Jhe Brexit libertarians control our destiny for at least the next two years and already the scale of the threat they pose to our well-being and security is becoming clear. Prime Minister Liz Truss may have swallowed her own words from just a month ago that she was against ‘handouts’ to launch the biggest handout in our history, but it was to offer her , to her and her acolytes, the political respite to launch their programs. The energy price cap could have been a jaw-dropping turnaround, but it had a darker purpose.
The intention was betrayed by the summary dismissal by Chancellor Kwasi Kwarteng of Sir Tom Scholar, one of our best and most dedicated civil servants, now a former Permanent Secretary to the Treasury. Kwarteng’s thinking came to light when he blamed “the same old economic managerialism” for leaving Britain “with a stagnant economy and anemic growth”.
“Bold action,” he suggested, was imperative to relieve this “toxic combination”: “Cutting taxes, putting money back in people’s pockets, and freeing our businesses from heavy taxes and misguided regulations .” Only then could investment and growth be unlocked. Better that, he added, than “burying your head in a redistributive struggle for what’s left”.
This is baseless hogwash – ideological faith triumphing over evidence and reason. In these terms, Scholar, exemplary of the so-called old economic managerialism, had to go. We are on an economical carousel run by fairies and fools.
Of course, the two-year price cap of £2,500 is welcome. It will remove the threat of desperate choices for heat or food from millions of people. It will also reduce the peak rate of inflation by up to 4% and so reduce full-year debt servicing costs by around £20bn – a quarter of our national debt is represented by bonds indexed to the level of inflation. It will also partly eliminate the risk of a dangerous wage price spiral. But these are the reasons why Labor first advocated a price cap. Libertarians only changed tack when they realized that resisting and sticking to their preferred response of minimalist tax cuts and rebates risked overwhelming them politically.
But you don’t win wars and reset economies with daffy libertarianism. Europe is in a de facto war with Russia over Ukraine as it threatens to cap Russian gas prices. Putin responded by telling Vladivostok that ultimately Russia will not export anything – no gas, no oil, no food – to Europe. It is an economic war rather than a war on the battlefield, but it is a war nonetheless. British energy policy is not serious, it betrays the cause.
Energy policy in an era of potentially prolonged supply disruption must be designed for the long term; must protect businesses as well as consumers; must be financially viable and avoid the risk of breakdowns. The government’s plan is failing on all counts.
Basically, it’s not financially viable: Britain’s national debt, as the Trussians continually say, is the lowest in the G7, except for Germany, so there’s room to borrow. But the dollar, yen and euro are the world’s reserve currencies and Canada has a balance of payments surplus. Britain stands alone, outside one of the major trading blocs, with a weak legacy economy and a chronic deficit of international payments. He cannot sell at least £100bn of additional government debt a year to protect living standards rather than increase investment without the threat of further sterling weakness or a forced rise in interest rate.
Financial viability could have been approached in several ways. A new windfall tax could have been imposed on the windfall profits of the energy sector. Furthermore, for the duration of the war in Ukraine, all gas and oil from British fields would have to be sold to the government on a cost-plus basis rather than distorted international prices. Consumers could have been told to tighten their belts, ministers leading by example and a rationing system deployed if necessary. There should be a state-led emergency program for the construction of onshore and offshore wind farms, – the fastest and cheapest way to increase energy supply – as well as the acceleration of the program of house insulation.
For libertarians, each of these measures sticks to their throats. So they offer untargeted, albeit generous, aid to households but, while acknowledging the near-unlimited costs, they have limited business aid to six months. Scared of what might come next, companies will batten down the hatches so that Kwarteng reversing the proposed corporate tax hike will have no effect on investment. He is also aware of the risk of outages this winter, not relieved by the uncertain prospect of fractured gas in service a decade from now.
At least when Britain was in the single market, it was linked via undersea interconnectors to the Irish, Dutch, French and Belgian networks; it was also linked, in a special agreement, with Norway. The price was fixed in the single market and electricity flowed freely as capacity ebbed and flowed between the networks.
Today, Brexit Britain has developed a bureaucratic and costly auction system, raising the price of electricity and exposing us to supply shocks. In addition, US Energy Secretary Jennifer Granholm demanded that all US refineries exporting gasoline, diesel and distillates accumulate reserves rather than export – coinciding with Russia’s shutdown. This is another supply threat.
Prior to these challenges, the EU had built up its gas reserves in a process in which we should have participated. But it wasn’t until late August that Centrica got the go-ahead to reopen its raw gas storage facility in the North Sea; and that can only be brought back into use slowly. This winter, it will only be of marginal help.
So libertarians manage energy crises and wage wars. Planning, using state power, taxing, regulating, building reserves and working with other Europeans are all anathema. The same philosophy that is going nowhere will inform the “fiscal event” of tax cuts later this month, which will further inflate our national debt to no avail. Growth is the result of well-organized and imaginatively directed investments by the public and private sectors in an interdependent relationship – without making individual so-called “wealth creators” even richer through tax cuts.
The whole project will fail. Too bad that, whatever damage it will cause to the Conservative Party, we are all condemned to experience the same disaster.