Just because someone proposes a solution to the cost of living crisis doesn’t mean we have to jump at it

Whilst I’ve complained at times that there has been a slowness to talk about the cost-of-living crises, that doesn’t mean that no-one is talking about it. This week, former Prime Minister Gordon Brown weighed in with his take on the crisis and what needs to be done. He spoke with a characteristic sense of urgency that action is needed quickly.

Brown’s willingness to speak, to show that sense of urgency and to propose tangible solutions has been compared unfavourably, not just with the UK Government’s response but also with that of Keir Starmer and the Labour opposition.  Brown is seen to be taking a moral lead whilst Starmer is presented as over cautious. 

Well, first of all, there are good reasons for why Brown is able to speak in the way he is doing. First of all, it reflects the type of politician he is.  Brown’s style has always been to throw ideas at a problem, similar in style to other activist politicians including Michael Heseltine and indeed Boris Johnson. Don’t be surprised to see frequent newspaper columns full of suggestions on anything from airport islands and Irish tunnel crossings to asylum amnesties once more as soon as Boris is free from office. Secondly, there is a freedom in not being in office.  You are not held accountable for your proposals. Thirdly, exactly because of this, it is actually helpful for people like Starmer to have people like Brown offering their advice. It enables a policy proposal to be checked, tested and critiqued before becoming formerly part of his manifesto. If the idea proves sound, he can claim it as his own, if it bombs, he distances himself from it.

None of this means that Brown shouldn’t speak and give his opinion.  He has a colossal mind and whilst I thought he was a weak prime-minister and wasn’t keen on a lot of his policies as chancellor, his genuine concern for the country and to see people better off always came through.  His opinions are worth listening to.

At the same time, nor should we feel pressurised to do whatever Brown suggests because of his reputation and because he is the only serious public figure coming up with proposals. Yes, there’s an urgency and my view is that we need clear place before the winter starts to bite.  However, there is a risk that we are panicked into rushing in solutions that don’t help and aren’t needed or even create worse problems.

Part of my reason for calling for a little caution here is that there’s a narrative building up which is that this crisis is about one or other of people’s pet themes. To some, it’s all about Brexit. It’s those who wanted to leave the EU who are at fault for any problems at the moment from shortages through to high fuel bills.  Now, whilst the Government have made some unforced errors regarding immigration and that might have affected labour availability and queues at airports and ports, I don’t believe that Brexit necessitated those decisions.  But, that’s not the cause of high fuel prices.

Others have pointed to high profits for energy companies and evidence of costs actually falling at the time prices were going up.  This, they argue proves that we are dealing purely with a problem of greed.  Well, I cannot say whether or not the shareholders of British Gas and Scottish Power are greedy but the picture is a little bit more complex than that.  Energy companies have to take into account future markets as well as current ones.  Further, it may be true that some owners have recorder high profits, though those in some cases reflect successes in other parts of their businesses whilst the energy side of the business has proved less profitable. 

But the blame game also ignores what has been happening longer term and the realities we are seeing around the World.  The UK is not alone in seeing unusually high inflation. This is a global issue. The world has been hit by three significant shocks over the past 15 years, the financial crisis of 2008, the COVID pandemic and then the war in Ukraine.  I suspect that the shocks created by the latter two haven’t been helped by the long-term vulnerabilities that the financial crisis created which led to a decade of economic fragility. Incidentally, before we rush to re-use solutions relied upon during the financial crisis, we would do well to stop and ask whether or not those solutions were wholly successful then. If I’m right and we are still suffering the long-term effects of the credit crunch and debt crisis then that should require a level of caution before borrowing from the solutions tried then.

So, what about Brown’s specific solutions? Well, first of all, he argues for the energy price cap to be abandoned as a policy.  If I remember correctly, the idea of a price cap originally came from Ed Miliband. When it was first proposed, Conservatives were sceptical. They thought that attempts to artificially suppress prices would cause problems further down the line and would go the way of other attempts to micro-manage the economy. 

However, Brown’s proposal is not to scrap it altogether but to replace it with a newly negotiated energy tarrif. Brown then suggests that if companies are unable to meet that tarrif without going under that they should be nationalised just as failing banks were nationalised in the naughties.

On one level, this all sounds great, except that a partially nationalised industry with some companies functioning privately but facing competition from some that are temporarily nationalised raises a whole host of legal questions that could bog a government down. Further, it focuses on the companies rather than actually asking two simple questions:

  1. What are the root causes of the crisis -and is this long term or temporary?
  2. What is the most effective way of helping the end users who most need support.

I’m not sure that we have done due diligence on those questions yet and the risk is that we rush in solutions that don’t in fact deliver help to end users and instead store up longer term problems.

What we do know, is that a significant factor has been the war in Ukraine and that this came on top of an already fragile market due to the impact of COVID on logistics.  This means that a significant part of the problem is around an imbalance between supply and demand. How we respond to that depends on two things. First, it depends on how long the conflict in Ukraine will go on and then it depends upon how quickly we can adapt energy supplies to resolve the imbalance. I suspect that we aren’t going to see a resolution to the war in Ukraine anytime soon and that even if we do, there are still years ahead of Russia seeking to use energy to threaten the west.  So, without a solution to the supply issues, we are just going to keep facing this cost of living challenge with increasing intensity until we find alternative sources of energy.

What hasn’t been talked about much is whether or not there have been longer term pressures on inflation. We have been through a 20 year period of low inflation coupled with low interest rates. Added to that, we’ve seen a decade of Quantitive Easing (of Governments via central banks feeding money into circulation).  Low interest rates, high debt and QE should be expected to combine to create inflationary pressures. The question is perhaps why it has taken so long for inflation to break through. I suspect that the answer is that for a long time, the market has absorbed those pressures but perhaps it could not be expected to for ever. If this is the case, then we need to be careful about bringing in measures that might add to those pressures.

In conclusion, I agree with Gordon Brown that we need a sense of urgency and we need to be ready to make tough decisions this summer/autumn rather than postponing them only to have ever harder choices to make in the New Year.  But we need also to make sure that we carefully make the right decisions and don’t just act for the sake of being seen to.

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