Will the Government hold their nerve?
Plus: assessing Reeves and Polanski's economic pitches
In today’s newsletter:
A taxing inheritance
Tariff time
EU Green Deal failure
Remember, remember the 8th of September.
On 8 September 2022, in reaction to a spike in natural gas prices (one of several), the short-lived Truss administration introduced the Energy Price Guarantee (EPG). This capped ‘typical’ annual household energy bills at £2,500 for two years, by subsidising energy use. Over the next 2 weeks the cost of UK borrowing, as measured by 10-year gilt yields rose from around 2.8% to 3.5%. This, in reaction to a forecast £60-150bn unfunded borrowing liability linked to the uncertain progress of the Russia-Ukraine conflict.
On 23 September, the ‘mini-budget’, included commitments to cut around £45bn of taxes, which the administration believed would fund themselves, given a positive impact on growth. The market did not endorse this view, gilts rose briefly but sharply to 4.5% before falling in October after regime change.
Everyone remembers the second event, few the first. Both mattered.
The current price of UK 10-year gilts is higher than peak 2022 at 4.9%. Confidence in the ability of Government to pay its debts has fallen, not risen.
The current price of UK natural gas is lower than peak 2022 around 150p not 640p per therm, but well above the 70-90p typical throughout 2025. Markets remain nervous about the uncertain progress of the Iran conflict.
Every sustained 10p rise in a therm adds roughly £40-50 a year to household bills. A protracted crisis could see bills back in 2022 territory, putting the Government under pressure for a similarly unwise demand-side response.
This may not happen. Their first policy measure is a £50m extension to a £1bn Crisis and Resilience Fund (CRF). This is to provide targeted relief to ‘vulnerable households’ using kerosene (heating oil). A market in which suppliers reacted immediately to price rises, causing alarm, and sales fall outside the Default Tariff Cap on household bills. The CRF otherwise provides ‘cost of living’ relief through cash transfers distributed by local authorities.
This is not the EPG approach, yet. It’s small, highly targeted, capped, and doesn’t repeat the mistake of entirely eliminating the higher price-signal necessary to reducing non-essential use. Where the EPG subsidised the heating of swimming pools, this is focused on home heating for those who can’t risk sitting in the cold. This will clearly not cause a market event.
But… it was attacked immediately by a handful of the usual suspects on the left, and if as polls suggest, the governing Labour party suffer large losses at the May local elections the political incentives will change. The administration will be under pressure to repeat the policy people remember, not act prudentially. Their £2.5bn bung to the steel industry this week illustrates just how quickly they can make bad calls in response to headlines and difficult choices.
£1bn here, £2.5bn there, a potential £60-150bn on gas subsidies while refusing to drill in the North Sea, it all adds up.
The warning from recent history however is there.
Will the Government hold their nerve, or ‘crash the economy’ for the sugar rush of wanting to look like nice people through the generosity of future taxpayers?
Andy Mayer
Energy Analyst
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IEA Podcast: Director of Communications Callum Price is joined by Editorial Director Kristian Niemietz and our new Senior Economist Valentin Boboc to discuss the Chancellor’s Mais Lecture, ‘Zackonomics’, and how planning raises the price of your weekly shop - IEA YouTube
A Taxing Inheritance
Britain’s inheritance tax (IHT) is far more punishing than headline comparisons suggest, and should be scrapped entirely, according to a new paper published this week. The report, A Taxing Inheritance by Rory Meakin, finds that measured on what parents can actually leave their children, the UK has the fifth highest inheritance tax in the OECD. Almost half of OECD members, 18 out of 38, levy no tax on such transfers whatsoever, and a further 10 charge preferential rates.
Britain’s inheritance tax ‘among the harshest in the world’, The Telegraph
Reeves is urged to axe levy that is ‘far more punishing’ than it looks, Daily Mail
Scrap Inheritance Tax! Kristian Niemietz writes for CityAM
Why Britain Should Abolish Inheritance Tax, Callum Price writes for CapX
News and Views
The EU Green Deal has failed to deliver and holds damaging lessons for Britain
Six years on, the EU Green Deal has left electricity prices twice as high as in the US and China, hydrogen investment collapsed, and European industrial competitiveness in decline
Eight structural failures – from rent-seeking to distorted incentives – explain why mission-oriented green industrial policy systematically misfires
In the week the Chancellor declared an ‘active and strategic state’, the report urges caution: the UK should learn from the EU’s mistakes and abandon technology-specific subsidies and sector targets, replacing them with a comprehensive, technology-neutral emissions trading system
Steel tariffs will hurt cost of living, Andy Mayer and Daniel Freeman react to the news that the UK will levy a 50% tariff on steel imports
Bank of England stands firm against inflation risks
“The Monetary Policy Committee’s decision to keep interest rates on hold this week was no surprise, but the accompanying language was more hawkish than expected.
“This has already triggered a sharp rise in the government’s cost of borrowing as the markets speculate that the next moves in interest rates will be up. Mortgage rates will inevitably follow.
“This was always a difficult balancing act. It is still right to look past the temporary impact of the surge in energy prices, especially as these will also dampen economic activity. Nonetheless, it will take time to gauge all the second round effects, including on inflation expectations.
“Given all the current uncertainty and after leaving interest rates too low for too long in the wake of the pandemic, the Bank can be forgiven for erring on the side of caution…
“In short, the Bank’s job is to worry about inflation, not growth, and it cannot ignore these upside risks.”
Kristian Niemietz reviewed Zack Polanski’s major economic speech:
Britain’s broken energy system, Andy Mayer speaks to the Centre for Policy Studies’ Sean Ridley for Free the Power, IEA YouTube
Red tape and black markets, Chris Snowdon on how prohibition is a criminal’s best friend, The Critic
Julian Jessop delivered some home truths to the MPs on the Treasury Select Committee:
The Government’s employment grant won’t get Britain working, Len Shackleton responds to the latest employment data and the government’s misguided plan to improve them, CapX
Andy Mayer on how to solve Britain’s energy crisis in Spiked
Economic shocks: is there a duty to accept sacrifice? Chris Snowdon argued yes on BBC Radio 4’s Moral Maze
“…the government doesn’t have any money of its own. I think that’s the important point to make, and so all it can really do is tax more or borrow more from the bond markets, and if it is borrowing from the bond markets it is just pushing that cost on to future taxpayers. So I think the moral question here is actually whether it is moral to force people, some of whom are not yet born, to bear the costs for us, to carry on as if nothing has happened when we meet various bumps in the road economically”