I wrote a couple of weeks ago that I expected Truss to break with the pro-market agenda of her campaign once Prime Minister. But I did not expect she would do so within 48 hours of entering Number 10. Today, she announced the most extensive and expensive peacetime intervention in our history. Well, I say expensive – but one of the many remarkable elements of today’s announcement was Truss declining to mention how much it would cost, or how it would be paid for.
Let’s start with what we do know. The proposals themselves were as expected from briefings. After a few days of showing bits of ankle to see what voters and the markets would accept, Truss announced she would freeze average household bills at £2,500 from October 1. This will essentially abolish the energy price cap. The Government will set the unit energy price companies can charge consumers. The freeze for households will last two years.
This ‘Energy Price Guarantee’ will save households, according to Truss, £1,000 a year on energy bills, involve the abolition of green levies, and shave four or five points off inflation. Businesses will receive the same support for the next six months, as will schools, hospitals, and other public buildings. Households will still receive a £400 support payment this autumn.
Alongside this, the Government will embark on a long-term plan to boost our domestic energy supplies. Not only will this mean the reversal of the moratorium on fracking, but she has pledged to expand the production of oil and gas in the North Sea. Truss also pledged to set the UK a “new ambition” of being a net energy exporter by 2040. The Net Zero target remains in place, and Chris Skidmore will chair a review to see it is being achieved in an “economically efficient” way.
So the twin tracks of Truss’s approach are clear: to support families and businesses through the immediate crisis, and to promote future energy self-reliance. That is welcome. These proposals are comprehensive, and can be delivered more quickly than any means-tested programme. For all their flaws and costs, they will at least end the concerns of many families going into this winter.
Inevitably, they are far from perfect. Removing the market mechanism removes the incentive provided by rising prices to cut usage. The very fact that the Government is so blatantly stepping in to keep bills down also suggests to consumers the situation is wholly manageable. Yet failing to get people to use less energy this winter raises the prospects of blackouts and energy rationing – two outcomes Truss wants to avoid.
The Prime Minister could make the argument she is plumping for the least worst option between a few lights going out and millions being unable to heat their homes. Not putting front and centre a public awareness campaign to reduce energy use this winter suggests that Truss wants to avoid panicking voters. However, we cannot avoid a continent-wide energy shortage, and the Government should ask the public to cut down, if she has any desire to avoid chaotic blackouts.
Communicating anything about these measures was hampered by Truss’s decision to introduce these measures via a debate, rather than a ministerial statement. Our Deputy Editor will know more about arcane parliamentary protocol than me, but it seemed bizarre for the Prime Minister to be making a speech this momentous and yet be continually interrupted from the backbenches and take interventions from the floor.
Taking interventions from Tory backbenchers was hardly a risk whilst the Prime Minister still has a few dozen ministerial appointments to dish out. So it fell to the Opposition. Keir Starmer seemed to suggest the only way to get money out of the energy corporations is to whack them with a windfall tax – forgetting, of course, that energy firms already pay a 65 percent take on profits. He can’t be blamed for forgetting though, as a windfall tax is the last thing Truss wants to address.
The new Prime Minister has chosen not to reverse the one introduced by her leadership rival. She considers such a measure un-Conservative. That neglects that previous windfall taxes have been introduced by those prominent socialists Geoffrey Howe and George Osbourne – and that she is engaging in the hardly free-market friendly act of setting prices. Starmer is wrong to suggest that there are £170 billion in excess profits going untaxed. But he was right to ask how this will be paid for.
Truss has timetabled the measures to last from 1st October 2022 and end two years later. This choice is entirely political – coming, as it does, four months before the date by which the next election must be held. The corollary to this is that the Government will be keeping prices down for two years at an extraordinary cost, during a period of international volatility that could potentially mean global prices continuing to spike. We have no idea what the gas price will be then.
Nor do we know how much all this will cost. Various figures have been touted – £100 billion, £150 billion, even £200 billion. Either way, that’s vastly more than the £70 billion on furlough – already the most expensive economic intervention in our post-war history. The debt that incurred caused Rishi Sunak to go prematurely grey worrying about our interest payments and the gnomes of the bond markets. I wouldn’t hold out much hope for the barnets of Truss and Kwarteng.
Yet both appeared sanguine today – for exactly the reason that they have punted the discussion about how all this will be paid for into Kwarteng’s near-future fiscal event. The assumption has to be that this will all come out of borrowing. The Government is already paying treble what it did a year ago on debt interest. Truss was clear today that she plans to reduce that cost by cutting inflation by her price intervention. In doing, she is taking a huge risk.
The Prime Minister and her Chancellor would argue that this need to be seen in the light of her wider proposals: tax cuts and supply-side reforms to boost growth. Leaving asides how likely we are to see either, borrowing more always means relying upon the markets. The pound has already plummeted to a 40 year low on her entering Number 10. Talk of tinkering with the Bank of England and borrowing heaps more obviously makes the money men jittery. If they have little faith in Truss, the public finances – and her tax plans – will suffer accordingly.
Today’s proposals, then, were comprehensive, but at a huge cost. Undoubtedly, they remove the immediate fears of many about their bills. Truss and Kwarteng must further hope they have done enough early enough to buy the time they need to implement their wider agenda. Whether they have done so or not will be crucial to the success of her premiership – and whether she has any chance to introduce those pro-growth reforms she promised.