No one could accuse Liz Truss, Britain’s new prime minister, of timidity. On September 8th she unveiled an ambitious plan to spray government funds at Britons’ soaring energy bills. You could, however, accuse her of abandoning the free-market principles she espoused so vigorously in campaigning for the job she was appointed to only two days before. Her plan mutes price signals by capping average annual household bills at around £2,500 ($2,900) for two years; businesses will get equivalent—but more complicated—support for six months. Ms Truss promises that her plan “will curb inflation and boost growth”.
Extreme circumstances call for extreme measures. Without help the poorest Britons would have faced a horrendous choice of “heating or eating” this winter. And the economy is facing serious headwinds, too. Assuming a smaller package of fiscal support worth around £30bn, Paul Dales of Capital Economics, a consultancy, expected inflation to surge to 14.5% in January, and gdp to fall by 1% from peak to trough.
Ms Truss’s intervention is much bigger than that. The government has so far refused to share estimates of how much it will cost—the precise amount could rise or fall dramatically depending on the trajectory of wholesale energy prices. But one estimate puts it at a stunning £150bn. The government has unveiled no new tax-raising measures, and indeed Ms Truss has promised that she would not introduce any. So borrowing—ie, future taxpayers—will absorb the hit.
In the short term, Mr Dales reckons that tackling energy prices will reduce headline inflation by around three percentage points; the government puts the reduction at up to 5%. Loosening the fiscal taps should also pep up growth relative to what was expected, though perhaps not enough to avoid a recession. This is no free lunch, however. In time the government’s intervention will lift demand and inflationary pressure, which means tighter monetary policy than there might otherwise have been. In the short term utility-bill payers have been protected. In the longer term, borrowers will feel the pinch.
Ms Truss’s scheme does protect the neediest. On top of subsidies for gas and electricity consumption, a new government fund will help those using heating oil (who do not enjoy a cap); schools, hospitals and other public institutions will get help with their bills. But the plan’s universality also means it subsidises the richest. Fine-tuned targeting of fiscal help through Britain’s tax-and-benefits system is tricky at short notice. But there is little sign that the government will attempt any fine-tuning in future either.
By ditching market mechanisms to ration scarce energy supplies, the government also risks inflating energy demand just as it needs to be curtailed. There are no plans for a public-information campaign to discourage energy use, on the mysterious grounds that the government is not in a position to hand out bespoke advice. The government’s boosters will say that prices are already so high that incentives to cut consumption are sharp enough, and that a new “Energy Supply Taskforce”, also unveiled on September 8th, will help to secure long-term supplies at low prices. As the rest of Europe also scrambles for supplies, that seems optimistic. Ms Truss has answered some questions, but has raised others.■
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