By Alasdair Galloway

A question was posed to me by Gerry Robertson following my “Mona Lott” piece (thanks Gerry for sparking this off)

(https://talkingupscotlandtwo.com/2022/10/12/from-mona-lott/) asking

“why has the price cap (if indeed this is a cap at all which seems doubtful) been set at £2500? Much has been reported about other as;pects of this disastrous ‘mini-budget’ but nothing I have seen in the media that this ‘cap’ will almost certainly benefit those disproportionately who live in larger properties (ie the richest in society) and whose normal energy bills would very likely be much higher. Anyone?”

The price cap is the average charge over the whole UK – the number of ‘units of energy’ (kwhs, therms and so on) consumed on average. However, what drives the actual cost – its all very well to know the number of units of energy – but how much would you be charged. On the international market the answer would be a “whole lot”. The idea of the price cap is that it is only a “lot”.

My guess is that the price cap was set according to how much the government was prepared to pay out in subsidy (or “government support” as our PM at the time of writing likes to put it), given average energy use. The price per unit of energy will be higher on the international market than the price in the price cap. The difference between the two is the government subsidy. So the price cap is not the maximum you can be charged, but the maximum you can be charged per unit of energy. (eg kw hour) Hope that is clear.

However, Gerry went on to a second part of his question – did the price cap benefit the better off? As far as I am concerned this is something that has been hiding in plain site all this time.

If the price of energy on the international market is X and the price per unit of energy in the price cap is Y (ie what the consumer pays), then the government subsidy is the difference between X and Y – let’s call it Z.

If you live in a single end you will almost certainly use a smaller number of Zs than if you live in Buckingham Palace (for instance), or just a “big hoose”. If we assume that typically folk who are better off live in bigger homes then the subsidy is regressive (ie it advantages the wealthier more than the poorer). So, Gerry is bang on.

However, there is more to it than this. First of all, for the poorest, energy bills will be a larger proportion of income than for the wealthier – and all the more so now. Thus, the subsidy is not only regressive but badly directed, as more goes to those who spend less on energy as a proportion of income.

Moreover, often the homes of the poorest suffer dampness, aren’t well insulated etc, so their energy bill is larger because of the poverty of their living accommodation, increasing the unfairness even further.

Does it have to be like this? Well, it is said that the government reckon the cost of energy subsidy over the next two years will be £89 billion. Would it have been impossible to, instead of paying relatively small sums to households, to pay a subsidy to individual h0mes, but profile it so that the poorest get the most and the wealthiest get much less?

Then there is the funding for this package, which will be through government borrowing (made more difficult and more expensive by the shambles of the last few days). Why not a windfall tax on the profits of the energy production companies? Its important to remember that the companies actually selling you your gas and electricity aren’t the main criminals (or not criminals at all) but the producers, who just pump the gas out of the ground/ generate the electricity, but get far more revenue from doing so than they might have expected this time last year. The only change is Putin invaded Ukraine. It has nothing to do with the production companies – theirs is pure serendipity.

The answer the UK government seems content with is that it would affect negatively the investment plans of these production companies. But are we really saying that if the levy removes only the increase in profits caused by the precipitate rise in energy prices, this is going to affect their decisions on investment? If there had been no such good fortune would there have been zero investment? I don’t think so.

In contrast the EU expects to raise £140 billion from a 33% levy on energy companies’ windfall profits in Europe. Norway is taxing them at 40%. Why not the UK?

But of course, the real kicker is that this less than fair subsidy is being paid for by borrowing which means it will have to be repaid and that means you and me. It also holds the country back since borrowing for other purposes will be restricted.

It really is the most appalling mess is it not? A regressive subsidy system, funded by borrowing ignores what is in effect “free money” by taxing away the windfall profits of energy companies. BP chief executive Bernard Looney, has said that BP becomes a “cash machine” at current prices. The Guardian has reported that historic profits have put BP shareholders in line for a $1.5bn share buyback in the first quarter of this year. Look after the wealthy!

But of course, this is not the only instance of the Truss government advantaging the wealthy. The best example are the tax proposals of her former Chancellor Kwasi Kwarteng. I have been studying economics for more than 50 years, and I cannot recall the IMF not only being so critical of a G7 government, but citing rising inequality as a consequence of the government’s policy.

The policy initiative taken by Kwarteng can be traced back to a short book written by inter alia Truss, Kwarteng, Raab and Patel – “Britannia Unchained”. This makes the usual noises about a “bloated state, high tax and excessive regulation”. You might be reminded of Thatcherism and you would be right, for she was the first PM to espouse these ideas, focusing on lowering taxes, and dismantling workers’ rights. Only by increasing poverty can we “incentivise people to climb out of the mud”, “Britannia Unchained” repeatedly implies. For Truss, as well as Thatcher, the IEA is an important influence.

This puts in context some of the observations of Kwarteng’s tax package. The Resolution Foundation found they will do nothing to prevent more than two million people falling below the poverty line, allowing 95% of the population to become poorer. At the same time, the richest 5% will see their incomes grow by 2% next year (2023-24), while IFS found that only those earning more than £150,000 a year will gain anything from Kwarteng’s tax proposals. They have been shamed into keeping the 45% tax band, which fewer than three quarters of a million paid. Had it gone, it is estimated these people would have tax bills 50k less than they would otherwise have been.

But perhaps the most egregious of Kwarteng’s errors was that he proposed a range of tax cuts, which were unfunded. This is a bit like me coming home and telling my wife I now own a Rolls Royce. Her first question is how are we going to pay for it? Somehow, I don’t think “I’ll tell you at Hallowe’en” is going to quite do it.

But Kwarteng was on an even stickier wicket as Susana Cruz, a strategist at Liberum Capital, pointed out. “Until the market sees a clear strategy to fund the energy cap freeze and other measures, we do not expect the pressure on UK gilts and sterling to ease, nor the pressure on equities, which is coming from persistent recession fears. The Chancellor is yet to reveal a clear strategy to finance its growth package (or planned expense cuts) so for now, his intent to reduce debt as a percentage of GDP does not seem plausible.” Put another way, the credit card is pretty much maxed out old boy.

But Kwarteng has gone. Corporation Tax will be increased to 25%, raising £18 billion. But where does the rest of the funding come from? Truss has been clear that she will not cut welfare expenditure, but this is not at odds with not increasing it in line with inflation – just at the right time for your energy bill going through the roof. Moreover, her new Chancellor Jeremy Hunt favours a 15% rate of Corporation Tax, so when Truss says she has only postponed the cut by a year she might well mean it (if she is still there, of course).

What is most notable is that the cuts to personal taxation do not appear to have been issues (other than the 45% rate), and as above these are wholly inequitable, not so much advantaging the better off as the very wealthy.

Thus, there is a pattern in the decision-making of the Conservative Party of advantaging the better off. In some regards this is no surprise. Yet within living memory is a more paternalist Conservatism of such as Harold McMillan and even Willie Whitelaw, now almost completely usurped and put to flight by Thatcher and most recently Truss.

Michael Fry tells of briefing Margaret Thatcher about the possibility of selling off council houses to sitting tenants at a discount. However, Fry’s version would have allowed the Councils to keep the proceeds which would have gone some of the way to providing alternative public housing. Thatcher rejected that, according to Fry, by arguing that the policy had to “benefit our people”.

And so it goes on, with an increasing emphasis on the interests of business, wealthy individuals (even the Russian ones!), deregulation of rights and protections to produce insecurity as a motivation to effort. “Britannia Unchained” argues that “Once they enter the workplace, the British are among the worst idlers in the world. We work among the lowest hours, we retire early and our productivity is poor”. There is plentiful evidence that this is not so, or is much more complex than this judgement allows for (a lack of investment or skills training)

However, if we look at what Truss and Kwarteng proposed but have now been pushed back on, that on its own is telling

• Sunak’s proposed rise in Corporation Tax from 19% to 25% will go ahead
• The removal of the 45% rate of income tax has been scrapped

But

• Cut in the base rate of income tax from 20% to 19% will go ahead
• Bankers’ bonuses will be allowed to rise to any level
• Sunak’s 1.25% rise in National Insurance, to fund personal care, will not go ahead
• No stamp duty on the first £250,000 of a property’s value
• First time buyers will pay no duty on the first £425,000 of a property’s value

Such as the bankers’ bonuses tells its own story, when a bonus can easily be more than the original six figure salary. Likewise removing stamp duty goes much further than helping the ordinary person. How many first-time buyers are going to spend £425,000 on their first home?

On the other hand we’ll have to see what happens to personal care now the National Insurance rise to pay for it has been cancelled.

The cut in the basic rate of income tax looks, let’s say ok. That is until we realise that the tax allowances are to be frozen for the next four years. This, for instance, will bring many people, who are too low paid to pay tax just now, into the income tax system. On its own it will create another 1.4 million tax payers, according to the FT, by 2025-26.

Over the same period, a freeze in the higher-rate threshold will increase the number paying the 40p rate by 1.6mn to 7.7mn — the highest on record. The level at which the 45% rate is paid – £150,000 – has been the same since 2010, when it was introduced. Freezing this for four years will treble the number who pay this rate since its inception – from 240,000 to 760,000.

By freezing allowances, it will also take away benefits for lower paid workers, and factoring these in as well as other planned changes to the welfare system, households will lose £1,450 a year on average by 2025-26 — bringing in £41bn for the exchequer according to the IFS. This is double the cost of £20 billion of Kwarteng’s well-publicised tax cuts, but while some might hit wealthier households, consistently it is the poorest households who will be hit, again according to IFS.

Thus, for this government philosophically, the centre of gravity of this government remains to make the rich richer/ the poor poorer, while at the same time belittling the latter as idle. You might want to say you “detest the Tories”.