Last week saw inflation rise to 9%, a forty-year high. This time 2 years ago, the rate was 0.8%. As a country we are seeing prices rise and wages fall. While this is happening globally, the UK isn’t weathering the storm so well. What can and should we do to reverse this? I took the government to task on the floor of the House on Tuesday.
Why are we in the current situation?
The global economy has been subject to large shocks including the coronavirus pandemic and Russia’s unprovoked invasion of Ukraine. This has reduced UK growth. The global outlook has put significant pressure on global inflation. Food and energy supplies have been severely disrupted across the globe. Much of the fish we use for fish and chips was from Russia and the oil we fry it in from Ukraine! Cod and chips is now an expensive dish!
The price of wholesale gas has increased in the UK and Europe as a result of reduced supply but increased demand following the end of lockdowns and economies reopening. The independent regulator Ofgem increased the energy price cap in February by 54 per cent. Ofgem have predicted that energy bills will increase by £693 a year. When the price cap increases in October the squeeze on budgets will be severe.
The problem in the UK has been more intense because of the shrinkage in the labour market. There are lots of jobs but too many of them remain unfilled. When employers compete for a shrinking resource, wages go up. That sounds good – but taken to extremes can result in a wage inflation spiral making things worse. Post-pandemic some people chose to take early retirement. Others chose more family-friendly careers. Devon bus driver shortages can in part be put down to the rise in internet shopping and resulting growth in couriers!
The Bank of England has regularly missed its target to keep inflation at 2%. An independent body, it has some of the levers of power to control this through interest rate changes. The Governor, Andrew Bailey, sitting before the Treasury Select Committee claimed it’s all out of his control! Interest rates should have been rising earlier and words should have been had with the Chancellor about his excessive quantitative easing during lockdown!
What should the Government do?
The Government needs to provide additional support to people at once. Taxes must go down not up - now. Corporation tax should go down to promote business growth. The National Insurance levy for the NHS should be delayed, certainly until we have a clear plan as to how we are going to reform the NHS so we spend it wisely. VAT on energy bills should be cut for a year. Waiting for the autumn and the increased price cap is too late.
Should we have a windfall tax on energy companies? It sounds attractive and I suspect it’s what the Chancellor will do in the end. But it’s not the answer - the sums being considered are too small, but more important it is not right to tax retrospectively. Businesses won’t invest in the UK if we dish out too many nasty surprises. And we need the energy companies to invest. And then what about the other sectors that have benefited as their margins have delivered big profits during lockdown and now during the war? A slippery slope?
But we have to look at the other challenges driving this downturn. We need a full review of our labour market- why is it shrinking? Is the benefit system in need of a further review to incentivise work? Are housing allowance and child care lost too soon as incomes grow? Are we failing to attract the skills we don’t have in the UK from elsewhere? I have called for a full enquiry.
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