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18 August 2022

Liz Truss must use the power of the state to relieve the living standards emergency

If the new prime minister relies only on tax cuts, it will be a long, miserable winter – for both the public and the Conservatives.

By David Gauke

Labour’s call for a freeze in energy prices is good politics. It demonstrated that the party is on the side of hard-pressed energy consumers, it is easy to understand and it has wrong-footed the Conservative candidates for prime minister. None of this makes the announcement good policy.  

Let us step back and examine the issue in question. Energy prices are soaring because of post-Covid demand and the consequences on supply of Russia’s invasion of Ukraine. Both factors, we assume, are temporary but prices are likely to remain high for a sustained period. Some households will be able to absorb these additional costs, others will not. There are also plausible scenarios for this winter (and perhaps the next) where the issue is not just one of price but also of supply. If we are not careful, we may not be able to keep the lights on.

The policy response should bear several objectives in mind. As a rule, governments should be wary about borrowing to protect current living standards at the expense of future taxpayers, but we are clearly in exceptional circumstances and intervention is necessary to prevent hardship. If the justification is preventing temporary hardship, the support should be targeted to benefit those who need it most. It should also be reversible, ensuring that the damage to the public finances lasts no longer than is necessary.

On this latter point, Labour’s price freeze passes the test. If energy prices fall back to the levels they occupied when the current price cap was set, the policy is no longer needed. On the former point – targeting resources where they are needed most – it is very inefficient. For this reason, if prices stay high for any length of time, funding the price freeze is going to be extraordinarily expensive.

[See also: Can Liz Truss save the economy with tax cuts?]

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There is a further problem. When demand exceeds supply, either supply has to increase or demand has to fall. Higher prices incentivise both, but it is demand that will be the more immediately responsive to high energy prices. To ensure the lights stay on (and, for that matter, to weaken Vladimir Putin’s leverage), we need to use less energy this winter than we would otherwise have done. At a household level, that means being a little more frugal in energy use, investing in improved home insulation and so on. Using taxpayers’ money to cap prices (or, for that matter, to cut VAT on domestic fuel, as Rishi Sunak has pledged to do) reduces those incentives more than providing direct support.  

A better approach was the one originally taken by Sunak in May. The £400 rebate per household was a little too universal for my taste but, overall, it was a progressive and well-targeted package that protected the poorest households from the energy price increases by providing direct support. This support now appears inadequate, with prices rising faster than expected, but the levers were the right ones to operate (at least after the opportunity was missed to increase Universal Credit by more than the September 2021 rate of inflation). 

What was striking about Sunak’s May announcement was quite how friendless it was. Rather than trumpeting a £15bn package, the government quickly changed the subject (“Boris Johnson declares war on rip-off petrol stations”) and appeared embarrassed by the largesse. It was seen as too profligate, too interventionist, and insufficiently Conservative. It was barely mentioned again.  

It was telling that for some time during the Tory leadership contest, Liz Truss claimed that the best response to the cost-of-living pressures was to cut taxes – even though those most affected pay very little in tax – rather than provide “handouts”. This policy response is badly targeted and hard to reverse. Truss has abandoned that position now but she probably judged that this was what the Tory selectorate wanted to hear – her small-state instincts were always likely to make her a formidable candidate in front of the Tory membership. Sunak may have won public support because he implemented the furlough scheme, but two years later it is the source of suspicion in the Tory party.

It did not take a lot of political imagination in March to see that a crisis lay ahead and that extraordinary government intervention was going to be required again. Every step should have been taken to increase domestic supply (there are sites that have planning permission for solar farms that could have been in operation by now) and, more importantly, launch a national mission to improve home insulation. (It is probably too late for any of this to make much difference for this winter but we should not assume that our problems will be over in a year’s time.)

None of this happened. Partly this was symptomatic of the general aimlessness of the Johnson regime, and it was partly about a vulnerable prime minister avoiding upsetting MPs sceptical about government action. Telling people to reduce their energy use? Too nannyish. Expanding renewables? Too faddish. Providing home insulation to the poor? Too interventionist. Wariness about big government is often justified, but there was (and continues to be) an overwhelming and pragmatic case for vigorous government action in the current extraordinary circumstances.

Labour’s freeze proposal may be flawed but it is at least a plan. If the new prime minister cannot make proper use of the powers of the state to help people through the coming emergency, it is going to be a long, miserable winter for both the British public and the Conservatives.

[See also: Can Liz Truss resist becoming Boris 2.0?]

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