In an economic crisis, the Chancellor is arguably the most important job in Government. Sadly, Rishi Sunak has been absent. He has done nothing to address the root causes of this economic crisis. Worse, he has nothing planned to address this crisis. In fact virtually every decision he has made over the last year has actively made the situation worse. Today’s announcement is not much different. Yes, it will bring some relief for the more serious “symptoms” we are currently experiencing. This is a very welcome U-turn. But it will do absolutely nothing to address the root cause.
The fact is, our Chancellor is not very good at his job. He is inexperienced and, like the rest of this useless government, is more interested in self preservation. Economic planning requires long term thinking. This is anathema to our current leaders. Rishi Sunak’s statement today was particularly illuminating.
I trust the British people, and I know they understand no government can solve every problem, particularly the complex and global challenge of inflation. But this government will never stop trying to help people, to fix problems where we can, to do what is right – as we did throughout the pandemic.Rishi Sunak, 26th May 2022
I have three issues with this. First of all, the job of government is to tackle these issues. Second, the government is doing absolutely nothing to even try to tackle inflation. I have written before about this Chancellor’s borderline economic illiteracy. Today’s announcements proved this. Finally, the measures today categorically do not improve the situation. By any measure households will be worse off when Ofgem’s planned price rises go through in October. Yes, they will be less worse off than they would be without this package, but they will still be worse off in October than they are today.
What is Rishi Sunak doing to help?
First and foremost, this statement today is better than the Spring statement, but it raises as many questions as it answers. We are expected to believe that the driver behind this statement is Ofgem’s announcement that energy bills will rise by another £800 in October.
- The “loan-not-a-loan” scheme is now a one off grant, meaning it will not have to be paid back in future
- The value of this grant has also been increased from £200 to £400 per household
- In addition to this, targeted support will be given to:
- A £650 payment for 8 million households on means tested benefits (paid in two lump sums in July and Autumn)
- An additional £300 for pensioners in receipt of the Winter Fuel Payment
- An additional £150 for those on non-means tested disability benefits
- There will also be a £500m increase in the Household Support Fund available for local councils
For Business & Industry
- None of the measures announced today were designed to support businesses struggling with rising fuel costs
- A new “Energy Profits Levy” (Windfall Tax) has been announced on Energy companies set at 25%
- This coincided with a doubling of “investment relief” for oil and gas companies, meaning that for every £1 they invest they will get back 90% in tax relief
Notably absent from this statement was any explanation on how the Government is addressing the root causes. It’s also worth noting that this comes hot on the heels of a £700 rise in April, and would represent a would represent a 124% increase vs prices in October 2021. The Chancellor has frankly ignored this issue for months, causing enormous damage to consumer and business confidence. Given this context, I’m sure it’s just a coincidence that this has come out the day after Sue Gray’s report.
What will this mean for households?
There’s a lot to unpack here and the measures today will have a different impact on different groups.
The £400 grant per household is a mixed blessing. Obviously, £400 represents a fraction of the £1,500 price rise seen since last October. But averages hide the real story. Let’s consider the following…
With prices set to rise by 42% in October, some simple maths shows the impact on different sized households…
The most obvious impact is that the £400 goes nowhere near covering the planned October rise for any group. Consider that many are already underwater from the April rise and this grant, in essence, does nothing to actually help. It is still allowing a planned increase to go ahead albeit at a reduced level. That is not good enough.
The second impact is that the change is much worse for big households. For single person households the £400 grant will reduce the overall increase to just under £200 per year (roughly 13%). For 4 or 5 person households, however, the rise is nearly £750 (roughly 27% on the April rate). Given that larger households are more likely to struggle with bills, this feels like an ill thought out policy.
Of course, the impact of the more targeted measures will help to alleviate this issue for the poorest households. However, against a backdrop of a 10% inflation rate this will leave little to nothing to cover other household expenses. Again, given the fact that many are already on the edge allowing any increase is an utter disgrace.
But there is a final consideration; this analysis assumes even usage throughout the year. In practice, usage is much higher in winter. Increasing the price in October will mean that the actual usage during this period will feel a lot higher. A lot higher.
How will this impact the economy?
The biggest grievance I have with Rishi Sunak right now is that he is doing nothing to try to stop these issues. He has absolutely no plan to try to arrest inflation. In fact economists think his policies will actively make things worse.
First, let’s consider the price rise. Allowing Ofgem to increase prices by 124% will impact every single person and every single business in the UK. This will have two major impacts. First, it will substantially increase costs for businesses which will in turn drive further inflation. The second impact is that it will eat up a large chunk of disposable income. This on the face of it is deflationary as it will depress demand, but now consider how the government has tried to address the price rise – by printing money. This will serve to increase inflationary pressure further.
But it gets worse, this support is not being made available to businesses and with so many businesses on the edge even a small drop in demand or increase in cost will likely lead to mass insolvency. This will further reduce supply, negating the impact of any deflationary drop in demand. The result? A smaller economy, with no reduction in inflationary pressure.
So to recap, Rishi Sunak is allowing the price cap to go ahead, causing massive inflation and pushing businesses and households underwater. But to make up for the price rise he is taxing the companies who are benefitting from it so he can give some of the money back to households. Which in turn is creating more inflation. Why? This is a classic case of “treating the symptoms rather than the disease”.
The government seems to be utterly reliant on the Bank of England, but monetary policy works by discouraging spending. This is an awful way of trying to reduce inflation when we are on the verge of recession. A better way of managing this debacle would have been to block the planned price rise and revert prices to October 2021 levels. To ensure that this does not lead to a major collapse, the windfall tax should be used to create a bail out fund to support energy companies. This would create a find that protects suppliers, acting like an insurance policy, whilst reducing inflationary pressure without impacting households. As critical infrastructure, this type of safe guard is vital.