The UK has been hit with an unexpected bill for energy of the order of £100bn. This is a one-off, as gas prices will eventually drop. Reducing energy consumption by enough, quickly enough, is simply not feasible. Borrowing is necessary to spread the cost over a number of years and government is best placed, by far, to issue the requisite debt.
My memory is playing tricks. I have a clear recollection that I was blogging when Lehman Brothers was allowed to fail, but I can find no post or even draft for that (later note: I think I confused it with the rejection of the US TARP bailout a few weeks later, noted at the end of this post). I wanted to revisit my reaction, because allowing the UK energy price cap to rise by around 80% as planned from October would have been a “Lehman Moment” for the UK economy. Then (when the bailout was – temporarily – rejected as well as when Lehman was allowed to collapse, incidentally), as now, misguided economic orthodoxy would have taken precedence over actually keeping the economy going.
And I wonder if Rishi Sunak was actually going to let it happen.
Instead, Liz Truss has been chosen as the next PM and is planning to do something along the lines of what I proposed last week. It’s the only logical thing to do.
Johnson was a hopeless PM, but did the right thing on Ukraine. Similarly, Truss may be unconvincing (I don’t think it would be wise for opposition parties to bank on her being as bad as Johnson, by the way), but seems to be about to do the right thing on the energy price crisis.
Let’s try to think about it logically.
Let’s be very clear that the energy price rise is temporary, caused by the sudden loss of Russian gas supply to Europe. Even if the pipelines from Russia never reopen, markets will correct themselves as other sources of supply of gas and other forms of energy are ramped up. Ultimately most Russian gas will be exported elsewhere, at slightly less than the mean global gas price, because Russia has fewer competing customers, and Europe will pay slightly more than the mean global gas price because they have fewer competing suppliers.
Financially the UK could, in theory, pay the same in total for its gas this winter, but use a fraction of the normal amount. This is not feasible.
Instead, we, the UK, are collectively taking a hit of an additional cost of £100bn or so for gas. Actually some of the cost is for other energy and some of both that and gas is produced in the UK. We should aim to claw much of this back with windfall taxes, even on renewable energy producers. I understand the profit motive, but it’s not as if their business plans were predicated on the price of their product rising dramatically.
There are two consequences of this ~£100bn cost:
- Either we reduce consumption of everything else but gas, or we borrow the £100bn. If we reduce consumption that much we’d face the mother of all recessions. So, if we’re going to borrow the £100bn, who should do it? Of course, the government is in the best position to do so. Indeed many consumers – households and businesses – wouldn’t actually be able to.
- We’re eventually going to have to pay that £100bn back, by selling sterling-denominated goods or assets to recover the sterling that has been used to pay for the gas. There’s no way around that fact, whoever borrows the £100bn. Repayment will almost certainly involve a depreciation of sterling (along with the euro and other European currencies) in order to make our exports more competitive. Whether or not this depreciation occurs in response to immediate inflation doesn’t alter the fact that sterling must adjust in the mid to long term.
It might be tempting for government to protect only consumers, but the result would be both more inflation and recession. Many businesses – not least shops, restaurants and pubs – would be forced to increase their prices dramatically (impacting consumers anyway) or close down.
Oh, and don’t forget that inflation at 10% is already rapidly eroding UK government debt, increasing the scope for borrowing.