax cut by restoring longer-term prosperity, as well as confidence in the economy.
We can be equally sure that Jacob Rees-Mogg does not understand that these issues need to be addressed. So in that case what is he saying? My suggestion is that he is acting for short-term advantage by suggesting that there be a tax cut, but that there will be an iron fist within his silk glove, and that in due course he will demand two other things. One will, of course, be austerity and a balanced budget, by saying which I am suggesting that he will revert to the Tory norm of blaming excess government spending for being the cause of inflation when there is no evidence that this is the case at present. Those he seeks to compensate now he will punish hard in future as a result of this position. Secondly, he will no doubt be demanding significant increases in interest rates, which do of course suit the Tory electorate very well because they represent that part of the population with wealth. This, too, will punish ordinary families.
In other words, unless Jacob Rees-Mogg has departed from normal Tory norms (and in the current climate, anything is possible) we should not believe that he is making his demand out of the goodness of his heart. I am quite sure that he has two other agendas in play. One is to oppose Rishi Sunak in the short term. The other is to promote Liz Truss and a policy of fiscal austerity in the long-term. I could, of course, be wrong, but I think that what we are seeing here is not some very hard to explain anti-inflationary policy but that we are seeing instead is the now commonplace policy demand designed solely to pursue a Tory party agenda. And I am so bored by that.
We can beat inflation in this country. Aligning UK point of origin rules with those of the EU would help enormously. Removing all trade barriers with the EU would help as well. Resolving the Northern Ireland protocol is an essential part of that programme, as is putting in place the measures like improving filtration and ventilation in schools and elsewhere that are necessary to ensure that we can return to a more normal way of working and so manage Covid. Of course, investing in the NHS is in this sense a profoundly anti-inflationary policy as well. But what Jacob Rees-Mogg is suggesting is not an anti-inflationary policy. It is merely a short-term fix intended to suit Tory party manoeuvres. I long for the day when we might have responsible politicians with the national interest at heart. So far it is clear that we are nowhere near getting them from the current government.
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Rather than being bored, which is understandable, I am infuriated. Putting his and his parties’ fortunes aside as it were before the national interest is execrable.
Thank you for this insight Richard, excellent analysis/
To me, the obscenity that is Rees-Mogg is that we seem to tolerate a man who as well as being an MP also runs and is a beneficiary of an investment vehicle.
He should do one thing or the other. Not both. And that should be the law. I detect a strong whiff of self interest as per usual as well as agreeing with all you say above.
Survival – that is what it is about. There may be Tory leadership games involved but survival is at its heart.
His constituents will be feeling the pain and, perhaps for the first time in his political career, his seat is vulnerable if LibDem/Lab supporters can vote tactically. So, Jacob is trying to pretend that “he feels their pain”….. but if he IS re-elected, the higher deficit implied by the NI cut will then permit him to promote austerity.
North East Somerset is a perfect example of why some sort of electoral pact is critical; Conservatives win typically with the non-Tory vote split equally between Lib Dems and Labour. Now, if that split were to alter……
I agree with the overall “big picture”. In the case of this point:
“Thirdly, we can simply import inflation. This happens when a price entirely beyond our control is altered and we have no choice but to continue to buy the product that has this inflationary pressure built into it. This is what is happening with gas and other fuel prices present. Worldwide pressure is increasing prices and there is literally nothing that the UK can do to prevent this happening.”
The solution is straight-forward, but not easy & somewhat time consuming: build out renewables asap. That the toryscum have been dilatory in this respect reflects a range of realities including that oil&gas companies fund the toryparty. I have mentioned before that the off-shore wind resource in the Uk is in the range 600GW to 1200GW. Even exploting 30% of this offers the prospect of energy independence (elec & gas). That there are no plans/strategies/tactics tells us all we need to know about tory capacity to implement anything apart from trying to stay in power = the short term fixes you mentioned in the last para..
I should have said that
Thanks
Mr Parr,
I am always interested in your reflections on energy; but surely off-shore still assumes the wind is blowing sufficeintly somewhere (but not too much). I would be interested to know what you think of the prospects for tidal, which in theory is best of all because guaranteed. I know there have been practical development problems so far, but I wonder whether that is because insufficient R&D has been invested (too difficult/risky for the private sector), which should be undertaken by Government. Surely it is not beyond the genius of modern engineering; far side of moon – yes; Mars ‘Rovers’ – yes; Hubble telescope – yes; tidal energy – too tough!
I wonder why BP cannot be prevailed upon to lead this; as the conduit for the investment and
and engineering. After all, the British Government has always had, and has a Special Relationship with BP: after all, the company originated: born and bred the creature of British Government (cooked up originally by the Admiralty), and it led the British venture into the age of oil, in Iran (Persia), 1908. A brilliant engineer from Burmah Oil (who supplied the risk capital) Charles Ritchie, built the very first major pipeline 1908-1911. All of this done at great speed in the British Imperial national interest, within a very few years, from scratch once the oil was first struck, in what was then called Bakhtiariland.
On the cost of energy, we need a radical change to network charges; and stop surcharging most of the country in order to subsidise London and the South East. It is ridiculous that in Scotland, which produces a disproprionate amount of renewable enrgey, also pays the largest network price surcharges in Britain.
Sorry, rushed comment; badly phrased and presented.
@ John S Warren
There is tidal energy – but as ever, it lacks heavyweight investment:
http://www.progressivepulse.org/green-new-deal/time-for-tide
If that is true John about Scotland (and I have no reason Sir to disbelieve you) then that is definitely a marker for a corrupt market.
In my line of work which is housing development, we have made commitments to all sorts of low carbon gear, insulation standards, solar PV etc., but even we know that tenants and occupiers will still be hit be excessively costly charges for heating, cooking and hot water.
It’s as if the supply side knows very well that it faces less profits because of more efficient systems and is just making sure that the profits just keep rolling in in line with investor expectations no matter what. That’s what it feels like to me anyway.
Thanks for the kind comments. Tidal could have a role to play. Not sure it needs much R&D since mostly it is about (well-understood) civil engineering. E.g. Mersey barrage would look a bit like a dam. Barrier (sic) is almost certainly lack of investment & ultimately, I guess that this is the sort of thing a government could/should do.
However, back to the wind point (“assumes the wind is blowing sufficeintly somewhere”). Wind output decorrelates over distance greater than 600km. This has been known for more than 20 years. Thus spreading off-shore wind farms around the UK would deliver that (desirable) de-correlation. This can be seen in real time here: https://app.electricitymap.org/map?wind=true (click on the wind layer – RHS – to see what the wind is doing – oddly today it seems to be blowing everywhere!).
Couple wind farms (or indeed PV) to electrolysers producing H2 (coupled to gas network) and you start to move towards an integrated energy solution (able to absorb excess RES elec at scale), which is the only valid approach i.e. a total systems approach which seems to be lacking at the moment. Obviously, tidal would have a place in that.
In the case of energy costs. I have BTLed on this previously. Summary: first, move from marginal pricing to basket valuations @ wholesale level (this would reduce wholesale prices and stabilise them). Second distribute generation around the UK (& where possible embed in distribution network). Third use the gas network to store excess elec as H2. Fourth nationalise the energy networks, all of them.
U-switch, ‘Comparing energy prices by region’, states: “In regions where it gets colder — for instance in North Scotland – customers on average use more of their electricity for heating purposes than they do in the rest of the country. The network distributing the energy factors this into their costs, and explains to some degree why North Scotland has some of the highest electricity distribution costs.”
When you turn to Ofgem, for example their 2015 web report ‘Regional Differences in Network Charges’, the explanations are quite opaque for the layman, and in its statistical and graphical presentation of the regional data, it resorts to analysis of consumer bills, by deviation from the average, rather than presenting the plain data and the expalining it; which I consider an ill judged method if they intend this to be publicly understood, rather thanan exercise in obfuscation . When it turned to customers using primarily electricity for heating (typically in colder areas – I would also speculate in rural areas, they may have no access to a gas networks – and prevalently among poorer households elsewhere), we see the highest numbers of users the further north you look. See map of electricity-for-heating (p.29). In their conclusions Ofgem state: Para. “2.37. As recognised in our wider analysis, even after the reductions in charges as a result of our recent RIIO-ED1 review, North Scotland electricity distribution charges continue to be some of the highest. When combined with gas and electricity transmission charges, this difference narrows. This is also similar in South West England” (p.30). Making sense of the fairness of network charges from this sort of work is therefore at best, difficult.
I do not have more up-to-date information beyond 2015 from Ofgem (I did see some figures that showed much higher network charges outside London and the South of England, but did not reproduce these, because I was not sure of their authority), but I raised the issue hoping to spark informed insights (confirming or disconfirming my hypothesis) here.
Your last paragraph says it all.
I agree with what you say but it can be put more pithily as : Rees-Mogg believes in cutting public spending as the answer to everything. He therefore is against funding any additional public expenditure.
He also believes that cutting taxes is the answer to everything as it puts more money in the pockets of the rich.
Inflation is just a useful stick to use in support of both policies.
If you look at when it kicked off it was clearly after America fell off the gold standard and oil prices shot up:
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cdko/mm23
What is surprising in retrospect is how smooth the gradient is. Which is why statisticians like to rebase it.
In reply to Mike Parr’s post at 9:06am Jan 7, The UK withdrew its funding of R&D for tidal power development a number of years ago, which effectively halted development of underwater arrays, floating generators and gravitational basins. Without more detailed research I can’t say exactly when that happened, but it led to abandonment of the Swansea Bay gravitational basin proposal. The Scottish Gov, which has very limited borrowing powers, was keen to continue development of underwater and floating technologies and was forced to enter into collaborations with the EU and interested businesses to keep the projects rolling, but inevitably progress has been slowed dramatically. A limited number of underwater turbine arrays are already productive in the Pentland Firth, but ongoing progress is slower than it should be. A small number of floating turbine vessels have been developed and one of them is now deployed in the Bay of Fundy and is selling renewable power to Nova Scotia, so the technology works, but is currently only benefitting another country – a familiar tale of UK industry. The UK Gov recently announced the re-opening of investment in tidal power, but no substantive details have been issued so far.
Re John S Warren’s post at 10:38am on 7th Jan: The higher usage of electricity for heating in the north of Scotland and Orkney is indeed caused by the UK gas network bypassing them. Scotland’s natural gas comes ashore at St Fergus, near Peterhead, but links into Shetland on its way to the mainland, leaving Orkney and most of the north and west of Scotland reliant on electricity or diesel generators for heating. BBC Radio Scotland recently ran a short item on the costs of heating in Orkney: the electricity on which they rely is the dearest in the UK. Clearly the so-called UK Energy Market is not functioning equitably when the richest part of the UK is effectively subsidised by the rest.