The Cost of Living Crisis: What does Liz Truss need to do?

Today, the United Kingdom gets a new Prime Minister. However we feel about her personally and the party she represents, our first responsibility as Christians is to pray for her and the government as well as for the leader of the opposition. Liz Truss comes into power with some pressing challenges to respond to. The biggest of all is what has become known as The Cost of Living Crisis.  When we talk about a Cost of Living Crisis, we are referring specifically to a problem where the cost of goods and services is increasing rapidly. In other words we are talking specifically about inflation.

Now, much of the attention this year has focused on the energy crisis as fuel prices have sored and we’ve particularly associated that with the Russian invasion of Ukraine. However, the challenge of inflation predates Putin’s aggression.  So, before we talk about specific responses on gas and electricity, we need to look at the wider picture. 

Prices have been affected by two other specific short-term factors. Across the globe, the COVID-19 pandemic affected logistics and the supply chain resulting in the cost of raw materials rising. Here in the UK, I think that this was exacerbated by the way in which Brexit was implemented.[1] Most of the turbulence here should therefore be short-lived and is reasonably easily correctable.

I think though we have to consider the possibility that there have been other long-term pressures.  Inflation is primarily caused by a gap between supply and demand. If there is greater demand for products and services than can be met then prices go up as the vendors/providers can charge pretty much what they want.  If demand drops, then suppliers have to reduce prices in order to remain competitive. So, for example, house prices have unsurprisingly been increasing in a market where there’s 10 offers for every property on the market. 

Those long-term pressures date back to the financial crisis of 2007-8. That crisis highlighted the debt problem that we have.  In blunt terms, we as a society are addicted to money and therefore to easy credit.  Yet, we’ve never been able to come to terms with the problem and so we find new ways to create money. So, over the past decade, we’ve continued to enjoy low interest rates, and governments have found modern ways of printing money – primarily through Quantitative Easing. What that has meant is that we’ve continued to artificially sustain demand.  This was always something that would catch up with us eventually.  Short term boosts are one thing, pumping money into the economy longer term is another.

Meanwhile, we’ve suppressed wages over that period. This has helped to keep prices down as well. However, readers will remember that during COVID I argued that if we suppress things (virus transmission, economic factors, social behaviours) then the day comes when the lid is off and whatever was suppressed boils up again.  We may have to consider that there is an element of longer term self correction going on in the economy. We were going to have to pay for those cheap prices and low interest rates at some point. This means that one aspect of responding to the crisis does involve increasing interest rates as we are beginning to see the Bank of England doing now, all be it slowly. This is important first because by restricting the money supply, we dampen demand. However, it’s also important because it increases the value of savings and that’s good news for people like pensioners who are more dependent on their savings and those who have sought to be responsible and save up for more expensive goods rather than relying on credit.

However, the energy crisis has substantially changed things. In the past, probably your biggest financial consideration was the cost of rent or your mortgage. For many people, it may well be their fuel bills this winter.  So, what can be done about this.

Well, if demand is greater than supply, the first answer has to be to find ways in which we can increase the supply of scare resources. This means reducing our dependency on Russian Gas and oil.  Whilst the UK isn’t particularly dependent upon Russia, we are part of a global energy market which is and therefore, that affects the overall price.  So, we don’t just need a solution for the UK domestic market.  The solutions we need in place are therefore going to take time to put in place.

In my opinion, this includes a mixture of

  • Sourcing alternative supplies of gas and oil including through fracking.
  • Restoring gas storage facilities
  • Nuclear power
  • Renewable energy sources.

In the UK, domestic consumption of gas is primarily through our boilers for central heating and hot water.  So, if we are going to switch to other sources then we’ll need to help and encourage people to switch over.  This might come through grants to help people not just replace inefficient older gas boilers with new ones but to switch to alternative fuel source boilers. It will also presumably mean that new homes will need to be built without gas boilers. 

We will want to do everything we can to reduce energy consumption and therefore demand on gas and electric.  So, one thing the Government can do is communicate clear advice on ways in which people can do this.  It should also mean stepping up support for people needing to take measures to make their homes more energy efficient.

However, the biggest challenge at the moment is that many people simply won’t be able to afford to pay the fuel bills this winter. Therefore, this needs to be addressed the most urgently.  The first point here is to recognise that the energy cap is about as useful as a chocolate fire guard in the present circumstances.  The energy cap was first proposed by Ed Miliband and he was dubbed as “red Ed” for suggesting it. So, it is ironic that Theresa May went ahead an implemented it.  Personally, I think it was always the wrong solution because it favoured the bigger, wealthier corporations and reduced competition in the energy market. It was also another example of attempting to suppress things, just as price freezes in other countries are. However, the price cap was never designed to respond to a situation like we face now. There’s no point having a cap which is well above what people can afford and is going to go up in any case. 

The energy price cap policy like other suggestions such as windfall taxes is based on the assumption that the energy companies can afford to subsidise the cost of fuel to buyers by reducing the amount of profit they make. That by the way is a reasonable assumption. The question is about how best to do this in a way that gains buy in from the energy companies.

My view is that the best way is to put in place measures so that energy companies are required to set aside a proportion of their profits to cover energy price spikes and provide support for those most in need. To some extent, that already happens but it needs to happen on a greater scale.

However, there are other ways in which people can receive financial help and one way is to turn our attention away from the specific problem of fuel prices.  We should instead focus on overall household income and expenditure.  There are two ways in which the Government can do this. First by substantially increasing pensions and benefits and the second is by reducing tax bills.

Now, it makes sense to focus tax reductions on things like fuel levies and VAT because that will most directly affect the cost of energy and will include the lower paid who don’t pay income tax. However, there are I think a couple of good reasons to look at cutting income tax either by reducing the percentage rates or by increasing thresholds.  The first is that we can help those on benefits by increasing things like Universal Credit. The second is that with inflation having increased dramatically and with wages having been suppressed for so long, there is now a lot of pressure to increase wages. One reason why wage demands are so high in current negotiations is that for a lot of people, even a small wage increase moves them into a higher tax band and much of the increase is eating up in income tax.  So, if we want people to benefit from pay increases and to reduce the amount of increase needed, then we should look at reducing the income tax burden as well.

It’s important to remember that whilst inflation and rising fuel costs normally hit the poorest hardest, the current Tsunami could push far more people into fuel poverty this winter.  Even people on good incomes may struggle.

I believe there are other ways in which we can increase household disposable income.  A lot of people are using significant amounts of their income to service debt whether through mortgages, student loans, credit repayments or pay day loans.  I believe that it is time to have a debt jubilee and for the lenders to use a proportion of their profits to wipe off a proportion of loans. This will significantly reduce household bills.  The Government should be negotiating this with banks and other lenders, ideally as a voluntary measure.

Finally, the government will have to say no to certain things. For example, there has been a lot of talk about warm spaces and warm banks this winter with public venues such as libraries as well as church halls being volunteered as places where people can go to get warm. Of course the fuel bills for such spaces have to be paid.  So, people are now calling for grants from the Government and energy companies towards these “warm banks.” That would not be a good use of either public or private funds. The proposals are well intentioned but unlikely to provide real help and may in fact make the problem worse for many.  The Government and the energy companies need to make it clear now that such grants will not be available and that all available funds will be used to implement the kinds of measures described above which all have greater long-term potential. This will help prevent people putting too much time and energy into projects that will only give false hope.

These are of course my personal opinions on what can be done and others will have different views.  I’ve talked here about what Liz Truss should do but perhaps the biggest thing she needs to do is to admit that Governments are finite.  If she wishes to abandon the approach of her predecessor, then admitting that we can’t simply go on saying “we’ll do whatever it takes” and sometimes we have to recognise that our best efforts cannot solve the problem will be a start.  This reminds us again that the first thing we should be doing as Christians is praying and we need to be pointing people to the only true and lasting hope we have in any crisis or storm.

[1] Note, I’m not saying “by Brexit”. It is possible that Brexit would always have caused some economic bumps and they may have been short lived but I think there are longer term issues not because of Brexit itself. The UK’s economic situation does not have to be negatively impacted by its decisions about political treaties and indeed, I am among those who think there will be longer term economic dividends from leaving the EU due to its protectionist structures. However, the UK and EU had choices about how they implemented Brexit. For example, there was no need in my opinion to immediately impose tough immigration quotas.

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