The Dark Night Part 2

By Alasdair Galloway

Today’s news is dominated by a forecast by Cornwelll Insight that the “price cap” to be announced come January will be £4200 (https://www.bbc.co.uk/news/business-62475171), which is roughly twice what we were paying at the beginning of this year – 100% in 12 months.

What I want to consider here are some of the consequences that might follow, for the media has been excessively slow in considering this.

The most obvious implication is that the price of energy has increased and will increase some more in the near future. Obviously, this is going to blow a hole in a lot of family budgets, and indeed may blow them up altogether. But I would argue to understand completely we need to consider the feedback loops from different parts of the economy and indeed wider society.

The most obvious feedback loop is that if electricity and gas had been taking 15% of your net household income last year, it’s going to be 30% next year. We can deal with this by such as spending savings, but this can only go on for so long. Most likely, and in some cases immediately, we are likely to spend less on other things – ie our normal consumer spend.

In turn this means a decline in aggregate demand, but one difficulty is that the economist’s normal “cet par” (all other things equal) won’t apply. If, for instance, you would spend on day to day, or week to week essentials, £x, the problem is that this £x (reduced already because of the cost of energy) is going to buy less than it might have done earlier this year.

So, demand is not diminished only by consumers reigning in spending, but at least as much by increases in prices much of it caused by energy price increases, so that for the same spend fewer goods and services can be bought.

One consequence is that manufacturers will start to lay off staff, faced with declining demand. Likewise, retailers will find their income reduced and lay off staff. If it becomes bad enough, then whole outlets could be closed down, so perhaps leading to a property crisis.  In much the same way, hospitality and leisure will be affected. All this at the same time as the Bank of England forecasts unemployment will double as well as the economy moving into recession.

And as unemployment goes up, it will bring with it a further reduction in aggregate demand, for I think its clear that going on to benefit will reduce one’s income, possibly to a critical level, so more unemployment, less aggregate demand and more unemployment ….. and so on (and on).

A cartoon introduced me to the phrase “heat, eat or on the street” for consumers, which brings another possible dimension into this – tenants being late with payments or failing to pay at all. The parallel in the private sector is failing to meet mortgage payments. Both could lead to a staggering rise in evictions, but how will this be managed? If enough people are in enough difficulty, if a landlord evicts a tenant for non-payment, what does he do when he finds the applicants to move in all have arrears with their current landlords? What will the consequences be for the price of property if banks evict large numbers for non-payment of mortgages? Will the banks even secure the value of the mortgages? Or will the only winners be property developers who will buy up cheap, be willing to hang on till this all comes to its end, and then sell at enormous profit?

Of course, this won’t all happen at once. Right now, what we have is something of a “phony war”. Energy bills are routinely lower in summer than in winter, so while the problem is clear, it has not started to bite to its full potential. But as it does ramp up, I suspect it will do so quite quickly – I would expect it will all get going this side of Christmas, which provokes the question, “what about Christmas?”. Richard Murphy in a very good tweet thread (https://twitter.com/RichardJMurphy/status/1555466755094503424)  argues that “Faced with the choice between impossible bills to pay or buying their children Christmas presents, the kids are going to win.”

I agree with Murphy that things will move quickly, but in my opinion, what happens before Christmas will be little more than an overture to 2023, when (remember?) the price of energy is going to double in price on 12 months earlier, and even almost 20% on just 3 months earlier. At that point all hell really could let loose.

If there are enough people in difficulties, faced with “impossible bills”, if unemployment is rising as we might expect, as inflation continues to increase and cuts our real incomes more widely than just on the price of energy, then we really are in a situation which could be said to be “challenging” to the power of the biggest number that you can think of.

One consequence – perhaps an early one – is that foodbanks could simply be overwhelmed as they would be facing a double whammy. On the one hand, increasing poverty would see more people at their door looking for supplies. On the other hand, as the incomes of regular givers are challenged what the foodbank has to hand out will decline.

Another consequence might be that the “Can pay, wont pay” campaigners of the not so beloved Community Charge (Poll Tax) dust down their tactics from that time. Frances Curran of the SWP appeared on “The Nine” recently to speak about a campaign against energy price increases. It is almost inevitable that there will be others, but if this is sufficiently widespread do our society’s protest movements have the infrastructure to be able to stay in control of this?

However, I suspect very strongly that Richard Murphy is right when he argues “The biggest civil unrest in decades is likely this autumn. Not all angry people are not going to sit quietly at home, fretting in silence when they realise what is happening to them is being done deliberately. They are going to take to the streets.” My only caveat would be that if this continues, it will be worse after New Year for more will have fallen into uncontrollable difficulties.

It’s not as if the UK hasn’t faced civil unrest before, but it has tended to be in/around London and often based on poor race relations between the police and the black community (https://www.irishtimes.com/news/a-guide-to-british-riots-1980-2011-1.881635). However, the very strong likelihood is that unrest will be more widely dispersed, involving sections of the community who have never been involved before.

At the same time, it is only a little comfort that Scotland may have more police officers than elsewhere in the UK, but the fact remains their numbers are about where they were in 2008 (see https://www.gov.scot/publications/police-officer-quarterly-strength-statistics-31-march-2022/ see diagram re FTEs in particular). Nor is it likely that, having their own wage dispute already, the police are going to be particularly motivated to get the government out of a hole. Therefore, we face a situation when unrest is particularly likely but the fewer officers we do have are unlikely to be especially well motivated.

So, where are we? The above is perhaps a little apocalyptic but not impossible. It’s hard to see anything other than a significant increase in indebtedness, a reduction in aggregate demand driven by energy prices and its associated feedback loops, as well as a potential crisis in the financially critical housing and property markets. The question is how people will react?

Its hard to see the present bunch in government reacting with anything other than hostility. Truss has been shamed into mumbling about payments to people “really in need”, but her main focus is to reduce tax which of course will be of most benefit to those most able to pay, and not at all to folk who don’t earn enough to pay tax at all.

Sunak is said to face criticism for what he did to public finances with the furlough scheme. While the scheme itself might not have been all that well conceived, the fact is that if a government is going to keep folk away from work, then there simply had to be alternative income so that they can put food on the table. In terms of economics the furlough scheme stopped the bottom falling out of the UK economy altogether. Does he have the nerve to do this again? Given the pressures on him from his own party I doubt it, but it is something like this that is necessary if we are to avoid the difficulties set out above.

Richard Murphy in the tweet cited above, suggests there may be a way of diminishing the degree of challenge in all this by making it illegal to cut off electricity, gas and broadband. My own view on this is that Murphy doesn’t give enough weight to the fact that many of the companies involved are ultimately foreign owned (eg EDF, Scottish Power, BT). How long will their foreign owners be content to wait for the promised profits to come through? Or will they just pull the plug?

He also suggests that there should be no evictions, though does accept that repossession will be necessary in many cases for non-payment (assuming I suppose that the debtors continue to live in the house, even though they don’t own it anymore). The difficulty with this is that it does no more than kick that particular can down the road some more.

Subsidising energy prices – both domestic and industrial – might be expensive, but so are massive increases in unemployment, a widespread collapse of business, and severe social dislocation.

Modern Monetary Theory is derided for underpinning the Magic Money Tree (MMT – geddit?), yet consider if the government facing Covid and attempting a lockdown had only reduced tax? In such a situation is the role of government really to focus on the fiscal deficit, or to act in support of the economy and of society? Something had to be done in the face of Covid, and it needs to be done now or we face a very grave situation.

5 thoughts on “The Dark Night Part 2

  1. The Oil/Gas industry should be taxed appropriately. When prices and profits are high the tax should be higher. When prices and profits are lower. The tax (%) should be lower. That is how the industry was supposed to be managed. Taxes went as high as 80% when the barrel price was higher. The UK Treasury was getting £Billions in Oil & Gas revenues and taxes. Up to 12Billion++. Then prices fell limiting exploration and production. The tax was not reduced quickly enough. Prices fell 75% . Tax was lowered 25%. 120,000 jobs were lost. Jobs were gained in renewables. The industry is being mismanaged by Westminster incompetents. Since 2010 and before.

    If tax was higher other taxes could be lowered. Ie NI. The tax on petrol at the pumps. The £20 reduction restored to Universal Credi.t. Or the tax threshold increased. So people on lower incomes etc could afford the higher fuel and energy costs and be able to eat. The economy is being mismanaged by Westminster incompetents. If nothing is done businesses could close and jobs could be lost. Putting up unemployment which would have to be funded. Typical Tory unionists. They will be gone in a year+. Independence Ref coming.

    The price of fuel and energy could fall as world prices could fall again. Investment in renewables, tidal, wind and solar keeps energy costs lower. Scotland is in surplus in fuel and energy, 25% but pays a higher cost despite being nearer the source Oil &Gas and renewables. The economy increased £3Billion from renewables.

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  2. This is scary, even if only 25% of the gloomier forecast happens. The only upside is that it may, just may benefit the independence cause.

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  3. Well said , Alasdair !

    If the cuckoo currently in No. 10 does the square root of f*ck all – as usual – and we kick the decision making down the road until either Tweedle-Dum or the other one ”takes back control ” then the ‘country’ is seriously F*cked !

    These two Wannabe PMs could be compared to rabbits-in-the-headlights , except a rabbit with a functioning brain has more empathy than these monstrous individuals.

    Civil unrest is , even at this stage of the energy crisis , not too great a stretch .

    Perhaps Baroness Ruth will be volunteering her services to help out our Armed Services if the worst happens . She probably has her own tank !

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  4. Aye, a good follow up Alasdair.

    The cost of NONE of the UK’s home produced electricity and gas production has increased, the cost of imports has increased but the UK’s energy policy and structure is such that the highest cost applies to ALL. It’s nuts.
    Essentially consumers are going to struggle in order to give large corporations huge profits, in reality solely down to Tory party dogma.

    When the UK media began talk of Russian gas being crucial to the UK (when IIRC it was <1%, and that principally was LPG), I smelled a rat, dejavu of HMG and the US scamming the public over Iraqi oil, again the complicit media.

    For comparison, I'm living in eastern europe on a pension, russian gas and -20 winters, but improved insulation since August 2017 on a modest but modern house, and tracking energy use and cost.
    Having gas and power down below 50%, news of a massive energy price hike in October 2021 was a slight concern. My total energy bills in GBP –
    2020/21, 636
    2021/22, 765
    So +20% year on year WITH Russian gas, a long winter (but warmer at -15), and should prices rise a further 20% this October, next year will be 918.

    What is happening in the UK is completely bonkers.

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