The sheer size of Liz Truss’s first major economic policy decision is extraordinary. Even after a few years in which we have all grown used to exceptional figures attached to government initiatives, the promise to fix domestic energy prices until 2024 is superlative: expected to cost £150bn, it is a far larger spending commitment than the £70bn allocated to the pandemic furlough scheme.
In theory the policy shelves the issue of household energy prices until the next election by pledging support over the next two years. But the scheme, despite its immense size, is riddled with holes. The typical household energy bill is still set to rise by £600 from 1 October – far less than the £1,500 increase threatened by Ofgem, which sets the usual price cap, but nothing like as comprehensive as the total freeze that Labour and the Lib Dems have demanded. It’s not clear why an obvious open goal has been provided; I would guess that the decision was taken so as to extend household support to (potentially) the next election, due in December 2024, at the expense of providing more comprehensive support for a shorter period of time.
Support for most businesses, meanwhile, is only set to last six months. This is better than nothing at all, when hundreds of thousands of businesses were facing ruin over winter as demands for payment landed. But it’s nothing like the extraordinary generosity the government has found for the energy companies, who will be granted a £40bn lifeline from the Bank of England in the form of “liquidity support”.
These are the privatised energy suppliers, leveraged to the hilt and running a fundamentally unworkable business model, that have been failing in dramatically large numbers over the last 18 months. One, Bulb Energy, had to be somewhat shamefacedly nationalised by Kwasi Kwarteng, the business secretary at the time and now the Chancellor. Attempts to offload Bulb to the private sector have, so far, come to nothing. The exceptional support from the Bank amounts to a bailout for the sector, privatising profits while dumping losses on the public sector to spare Thatcherite blushes at future nationalisations.
This £40bn for the marginal and over-leveraged UK energy middlemen pales next to the defence the government has mounted of sky-high profits being grabbed by the gas producers and electricity generators. Treasury estimates suggest that, on the back of an exceptional surge in the price of essentials like natural gas, UK energy producers will bank up to £170bn in excess profits over the next two years. This, happily, is easily enough to cover the expected cost of the energy price semi-freeze. Less happily, the government is insisting on, instead, borrowing the money: an unnecessary waste of its capacity to borrow and creating the risk of a future row about the size of the government debt and the need for spending cuts.
The handout doesn’t fully protect households from future rises. The support for businesses is even weaker – except for those arguably nearest to Conservative hearts, whether as examples of privatised “success” or as major donors. And the government is losing the narrative, being easily portrayed as so obsessed with defending excess profits that it would rather add billions to government debt than impose proper taxes. Given all this, the government will be sorely tempted to duck out of parliamentary scrutiny; it is essential, given all this, that it is not allowed to do so.
If the domestic politics, entering winter, do not look promising for the Truss government, the international economic reaction could be even worse. The pound has fallen to its lowest level for almost forty years against a (rapidly strengthening) dollar; government borrowing costs continue to climb. Neither of these things, arguably, should be pressing concerns for a sovereign government with its own currency, in normal times. But the times are not normal, and Britain’s combination of instabilities – from Brexit to energy prices to strikes to perhaps even the jolting loss and replacement of a much-loved monarch – do not necessarily inspire confidence.