Britain is facing a cost of living crisis this winter more brutal than any in living memory. Annual energy bills for the average household are set to hit £300 a month from October, almost double the current level. Spending power will be sucked out of the economy as millions of households struggle – and fail – to make ends meet. The courts will be clogged up with people prosecuted for falling behind with their payments.
That’s the situation facing the two hopefuls slugging it out to be the country’s next prime minister, yet neither Liz Truss nor Rishi Sunak yet seems to have grasped the magnitude of the problem, in public at least.
Truss’s contribution to the debate has been a plan to reverse the increase in national insurance contributions Sunak introduced as chancellor and which came into force in April. This would save the median worker – someone smack in the middle of the income distribution – £170 a year. As Sunak’s team rightly note, this wouldn’t “touch the sides” given the likely £1,600 a year increase in the energy price cap.
For his part, Sunak has left himself open to the same “not nearly enough” accusation with his proposal for a one-off cut to VAT on domestic energy bills this winter. That would save the average household £160 a year.
Sunak’s £15bn package in late May cut bills for all households by £400, with additional payments worth £650 for 8 million of the poorest households. This, though was based on an energy price cap expected to be about £2,800 a year, rather than the figure of around £3,600 that will be announced by the regulator Ofgem at the end of this month and come into force in October.
A lot more help is going to be needed and were it not for the fact that Boris Johnson is a lame duck prime minister, a fresh package might already have been announced. Unfortunately, there is not going to be the immediate emergency budget called for by Gordon Brown, with action delayed until after Truss or Sunak moves into Downing Street in September.
But it would provide a much-needed boost to confidence were the foreign secretary and the former chancellor to announce jointly that a generous package – for both consumers and businesses – will be introduced whoever wins. Quite rightly, there has been plenty of attention paid to the plight of households, but far less heed had been paid to the pressures on already-struggling companies. According to the energy consultancy Cornwall Insight some businesses are facing a fivefold increase in energy bills in October. A tsunami of corporate failures looms.
Tories are hopping mad with Bank of England’s interest rate rise
Debate about what should be done with the Bank of England has rumbled on following its forecast that the economy faces 13% inflation and a prolonged recession. If Andrew Bailey thought the speculation would quickly die down after last week’s half-point increase in interest rates, he could not be more wrong. Tory critics, mostly Truss supporters on the party’s right, are hopping mad with the governor and are demanding change in the way Threadneedle Street operates.
What they have in mind is not entirely clear. It no longer seems to involve the Treasury regaining control of interest rates after a 25-year hiatus, but it might involve a different target to make big inflation overshoots less likely.
One idea floated is to replace the current 2% inflation target with a target for nominal GDP – the size of the economy in cash terms. Nominal GDP is made up of two parts: the actual expansion of the economy and the increase in prices – so the Bank would effectively be told to set interest rates to control the total amount of spending rather than to hit an inflation target.
Targeting nominal GDP is not a new idea and there are reasons why it has been rejected as an anchor for monetary policy in the past. An estimate has to be made of the economy’s trend growth rate, and that will depend on how long a period is being looked at. What’s more, GDP figures are revised all the time as more information becomes available to the Office for National Statistics so the Bank would be trying to hit a constantly moving target.
A better place to start might be to look at the Bank’s nine-strong monetary policy committee, which lacks business experience and heterodox thinkers. Appointing a few members of the awkward squad – be they hardcore monetarists, die-hard Keynesians or some other discipline entirely – would help blunt criticism that the Bank suffers from groupthink.