The likely impact of the Russian invasion on the standard of living in the UK has not yet been appreciated. Sanctions against Moscow will need to be prolonged to be effective and there will be a domestic price to pay. Never mind crushing the oligarchs – that’s putting business before pleasure – the UK and EU should reduce their dependence on Russian gas supplies. The harder and earlier the blow to Putin’s oil state, the better.
Although Russian gas accounted for less than 4% of Britain’s imported supply last year, the Energy and Climate Intelligence Unit think tank estimates that Moscow receives 2.3 billion pounds ($3 billion) a year from Great Britain, or the equivalent of 6.3 million pounds per day. revenues that will help fund Vladimir Putin’s war machine. Perhaps concerned about the slowing of the nascent recovery from the Covid-19 outbreak, the government has so far resisted targeting Russia’s energy sector. Wholesale gas price hikes are already on track to add £500 a year to the average household bill under the new April price cap, with more to follow in the autumn. Centrica Plc, owner of the biggest energy outlet, British Gas, is in talks to end its agreement with Gazprom PJSC, the main Russian supplier. BP Plc and Shell Plc are also ahead of No.10 by cutting ties with their Russian partners.
There are bad economic times around the corner for Britain. Inflation is expected to peak at 8%, ahead of Treasury forecasts, and the rise is expected to last longer. The prophets of doom evoke the oil shocks of the 1970s, when the price increases generated by the OPEC cartel created the ugly phenomenon of stagflation. The industrial turmoil that followed broke two British governments: Johnson is a keen student of history.
In last year’s budget, Sunak froze income tax allowances and thresholds. A 1.25% increase in payroll taxes to fund national insurance for employers and employees will take effect just before taxpayers head to the polls in May’s local elections, seen as a midterm test of the popularity of the government – and of Johnson. The right wing of the ruling Conservative Party wants the hike canceled, or at least postponed until next year. Food prices are expected to rise further, given Ukraine’s often overlooked role in providing cheap grain to the world.
The Hawks are now calling for increased defense spending as well. Peace dividends after the end of the Cold War reduced the proportion of UK gross domestic product spent on the armed forces from 4% to 2%. Some Tory fire-eaters want it cut to 3%, if only to give the UK an edge over newly belligerent Germany. The government has a series of new spending commitments to improve health and social services. He also promised to “level” the gap between the post-industrial north of England and the prosperous south. Something has to give.
Last month – before the invasion – Chancellor Sunak presented his stand at his conference But, traditionally the occasion to establish the key themes of the government’s economic policy. He quoted a Labor Prime Minister who once said that anyone who increases productivity is doing “a more essential service to his country than the whole race of politicians put together”. Yes but how?
Hailing artificial intelligence as the versatile technology of the future, Sunak said he was “optimistic” about Britain’s long-term growth prospects as long as the state creates the right conditions for investment, people and businesses. ideas. In the short term, resembling Margaret Thatcher in her heyday, the Chancellor ruled out the two unfunded tax cuts favored by her leadership rivals – “I am discouraged when I hear the flippant assertion that ‘tax cuts’ ‘Taxes always pay’. They don’t,” he said – and the higher public spending demanded by many in the Labor opposition.
Sunak’s third path to growth follows Thatcher’s original formula of raising taxes to balance the books amid economic hardship. Inflation hawks may cheer him on, but critics complain that the UK is caught in a “high tax, low growth” trap.
Sunak is chancellor, not prime minister. And his boss Boris Johnson is not Margaret Thatcher, but rather a flexible-principled leader who instinctively favors higher spending. The effects of the war in Ukraine resemble a veritable economic storm. The Prime Minister had better prepare his party and his country for the worst.
More from Bloomberg Opinion:
• You can’t just take a Russian oligarch’s townhouse: Chris Hughes
• Six scenarios for how Putin’s war could end: Andreas Kluth
• What investors should remember about volatility: Stuart Trow
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Martin Ivens was editor of The Sunday Times from 2013 to 2020 and was previously its chief political commentator. He is a director on the board of the Times Newspapers.