Chancellor of the Exchequer Rishi Sunak had no qualms about making the policy his own, picking up Labor’s idea but putting a conservative spin on it, calling it an energy profit tax to distinguish it from the proposed boon from the opposition.
The political justification for this hastily concocted package is clear. After months of deadly revelations and investigations into Partygate, the government is desperate to change the subject and appear to address voters’ real concerns, including the effect of soaring inflation and what media dubbed the cost of living crisis.
But the idea that the hasty measures will boost consumer confidence or avert a recession is dubious. The substantial package announced on Thursday looks like a defense of fiscal policy, a panicked chess move intended to protect the king but not really advance the government’s position.
On the plus side, the new spending should make a difference to the average household’s energy costs. The package includes a lump sum payment of up to £650 ($819) for some 8 million families who are already receiving benefits, as well as payments for pensioners and people with disabilities. Most of the support lands in the fourth quarter, when UK energy regulator Ofgem is expected to raise the price cap to £2,800, an increase of more than £800.
But tinkering with taxes and exemptions is risky business. Before introducing his tax, Sunak had argued that it would hurt investment. It therefore offers energy companies a chance to offset the 25% tax on investments. As BP Plc CEO Bernard Looney noted, investment plans in the industry are drawn up well in advance, so it’s unclear how well it will work. There is also a risk of moral hazard: will investors be so sure that there will not be other windfall taxes in the future to plug the holes?
Nor is it clear that the measures will be enough to boost consumer confidence, which has fallen to a four-decade low, even below the levels of the past four recessions. One reason is that the cost of rising energy prices to UK households is around £55 billion; Sunak’s relief doesn’t begin to cover that (as he more or less admitted).
A purchasing manager’s index suggests companies also expect a tough ride.
Sunak’s hope is that the £15billion relief package – which at 0.6% of gross domestic product is still substantial – will help stave off a recession this year. It’s debatable. Bloomberg Economics expects GDP to contract 0.4% in the second quarter of the year, then rise 0.3%, then fall again in the fourth quarter. Floating and weaving may not technically correspond to a recession (defined as two consecutive quarters of declining GDP), but it is also largely theoretical.
“There is no point in saying that a contraction is not a recession on the grounds that it is not two consecutive quarters, when the average person is 5% poorer,” notes Mark Bathgate, a independent economic consultant. Meanwhile, it is likely to aggravate inflationary pressures and add pressure on public finances.
Even though the new energy tax raises the whole to £5billion, it still pales in comparison to the extra spending. Sunak also promised to increase benefits and pensions in line with September inflation, which is expected to be around 10%. This means the government will be writing a big check – potentially eclipsing the whole package and presumably financed by borrowing. (Borrowing costs have already quintupled in the past 12 months.) With Britain’s tax burden already the highest since 1950, the government can’t exactly get back to taxpayers.
Britain obviously faces a supply crisis that defies easy solutions. Brexit-related factors are also contributing to higher costs. However, subsidizing demand will not be the answer and will have its own unintended consequences, including creating the expectation that more subsidies will have to follow.
Johnson wants to fight the upcoming election by showing progress on his main manifesto pledge to rebalance Britain’s hugely unequal economy – what he calls ‘leveling himself out’. There is no amount of public spending (below, perhaps, the 2 trillion euros – $2.14 trillion – that Germany has spent on reunification over more than two decades) that will achieve this goal. Johnson and Sunak desperately need to find a formula for economic growth.
The tax and spending trap is clearly an uncomfortable place for Sunak, who still wants to be seen more in the mold of a junior government chancellor. But populist policies are now the government’s calling card and harder to distinguish from the opposition. Instead of Singapore on the Thames – the unrealistic vision Brexiters threw in the direction of Brussels during tense exit negotiations – the UK looks a little more like Belgium on the Thames under its watch. No wonder the Labor benches look smug.
More from this writer and others on Bloomberg Opinion:
Boris Johnson’s next test is more important than Sue Grey: Therese Raphael
Britain’s business should be business: Adrian Wooldridge
Bigger shocks come with your electricity bills: Javier Blas
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion covering health care and British politics. Previously, she was the editorial page editor of The Wall Street Journal Europe.
More stories like this are available at bloomberg.com/opinion