Can the UK afford energy subsidies?
I published the following as a thread on Twitter. It may be of more general interest and probably applies somewhat to other European countries too.
1/ Analysing and estimating likely UK energy policy, its rough cost and its sustainability. 🧵
2/ There is now a scramble to get the most radical energy policy possible on the left because of the vacuum of ideas to tackle these issues on the right. Some version of interventionism is probably inevitable, so let's look at the numbers.
3/ The "tax the rich" stuff rings hollow. Raising taxes on wealthy people is a moral crusade, it's not a serious way of financing large-scale projects. In reality, the most likely policy will end up being a very large de facto tax cut in the form of subsidies to households.
4/ There are around 27.8m households in the UK. Their energy bills this winter are rising by around £3000 per household in 2022. So, the total cost of subsidies to completely offset the increased bills would be £83.5bn rising to £111.2bn in 2023 as bills rise by £4000.
5/ Here are some projections of the UK government deficit assuming different amounts of energy subsidies. Note that these estimates do NOT assume a recession in 2022-23. If that happens add another 5-7% to the deficit for lost revenues and increased unemployment claims.
6/ Those are large sustained deficits. On these numbers the years 2020-23 would see an average deficit of 10-11% of GDP. For reference, over the peak 4 years around the 2008 crisis, the average deficit was just over 8% of GDP.
7/ Are these deficits sustainable? Technically, yes. The BoE can just buy the debt. But note that interest rates are rising. That means the interest rate the government pays on the debt rises too. If the BoE holds the debt, these payments are recycled back to the government.
8/ This is not the case with the private sector. This means that for the debt to be sustainble, the BoE will need to figure out a way to buy more and more debt while keeping interest rates high. Not an easy task, but technically could be done.
9/ This is a tightrope act and the geopolitical climate is not favourable, with a cleavage taking place between DM and EM economies. In short, it is probably the worst possible time to engage in an experiment like this. It carries real risks of a flight of confidence.
10/ Am I saying sterling will collapse? Most likely not. But is there a POSSIBILITY that sterling might collapse? Yes, there is. If the government embark on this experiment or something like it they must ensure easy flows of capital in the City of London throughout.
11/ The easy capital flows should prop up sterling. So the key here is not to scare the horses. Keep the foreign investors propping up sterling happy. For this reason: no further experiments, no nationalisations, nothing that scares the investors.
12/ But that is precisely what the left is increasingly pushing for. That is the worst-case scenario: the left enacts these policies as part of a radical package of economic restructuring. That will almost certainly end in tears.
You are right about sterling risk, Philip regardless of which side wins the debate. In my view the tragedy is the delusion of the ruling class and their bankers to believe they can actually remedy what's coming down the line. I write about it every week as a sort of log as events unfold and a check against my own and others projections.
IMHO the strategy should be containment and management of the mechanics of the economy but avoiding interventions which only worsen the situation. The western economies will have to muddle through this once-in-250 years process as we transform from cheap and free energy to clean and sustainable alternatives always bearing mind that we will always need to use some hydrocarbon energy.
I am currently writing Part 2 of my book, The Financial Jigsaw, and posting articles from time to time: https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-the-end?s=w
The motives on the left are clear.
The amounts quoted by you are staggering and also their effect on the deficit. It is why there can be no catch all solution but only a limited targeted one. In addition there should be a campaign to reduce usage.
The absence of ideas on the right is noteworthy. There is a vaacum in government. In addition the leadership campaign has resulted in all and sundry airing their economic theory, pet tax cuts and vanity, perhaps to obtain cabinet posting. Meanwhile little is said about the cost of living crisis. It may be there is little intention of doing anything. It is possible they intend to just let people suffer and as a result lose the general election. I cannot yet say that is not the position of many. It seems like madness has taken grip of many on the right. But when the hustings are over surely the new leader will get down to business.