By Alasdair Galloway
You might remember a couple of things I have done for Talking Up Scotland in the last few weeks and months, forecasting doom and catastrophe The most recent one was “The Dark Night Part 2”, written in August (https://talkingupscotlandtwo.com/2022/08/11/the-dark-night-part-2/).
As my late mother used to say “it’s being so cheerful as keeps you going” (with thanks to Mona Lott from ITMA). https://en.wikipedia.org/wiki/It%27s_That_Man_Again
This was driven by a forecast by Cornwell Insight that the energy price cap come January would be £4200, and explored the consequences of this. Well of course, the price cap is now limited to £2500, still about twice what we were paying this time last year, but certainly better than if Cornwell had been allowed to be right.
However, many of the forecast consequences still stand. A price cap of £2500 is better than one of £4200 (a lot better as the latter would have been two thirds increase), BUT that increase in energy costs (another 35% or so on what was already an increase on last year) is still going to put stress on family budgets, AND will feed through to further inflationary pressures.
There are many stories about what this means, but this one from Twitter, has stuck with me. A Primary School in England was having a fire drill late one morning, and so all the kids were taken out into the playground. A teacher noticed one of the little girls in her class was crying, and so went over to comfort her and tell her it was only a drill. But what the little girl was crying about was that she was concerned lunch time might be cancelled, which was going to be the only time that day that she would eat. She hadn’t eaten the day before.
I don’t think there are words for that, other than that, if it is happening commonly then something is very, very wrong. My daughter has just started teaching, and during her placements in schools during her University year she would come back and tell us of schools where the teachers were buying paper and pencils for the kids so the teacher could do their job. But when schools have to feed the kids because the parents just can’t, then as a society we really do need to look at ourselves.
One “good thing” is that unemployment is now at a fifty-year low – though the other side of that is some employers are finding it difficult or impossible to find staff (thanks Mona).
But there are things happening as forecast. Rents and mortgages are going up (will go into the reasons why in a moment). Indeed, rented accommodation is either just being taken off the market, or is being sold by landlords on to a market with interest rates at a level unknown since at least 2008. “Heat, eat or on the street” has traction.
And let’s not forget the Richard Murphy quote that “Faced with the choice between impossible bills to pay or buying their children Christmas presents, the kids are going to win.” In other words, in the context of family budgets, as Christmas/kids jostles with rising energy costs and inflation generally, the former is going to come out on top, leaving the family less able to resist the latter in the new year.
However, there are two factors that I had not taken into account. The first of these is the possibility that the lights will go out because of shortage of gas. In the UK. The biggest producer of gas in Europe other than Norway. You couldn’t make it up. And at the same time as we are being warned of the possibility of three-hour power cuts, the Germans, who were supposed to be first in the firing line for problems with availability of gas, announce that they had just about got to 95% of their storage capacity, which is deemed enough to get them through most winters. Meantime the UK government has been reducing our storage capacity.
Both times when this happened in the 70s (both on account of strikes by the miners) I was at university, and the particular problem was “where to study” (stop laughing at the back). Tele was even taken off at 10.30 at night. But society dealt with this. How well would society take it now, particularly when the idea of the 9-5 has been subjected to such pressure. When we have so many more gadgets using electricity? I think it’s clear that it would add to the mix?
For the second, I take no responsibility, since I think it unreasonable that anyone with even a shred of rationalism would imagine that someone would try to put into place the sort of economic policy that Kwarteng has gifted us.
“Hard to understate the damage caused by Kwarteng’s mini-Budget: fresh Bank of England intervention in gilts market, up to £60 billion public spending cuts to balance unfunded tax cuts, overall credibility shot. For some reason the phrase human hand grenade comes to mind!”
That is not some left-wing firebrand, or even Keir Starmer. That is a Tweet by Lionel Barber. Who he? He who edits the Financial Times.
“Fiscal policy should not work at cross-purpose with monetary authorities’ efforts to bring down inflation … Doing so will only prolong inflation and could cause serious financial instability, as recent events illustrated.” – Pierre- Olivier Gourinchas, the IMF’s economic counsellor, who added for good measure that UK economic policy is like “two people trying to hold the steering wheel” trying to turn the car in different directions. “It’s not going to work very well,” he said.
Kwarteng’s budget was described by Paul Johnson, Director of Institute for Fiscal Studies as “extraordinary”, though he hoped the gamble being taken would work out. However, he also pointed out that to fundamentally change the UK economy is not only about tax cuts (the easy part) but about education, skills, regulation etc (not so easy).
In this regard Kwarteng’s retort that the IMF forecasts his tax cuts would promote UK growth in 2022 to the highest in the industrial world is just a sick joke, because he doesn’t mention that in 2023 the they are forecasting an economic crash, just as happened with Anthony Barber’s “dash for growth” budget in the early 1970s.
Moreover, going back to my observations about those already deprived, to make all that Kwarteng proposes add up, there would have to be spending cuts of £60 billion. Paul Johnson cautions here that more public spending cuts faced the problem that it had already suffered a huge hit over the last decade and that there was “not much fat left to cut”. This is what lies behind the Tory Party’s current dance display about whether benefits should rise by inflation (ie maintained in real terms) or less than this (a real terms reduction). It is though important to remember that we are talking about benefits as ‘generous’ as Universal Credit, on which people already face poverty. So, lets decide to leave them no less poor, or make them even poorer. Takes some neck to ask yourself a question like that.
And what about pensions, I hear you say? Well what about them. Kwarteng’s budget has managed to put the UK pensions industry up against a wall. Pension funds make considerable use of government gilts to manage risk, but with the precipitate increase in interest rates (mortgages are being sold at 6%) the price of bonds falls, so the pension funds are left with a pile of paper that has just lost value. The Bank of England has spent £65 billion “to smooth over febrile conditions in bond markets” and prevent a “fire sale” of UK government bonds – or gilts – by pension funds caught out by the sharp increase in interest rates following Mr Kwarteng’s intervention. The Bank announced today that its efforts in this regard will end at the end of this week. A “fire sale” then would be at further reduced prices of gilts and thus even higher interest rates.
What if a fund hasn’t got itself into a better position by then? Could it fail? Well perhaps, though more likely Bailey will press a few more keys on his computer keyboard.
There are though two important points from this. First is the utter recklessness of what Kwarteng has done, presumably with Truss’s full knowledge and approval. Really what did they expect? £45 billion in tax cuts by the Chancellor of an economy which already has considerable debt? To fund that debt was forecast to increase inflation and interest rates, and, even worse, he has never indicated just how he intends to pay for it, and is now hemmed in by his own party on some ways he might do so. For instance, welfare expenditure cuts are going to be a hard sell.
Secondly, how long can this go on for? The above, re the bond market assumes that the Bank of England can go on “smoothing” for as long as necessary – following the expenditure made necessary by Covid and to offer support for energy price increases without bothering the poor shareholders of energy companies. Or put another way, how strong are “the broad shoulders of the United Kingdom”? How long can they go on for? How many crises can they withstand? All at the same time? Add to this the funding necessary to deal with the precipitate increase in energy prices. How long?
And that brings us neatly to the final question. If the UK over the next winter is going to undergo the problems identified here
- Energy costs HAVE risen, though less than they might have done
- Inflation is rising
- Unemployment is low but at the price of some employers being unable to find workers
- Foodbanks are subject to increasing pressures . The Trussel Trust, which operates food banks across the UK, revealed that it had provided more than 2.1 million parcels to people facing financial hardship in the year to April 2022, a 14 per cent increase compared to the same period in 2019/20, before the pandemic. That kind of surge has led some foodbanks to warn a further surge in demand will prevent feeding hungriest this winter
- The cost of rent and mortgages is going up
- It is not impossible that the lights will start going out just as they did 50 years ago
- Our new Chancellor’s first economic initiative has been subjected to a greater and wider level of criticism than almost any other action by any other Chancellor that I can remember. I have, for instance, never been aware of the IMF being bothered about social inequality, yet they have warned Kwarteng of the dangers of increasing this through his mini-budget.
- To pay for the very richest getting a smaller tax bill will mean further cuts in public expenditure
- The Pensions industry for all its faults has always been regarded as a bedrock of the UK economy, yet Kwarteng has managed to destabilise it. Happy days if a pension fund goes down?
- How long will the international community allow the Bank of England to bail out its government, after Covid, cost of energy support and now Kwarteng’s farcical mini-budget.
can it survive?
Some final thoughts.
First how long will the Tory Party countenance Truss and those of her views, such as Kwarteng? The difficulty for the party is that their MPs left to themselves would have backed Sunak all the way to Number 10. BUT the party members wanted tax cuts so loved what Truss had to say, and which she has now done. With the present electoral process of the MPs selecting two candidates, and the membership choosing between them how could this end? It is said the most favoured candidate for the membership was Boris! There was even a campaign to write his name in.
Secondly it is clear that there is a degree of animus between our PM and our FM. I doubt very much if the latter really cares a fig that the former hasn’t bothered to contact her since taking up office. However, what does this say about the ability of the two governments to work together? How close are we to a total breakdown of relations and effectively inter-governmental warfare.
Lastly, if you are not yet terminally depressed, the public health guys are forecasting that if the UK is like Australia there will be a considerable flu epidemic this winter. https://www.newscientist.com/article/2339755-why-the-uk-could-be-heading-for-a-flu-covid-twindemic-this-winter/ I’ve had mine. Hope you have had your own.
Have a nice day!