“People are willing to endure hardships in solidarity with the heroic efforts of the people of Ukraine,” he told MPs. “People understand that in this country, because we are a generous and giving country.” He could not have imagined that after six months, the true cost of this solidarity would become so unimaginable – with household energy bills topping £3,500 – that he would be splashing over £100bn of taxpayers’ money from his new office at the Treasury ». money in energy markets. Truss’ historic statement setting out an “energy price guarantee”, setting the bill for a typical household at £2,500, was forgotten just hours after she delivered it last week as political news was muted by national mourning. But everything about the announcement was great. It is likely to be the most expensive single policy Britain has ever seen while not at war: a drastic intervention in energy markets, paid for by the taxpayer, for which the Treasury has yet to put a price tag. But it is being run by a pro-free market prime minister who spent much of the leadership campaign attacking “handouts” and by a party that has spent much of the last decade trying to make sound public finances a key political dividing line with Labour. . And despite the unprecedented cost of the measure, it still won’t be enough to protect many households from a bleak winter ahead. “We need a reality check,” says Kate Bell, head of finance at the TUC. “Millions of households still face a huge cost of living. “Energy bills may have been reduced, but they are double what they were last year. And with food and other prices soaring, workers across the economy are taking a huge hit in real wages. Unless wages rise across the economy, working families will continue to face enormous pressure on their finances.” Analysis by the Joseph Rowntree Foundation (JRF) shows that the move to cap the unit price of household energy, along with the significant support announced by Rishi Sunak in May, is still £800 short of meeting the rise in cost of living. that the poorest consumers will face in the coming months. JRF senior economist Rachelle Earwaker says these people were already struggling months ago. “We know that in May, our analysis showed that about 7 million low-income households were already without essentials. more than 5 million were food insecure – that was a problem before these energy increases,” he said. He added: “That £800 is as low as it is because of the support package Rishi Sunak submitted in May. That gap will only get much bigger after April when this one-off support package ends. So we will really need additional support for those on the lowest incomes.” Kwarteng has given no estimate of the cost of the measure or the separate, unspecified plans to protect businesses and public bodies from rising bills – and Finance Ministry insiders even suggest in his financial statement next week, he can only do so for his first few months. They highlight the vagaries of global gas markets – and the government’s hopes of striking long-term deals with some producers to help stabilize prices. Kwarteng, a veteran of a series of battles with the Finance Ministry when he was business secretary, has told his officials to focus relentlessly on growth rather than the size of the deficit. His greed for public finances is surprising from George Osborne’s party, which took a very different stance on the growing deficit in the wake of the 2007-08 financial crisis. Osborne has consistently said that financial markets could lose confidence in the government’s ability to meet its obligations, driving up borrowing costs and triggering a Greece-style debt crisis. The Labor Party arguably acquiesced in this context of the UK’s economic problems. When Ed Miliband missed part of his 2014 conference speech outlining his party’s plans to tackle the deficit, Unite general secretary Len McCluskey called it an “affirmative omission”. Economist Jonathan Portes, of the thinktank UK in a Changing Europe, argues that Osborne’s austerity was the wrong approach in 2010. But that doesn’t mean Kwarteng’s stance is a good idea now. Portes says there is a good case for much of the energy package to be financed through borrowing, but that when combined with Truss’ costly tax cut plans, and a Treasury with no clear plan to “fix the roof”, as Osborne called it , there is a risk of an alarming financial market. “We have inflation and interest rates going up. That’s the opposite situation, and it’s not a situation where you want to borrow much more, and you certainly don’t promise to continue to do so for the foreseeable future.” He plays down the risk of a full-blown market panic, but says: “There is a risk of continuing to push the pound down and continuing upward pressure on long-term interest rates. Pressure on the pound is exacerbating inflation. the Bank of England has to raise interest rates to keep the pound stable – and all this just makes things worse.” Such fears have been exacerbated by sterling’s weak performance in recent weeks, hitting its lowest level against the dollar since 1985 on Friday below $1.14, and it has also lost ground against the euro in recent weeks. Even without a sterling crisis, many economists expect the Bank of England to keep interest rates higher for longer as a result of the energy package, which will reduce headline inflation in the short term but could also boost demand in economy. Whatever the Council’s verdict, Tras will be hoping that by putting on the big bazookas to deal with the crisis, it can take some credit from worried consumers for acting decisively. Sunak saw his popularity with the public soar after announcing the radical leave scheme to protect jobs during the Covid lockdown – like Truss’s energy cap, a policy that goes against the grain of of Sunak’s free market policy. James Johnson, of pollsters JL Partners, suggests that Truss may win the polls once the policy receives more public attention once the Queen’s mourning period ends. “We’re not going to see a sudden 10-point push overnight because of events anymore – and in fact I think we could have if it wasn’t for what happened – but I think we’re going to see that have an impact on people’s views on her”. Labor argued that more of the package should have been paid for with a windfall tax on energy firms, which have generated big profits as global prices have risen. Sunak had already imposed a £5bn windfall tax, politely calling it a “temporary, targeted levy on energy profits” to avoid the appearance of a turnaround. but Labor argued that this should be widened dramatically. Truss rejected it, claiming it would “undermine the national interest” by discouraging investment. In a sign that Trush’s arrival has sharpened political divides, Keir Starmer claimed: “He wants to leave these huge gains on the table with one clear and obvious consequence: workers will foot the bill.” One constituency that certainly doesn’t like Truss’s price cap are the free-market thinktanks whose ideas she fervently supports in other policy areas. The Adam Smith Institute complained that the approach could lead to blackouts, dampening consumers’ incentives to cut energy use and “subsidizing affluent households that use more energy”. Free market ideologues will be more excited by Kwarteng’s fiscal statement next week. It will include the promised Truss tax cuts – most of the benefits of which go to higher earners – as well as more details on changes the new government hopes will weigh on growth. But even if Tras’s bold economic changes bear fruit, it will take many months, even years, to do so. Meanwhile, both stressed-out voters and jittery financial markets are more likely to judge the new regime on how well the £100bn price cap helps Britain’s struggling economy weather the difficult months ahead.
