HAMISH MCRAE: Rishi may have cracked the challenge of helping pay energy bills, but the bigger question is how to avoid recession
Rishi Sunak may have cracked it. The individual challenge that families face is how to pay the fuel bills. Pumping an extra £15billion or so directly into people’s bank accounts, with almost certainly more to come in the future, is the sort of measure that will make the difference between the economy growing and it contracting.
But the national challenge is how to avoid recession. For it is not just the money, very helpful to families, but not huge in the context of the country’s economy. It is the confidence factor. Everyone is frightened, and understandably so, by the prospect of energy bills this winter that will be almost unimaginably big.
So what do you do? You start cutting back on all spending now. A YouGov survey last week reported that about 40 per cent of Britons said they had already started to cut their spending on clothes, eating out, takeaways and so on.
Decisions: It is too early to have much feeling for the impact of Chancellor Rishi Sunak’s support package
There are always lags in economics, so if people cut back now, that will affect the economy through the autumn. If money that would have been spent in the shops or restaurants gets saved, that cuts jobs – which in turn further reduces the amount of money swishing round the economy. That is how recessions happen.
It is too early to have much feeling for the impact of the Chancellor’s package. Let’s wait until we see what people do, not what economists say they will do. But we do know from US policy when the pandemic struck, which was to send cash straight into people’s bank accounts, that this did give a solid push to spending. So it would make sense if that happened here.
As for the money side of it, that £5billion extra levy on energy companies is tiny when set against tax receipts last year of £830billion. But it matters politically, for mercifully we live in a democracy and democracies have to strive to be seen to be fair. Profits have been inflated by the surge in energy prices, so taxing some of that back makes sense.
The financial markets accept the reality of politics. Shell and BP shares were pretty much square on the week, with Shell up 39 per cent this year and BP 22 per cent. The share price of Centrica, owner of British Gas, was badly hit, but then it recovered and is 5 per cent up on the beginning of January.
From the Treasury’s perspective, the issue is how fast to cut the deficit. The first estimate of the deficit for the last financial year was £152billion, though the Office for Budget Responsibility thinks it will be revised down a bit. This year the target is about £90billion, so coming down but still meaty.
Spending an extra £15billion in theory pushes up the deficit but if it boosts confidence and sustains consumer spending and employment it will bring in more tax.
The big numbers come later when pensions and benefits are raised in line with inflation. That will add 10 per cent to the bill. Then there is the big imponderable: how much will the cost of the Government’s interest bill go up, given that a quarter of the national debt is linked to inflation? That, by the way, is inflation measured by the Retail Prices Index, which is running even higher than the consumer price version.
So there are huge uncertainties, of which the biggest single one is whether the economy can manage to keep growing despite the hit from energy prices. To do so, it will need not only the Chancellor’s package and whatever follows. It will need something more. That is that we have to get back to work.
You will have seen those unemployment figures, down to 3.7 per cent, the lowest since the 1970s. You may have heard how the number of payroll employees is at an all-time high of 29.5million. But you may also have had to struggle through Gatwick, or other airports, and face long delays because they haven’t enough staff.
Most employers are crying out for people. Though payroll employment is at a peak, the number of self-employed has fallen sharply. That is partly because of changes in regulation to cut down on people classified as self-employed but actually in jobs. Even allowing for that, there is a shortfall.
So the bottom line is this. If we are to keep the economy expanding, which we have to do to pay our way through the next few years, we have to entice people – who have perhaps retired early – back into some form of economic activity. And that is an even bigger challenge than paying our energy bills through the winter.
Hamish McRae’s book, The World In 2050: How To Think About The Future, has just been published by Bloomsbury