It is hard to think of another day – certainly one outside a recession – when so much bad economic news came in one single torrent.
Energy bills up by £700 (with more to come thereafter), interest rates raised, inflation set to exceed 7% for the first time in a generation and now households expected to face the worst year for their post-tax disposable incomes since, well, pretty much ever.
It is a deeply depressing economic cocktail, and while the chancellor’s measures are intended to reduce the pain somewhat – especially for lower income families – the most depressing thing is that there is only so much that can be done.
Reaction to Sunak’s help for households – follow live
For the reality is that Britain is locked in the very same flavour of crisis being faced not just here but across much of the world.
It is going too far to say this is “just” an energy crisis. There are all sorts of other things going on: the post-COVID recovery (and our consequent fiscal indebtedness), this country’s adjustment to Brexit, the impact of higher taxes and continued tightness in welfare spending.
All these factors contribute to what we’re facing right now. But ultimately, above all else, yes: this is an energy crisis.
And an energy crisis is an everything crisis.
Higher household bills – that’s energy. Higher food prices – that’s energy (after all, most nitrogen based fertiliser is made using, guess what, natural gas). Higher goods prices – that in large part is energy, since most industrial processes are deeply dependent on power and fuel. Higher transport costs – ditto.
Most other countries are facing a conjunction of these factors.
Inflation is at decadal highs elsewhere too. However, Britain has three other problems.
The first is Brexit, which has caused much less damage than many feared, but is nonetheless gnawing away at this country’s productivity.
The second is that this increase coincides with a sharp rise in taxes. British households will have to contend with higher bills from everything at the same time as they face higher taxes.
The third is that the Bank of England is raising interest rates faster than many other central banks – and faster than most economists had anticipated.
Put it all together: higher energy prices, higher food prices, higher interest rates and taxes, and at least half of all households’ typical spending is on the rise. It is an everything squeeze.
But the more profound question is whether any of these measures will do much to help.
Up until recently the Bank of England was insisting that there was nothing it could do to prevent higher imported and energy costs. Now it believes that it should raise interest rates anyway, if only to prevent those imported costs turning into higher domestic earnings.
The chancellor chose to move forward the Ofgem announcement to today so it could coincide with the Bank’s decision, with two consequences: first, that it would “kitchen sink” the bad news so it all came out at the same time. Second, so he could demonstrate that between his loan and grant scheme and the Bank of England’s policies, the UK’s authorities would take this cost of living crisis seriously.
His problem, however, is that it’s quite plausible that energy prices stay high – maybe even go higher in the coming months. It’s quite possible they fall rapidly, raising the question of whether today’s interest rate increase was surplus to requirements. In other words, for all Rishi Sunak’s attempts to demonstrate he has control of this crisis, it’s not clear he has any.
Instead, what matters is what happens to flows of gas around the world. What matters is what happens in Ukraine in the coming months. What matters is what happens with climate policy and energy policy. This is, I’m afraid, beyond the control of anyone in Whitehall or on Threadneedle Street.