“In a media-saturated world, persistent hype lends unwarranted credulity to the wildest claims” – Michael Crichton
Welcome to the supplement in yet another action-packed week in terms of the economic landscape. Some momentous news and the long-awaited price cap movement – after months of speculation and the direction of travel being only one way, from high £2,000s to £3,000 and beyond, and indeed over £3,500 in the end, we now know, in theory, the size of the problem facing the “average” household simply on the domestic energy bill front from October 1st. Another way of looking at it is that the government understands the scale of the problem that it now needs to intervene in, or face serious recriminations, blackouts, potential riots, and significant fuel poverty – they understand it on the domestic front, which, actually, is less than half the battle but 90% of the headlines. On the subject of the headlines…….
Here we go again
One further bombshell was unleashed early this week – Citi smashed the headlines open with their economic prediction that inflation will reach 18% in January, when the (by then new) quarterly price cap comes in on energy and rams things up through the roof again – £5,000+ is being mentioned as likely. A better way to frame this would be “without intervention, this is where the domestic price cap will be” – yes, I know, sex sells and that is not a sexy headline – but I have this annoying habit of preferring to keep a level head and tell the truth – hence why my career in journalism, let alone politics, is at quite such a non-existent level. After gas price movements this week, this is likely to be revised upwards again.
The PM-elect has been busy trying to blame the Bank of England, with unintended negative consequences (seems she needs to learn what to say and what not to say, says “hopeful in Solihull”), and while many would (especially in hindsight) say that rates could have been raised more quickly, anyone who knows anything about monetary policy accepts that this isn’t solved by interest rates climbing to ridiculous levels. Yes, that will destroy demand and start a recession, but, like inflation, lose control of that and you have a depression, need to put rates back to zero, and start all over again.
This is a bit like the brakes going on your car, and you have a choice: Shout at the manufacturer, OR drive more sensibly and take some action yourself to avoid a serious incident. Luckily, it is all populism these days, so since the people don’t seem to be up for blaming the Bank of England, that record should soon change. We don’t really know Liz as yet – does she actually care about the less fortunate? Who advises her on economic policy (early on it seemed absolutely no-one as she marvelled over the economic performance of the Bank of Japan – see my article some months ago about the “lost decades” in Japan which I can promise you is not a misnomer of a title, there’s no trickery there – the name tells you what you need to know).
OK – so what would YOU do, Mr Smartypants?
I’d be talking as though we are still in pandemic mode. Because we are. This has arisen because of the pandemic (as a major factor). There are long-term issues that need solving that I would be jumping on, immediately – but politically this wouldn’t gain the traction it needs. It would actually solve some of our problems including energy-specific infrastructure investment and renewables, and energy independence (where possible – on commodities this is impossible until we can mine asteroids or whatever Elon tells us we can do) – but would be a 40-year plan.
In the now I’d look at “capping the cap” and controlling the energy-inspired inflation for consumers. This isn’t a windfall tax but will hit the energy companies of course, however, they will still have excess profits for the next couple of years thanks to the incredible opportunity their traders had in early 2021 to buy big with massive upsides and tiny downsides. This is meddling of the highest order, but it should smooth out inflation a little better. The point of a cap should not be that it can go up 80% 6 months after the last rise – it makes a mockery of consumer protection. The households aren’t ready and even if they were, what could they do? If you are “old-school conservative” – get a better job, work a bit harder – etc. – but that’s abstract and unhelpful to those who already work very hard to pay for where they live and their household, a.k.a. The vast majority. To be clear, I’d include a way to ensure the energy companies still make a fair profit without a windfall tax, but expect them to bear some of the brunt, and the households and businesses to bear some of the brunt. It is the only way. Getting that balance right is hard.
There’s a few nuanced ways to go about it – but, as always, in the midst of worrying about ourselves, we are missing the wider point. The best detailed “how to” case I read this week on the subject was on a twitter link that I’m grateful to a supplement reader for sending to me – if you aren’t going to click the link, what I’d say is that this is very close to an implementable solution to help the most people in immediate need of the help for the best bang for buck, and, compared to the numbers mentioned this week in the wider media, £100bn, £150bn, offers good value. That’s a little unfair, because those numbers are talking about wider solutions, and as it turns out, the domestic solution is less than half of those numbers mooted.
Why? How? Well, don’t ever forget that in the private sector, over 90% of the workforce in the UK work in SME enterprises (small and medium). Companies you’ve never heard of. Thankfully, we have such a strong service sector and office-based service businesses are overall relatively insulated (pun intended) from the effect of these energy rises. The energy bill will be a tiny percentage of the turnover, compared to (for example) a fish and chip shop, or a leisure offering. Nevertheless one of the relatively few truisms being shared by the media this week (sensationalised to absolutely nuclear worst case scenarios of course – think Express winter weather forecast) is just how much pubs, cafes, leisure, and hospitality will struggle. Specific businesses like Fish and Chip shops use an awful lot of energy and we will either see £20 fish and chips, or closures – in the absence of support. If they go broke, or half of them go broke – unemployment would absolutely skyrocket (and even if we have still had zero riots thus far, which surprises me but the weather has been good, I suppose – take out the British Instiution that is the chippy and I’m sure there will be action). This situation needs avoiding.
Support and precedent
So – let’s talk support. Let’s be different and try to talk about what might play out versus the scaremongering which whips up the public (and thus the populists in charge) to spread fear, division, and misery.
We’ve got a precedent, haven’t we? Well, several precedents. Some economic influencers are talking about this situation being on a par with the global financial crisis (GFC) of 2008-9. Some are going a step further and proclaiming that this situation will dwarf the significance of the GFC. Hold on a second though – we heard that one before. It wasn’t that long ago. When was it – oh yes, March 2020. The doom mongers were out in force back then too. The prices were going down 46% according to illustrious institutions such as CBRE and Savills, based on a single variable model which should really have left them with egg on face. Many an investor long in the tooth told me how they remembered 2008/1990/the 1970s/insert other cherrypicked economic period here, and how this would dwarf it. I rarely engaged with a fact-based economic argument, because it wasn’t that that they were interested in – they are just natural pessimists who, left unchecked, will talk and worry themselves into early graves.
What precedents do we have then? Well, even if we limit ourselves to the channels of delivery already in place, and those used since 1st January 2020 – we have a fair portfolio of fiscal policy tools, and a couple of monetary policy ones. Let’s start with a stamp duty holiday.
Unlikely, I hear you say – sure. Stoked the fire during a time that was suspected to be tough for property but instead has seen capital uplift of 25-30%. However, a notorious predictor of election results is how house prices are doing in the short term in an election year. Despite all the concerns about price rises, the rental sector has been rapidly shrinking which means only one thing – those properties have been sold off to owner occupiers. I have a dozen or so experiences this year in selling individual properties, and the only property sold to investors was being converted for non-PRS use (supported living/care) so the rental sector definitely lost 12 properties there. Anecdotally and according to NRLA polls, the number is more like 50-60% of former rental properties being sold to owner-occupiers with the rest being sold to other landlords. We’ve certainly bought plenty from other landlords in the past 2.5 years, which of course has not changed the net number of units in the PRS at all as it is a neutral transaction. So this is on the table at some point when it comes down to the business of buying the election.
How about a slice of furlough? I wrote about the overall success of the furlough scheme according to my analysis around 9 months ago, which had a gross cost of £70 billion. This was, I argued, nowhere near the net cost in not paying unemployment benefits, and other related benefits including housing – but, even more stark than that – the massive cost saving of having to recreate all of these lost jobs that were instead preserved. The roughest estimate of cost per job at the time for the government to “create”, was £25,000. You could argue with relative ease that of the 11.7 million jobs that were furloughed at at least some point during the scheme, 50% of those might have been lost at a bare minimum (or just used the US data where there was no such furlough). Recreating those jobs would have cost £146.25 billion alone, more than double the gross cost of the entire scheme, without considering the other benefits. The other immediate win was that the gross cost was indeed £70 billion, but the might of UK PLC of course continued to draw tax and national insurance revenues from these amounts, leading to immediate cashback to the tune of around £10 billion. Nice business if you can get it.
Full furlough? Surely not. An unnecessary sledgehammer to crack this nut. But – targeted furlough, in certain sectors? Energy-hungry businesses that need to shut the doors for 9 months, or perhaps 2-3 years, whilst this entire energy market sorts itself out? 3 years ago I’d be branded a crackpot for writing that, but it doesn’t seem entirely stupid on the basis of the above analysis, nor does it seem politically unpalatable, nor does it seem that unlikely. I wouldn’t be surprised. Leisure, hospitality and retail? Maybe……
Business rates and VAT relief. We saw a raft of acronyms over the time of the pandemic pre and intra-vaccine, grants to businesses on the business rates register of £10k, or £25k to start with. Injecting huge liquidity. No need for that here, across the board – perhaps in the sectors already mentioned though, maybe. We’ve also seen rates forgiveness in certain sectors – with full rates kicking back in in April 2023 (not now, surely!). Then VAT relief for the beleaguered hospitality, pub and restaurant sectors – cut to 5%, reintroduced at 12.5% before coming back to 20% – the danger here is that it could be inflationary, although prices will not be going down – it’s simply a transfer from HMRC to those businesses, allowing them to hold onto more of their gross take. It might stoke wage demands though and provide the funds to satisfy them, which is indirectly inflationary of course.
Direct intervention on both council tax and utility bills has already been announced, the channel for that support is there. Government is so pathetically bureaucratic that the £400 rebate across the board was cheaper to give to everyone than to administer properly. Plenty will be donating theirs I am sure, although with price caps now, according to Cornwall Insight who have an unfortunately accurate record in these situations, forecasted to get to £5,387 in Jan 2023 (yes, a mere 3 months at a massive £3,549 before jumping another 52%) and £6,614 in April 2023 (so up another 23% then), perhaps people will be needing them instead.
This is on the back of a gigantic leap further forward in wholesale gas prices this week. It’s obvious that this has gone from a significant problem to one that would send more than 50% of households (median household income was £31,400 as at end December 2021, ONS) into a negative cashflow position once rent, mortgages, council tax and food are considered. The twitter thread referred to above contains a far more eloquent and elegant solution than I could provide on this front in the name of offering help to those most in need – and offers an easier admin solution to avoid wasting money in grants for those who are fortunate enough not to need them. So – increase the rebate? If that is what is felt needed – or pursue one of the more elegant solutions.
How about some bounceback, CBILS, or recovery loans? I can almost feel the collective hairs standing up on the arms of the readers and listeners. I find it unlikely (sorry), because of the danger of this being inflationary – however, the current success of the BBLs and the lack of companies that have gone bust and not repaid perhaps offers false hope to just how much will be repaid in the fullness of time. There might be a clue here though, inasmuch as loans are highly preferred from a political sensitivity perspective to grants or “handouts” as the PM elect prefers to term them with her individual approach to wordsmithery (or lack thereof).
Sounds good. Should Mr Kwarteng (chancellor elect) just crack on?
Any danger here in this whole raft of measures (and please remember, I’m only recycling here)? Well, yes. Sorry to be the miserable one here, but inflation is still at a dangerous level and it simply isn’t all energy prices doing the work anymore. Core inflation is outstripping 6%, an incredibly dangerous level, and all the numbers are now suggesting that, surprise surprise, inflation may be more secular than first thought. I still maintain this was really known, and the entire transitory thing was a political piece of trickery, whilst hoping inflation would be around 4-5% on average for a few years to erode away that debt. Well, that backfired folks, didn’t it?
Time to wheel it out one more time…….”The best cure for high prices is high prices”. Feels ever more savage when talking about energy though, doesn’t it? Economics is cruel, even bloodless, most of the time. I don’t need to explain in detail about how the dominoes would fall if nothing was done though – energy instead of rent, eviction instead of simply swallowing it (particularly with rates soaring upwards) – homelessness and far, far higher costs in temporary accommodation. Further dangers of social unrest. This, however, is why in reality the pain needs to be shared between householders, business owners and shareholders alike, alongside the Government (and of course, we always remember at times like this – it isn’t their money, they are just the custodians of it – without much of a track record, frankly).
All roads lead to Rome here though, and a revival of one of my favourite “Supplement Spoonerisms” of the year – The Bazooka. This move needs to be the biggest for a whole 30 months or so – to restore some faith and confidence. But – as always – it needs to be right. It needs to be agile. Emergency budgets and perhaps briefings might have to commence again. A dose of fear will no doubt be part of the Government toolkit – they got so good at it, of course, during Covid.
And to draw us to a close for this week, simply a lament to Rishi. You can’t help but feel he’d have a bloody good go at this, either in 11 or even 10. But the ship has sailed. Kwasi K is a smart cookie (personally, I’d rather have Kwasi A for those that know him), but unproven with the red briefcase, for me.
One final thought – next week’s efforts, in the absence of some economic cataclysm (probability non-zero, of course) may well come in the form of an obituary to our outgoing, impotent, feckless current Prime Minister. It feels – to me at least – that after decades of commenting on other people, and organisations, with his pen being far mightier than his sword (although his sword has got him into plenty of trouble, let’s face it) – that someone needs to make an effort to redress the balance – and I’m nominating myself.
Enjoy your bank holidays – keep calm, and carry on. This one is where we see just how far things can really be stretched – enjoy the soundbites, and answers on a postcard for what this will be called, once we get to “Strapline territory”. The Great Covid Energy Crisis? I’m sure you can beat that, answers on a comment please!