The sad end of the Queen’s life will be felt by us all. She has been our Queen all through our lives, a source of stability and a well known presence at our great national events.

Over seventy years of peace and rising national prosperity the Queen brought many subtle changes to the monarchy. She judged the evolving moods and attitudes of the nation. She quietly modernised the way the monarchy works and how we can relate to it. As the titled head  of a class conscious  society in the 1950s, proximity to the court  underwrote that culture. 70 years later the monarchy is more accessible to a  diverse range of people with more relaxed attitudes to etiquette.

She lived for service to her nation, for her family and for the animals and sports that helped enrich her life. Our longest reigning monarch, she ranks alongside Victoria as a long serving Queen who helped create the spirit of an era. The U.K. modernising  and rebuilding after the world war was self consciously the nation of the new Elizabethans. Our Queen throughout her seventy years stayed safely above politics and contentious opinions, the only way to ensure a constitutional monarchy flourishes.

The nation has lost its foremost diplomat and representative. She led the growth and work of the Commonwealth. Everywhere she went and in every country where had a role she created good will and graced many formal and entertaining events. I send my condolences to the royal family who have lost a mother, grandmother and great grandmother.

 

        1O DOWNING STREET

LONDON SW1A 2AA

www.gov.uk/number10

 

THE PRIME MINISTER

8 September 2022

 

 

Dear Colleague,
SUPPORTING PEOPLE AND BUSINESSES WITH THEIR ENERGY BILLS

 

On the steps of Downing Street on Tuesday, I pledged to take action to bring down energy bills. Today, within 48 hours of taking office, I have delivered on that promise.

 

This Government will bring forward emergency legislation to establish a new Energy Price Guarantee which will ensure that the average British household pays no more than £2,500 per year for their energy bills for the next two years from October.

 

This will save the average household at least £1,000 per year – giving certainty on energy prices so people can get through the winter, slowing inflation and making incomes go further. We will fully compensate energy suppliers for the cost of this emergency action – with the Chancellor setting out further details in the fiscal statement later this month. The new guarantee will apply to households in Great Britain, with the same level of support made available to households in Northern Ireland.

 

As part of the Energy Price Guarantee, we are temporarily suspending green levies – contributing £150 to the £1,000 yearly average saving. At this difficult time, it is right that households do not bear the cost of low-carbon electricity generation, but instead benefit from it.

 

And we will maintain the £400 Energy Bill Support Scheme for everyone, and the £1,200 of support for the most vulnerable households already announced earlier this year.

 

But I know that not everyone will be eligible for the schemes I have outlined above – especially those living in park homes, or who use heating oil in rural areas in constituencies such as mine. We will set up a discretionary fund to make sure that no one is left behind this winter.

 

Businesses will be offered an equivalent guarantee for six months for those hit by rising prices, and after those six months we will provide further support for vulnerable sectors, such as hospitality, including our local pubs. We will work with businesses to review where this should be targeted.

 

But we are also taking action to ensure that we are never in this position again. That means ending decades of short-term thinking which has allowed Putin to weaponise energy supplies as part of his illegal invasion of Ukraine.

We will ramp up energy supply and fix the regulation of our energy market. This will include establishing a new Energy Supply Taskforce, in the style of the Vaccine Taskforce, to negotiate new long-term contracts with suppliers to bring down energy costs.

 

Together with the Bank of England, we have secured a new £40 billion facility, so energy firms have the liquidity they need to manage volatility in energy markets, stabilising the market, reducing costs for the exchequer, and decreasing the chances of energy companies needing our support.

 

To fix domestic supply, we have to be bold. I want the UK to be a net energy exporter by 2040.

We will end the moratorium on shale extraction to get gas flowing as soon as six months’ time, boost renewables including wind and solar, launch Great British Nuclear later this month, and create a pro-investor environment to get more domestic supply projects off the ground, faster.

 

A review will be held to fix the longstanding problems within our energy regulation, and we will bring forward fundamental reforms to make our energy market fit for the challenges Britain faces today.

 

The Rt Hon Member for Kingswood, Chris Skidmore MP, will also lead a review to ensure we deliver net zero by 2050 in a way that is pro-business and pro-growth.

 

When I took office, I was clear that the next few months would not be easy. But I have every confidence that the resolve of the British people is strong enough to see us through the storm. Today’s package sends a clear message that this Government is with them every step of the way.

 

Yours Sincerely,

 

 

 

 

All MPs and Peers

Today we are told to expect a new energy policy. This note is based solely on press accounts of what the government may announce.  There will be two different parts to it. The first is to tackle the underlying problem. We have too little domestic energy. We are too dependent on imports from an energy starved Europe. We need to produce more of our own oil, gas, hydro power, renewable energy and nuclear energy. We need to prolong the lives of those gas, coal and nuclear stations where it is safe to do so, as we wait for the new investment to go in and provide us with sufficient alternative supply. I look forward to bold steps to promote more UK onshore and offshore oil and gas, which will bring in substantial tax revenues, create more well paid jobs and lower the CO2 generated compared with importing more LNG. I look forward to decisive action to commission new nuclear facilities through smaller nuclear reactors, to explore the commercial roll out of more ways of storing and using wind power and to ensure the lights and heating stay on this winter and next.

The second part is the need for immediate action to deal with the cost of living and business crisis created by extreme price movements in the gas and electricity markets here and on the continent, affecting our imports. If the government decides on a comprehensive price control as a temporary measure this would indeed take the worst pressure off business and families and save many jobs currently threatened by unaffordable business energy bills. It will also bring with it a substantial bill for taxpayers and the state in the form of borrowings needed to subsidise the supply of energy below the cost of production and purchase. That is why the government needs to reassure markets and taxpayers that everything will  be done to eliminate the demand/supply gap to bring prices down and to speed an elimination of price controls. Whilst they are in place the government will need to ensure it encourages investment in new energy supply. This requires prompt granting of licences, ending some of the penal taxes on the energy produced from new facilities and allowing contracts to supply that are reliable and make economic sense. Government itself needs to cut its own energy usage to show the way to reducing demand pressures on the  currently limited supply. One thing that most people do agree about in this contentious debate is the desirability of more insulation of buildings and more fuel efficient machines and processes where these can be afforded.

So the important questions  are likely to be

How will the government ensure proper incentives to greatly expand UK energy supply from domestic resources?

What can be expected of demand management in the public sector, and how can government help the private sector cut demand whilst still keeping warm and carrying out the work?

What controls will there be on the costs of this intervention?

In recent years a lot of economic advice and analysis has got too complex and out of touch . As a result  the Bank of England misread inflation and presided over a major surge in prices that set in  before an unexpected and unwanted European war made it worse. The Office of  Budget responsibility in the last two years was way out in its underestimates of tax revenue and far  too pessimistic in claiming a need for tax rises to cut the deficit. Its models did not realise revenue can be strong when there is more growth. Throughout the West the authorities decided fast money growth did not matter, and Central Banks could keep interest rates at zero whilst buying up state debt in large quantities so governments could borrow plenty on the cheap.

Central Banks are now wanting to correct their past inflationary mistakes, and are turning instead to tough money policies, pushing up interest rates, reducing their holdings of state debt and taking cash out of markets that might otherwise drive up prices. The danger is they now overshoot too far the other way, leading some countries into longer and deeper slowdowns than are needed to curb price rises. The new PM does not want the Bank to go easy on inflation, though it would also be bad news if they grew too tough. It would help them get it right if they took the growth in money and credit seriously, and watched those figures alongside evidence of any change in behaviour about how quickly the money circulated. They have tightened money substantially as they needed to do and should now wait for the impact on inflation to come through.

The new government team should want the Bank in its required reports on why inflation is running above target to provide its latest analysis of why inflation is five times target and to report on what actions it is taking to amend its models to help it forecast inflation more accurately. It would be good to hear from them about what role they now recognise the large programmes of buying bonds played in the inflation. More importantly they need to consider carefully how much impact rolling back all those bonds will have, as  it will cut liquidity and slow the economy. It will make borrowing more money by the government more difficult and more expensive. Some of that is necessary.  Too much of that brings on recession and paradoxically increases the debt and deficit as a result.

The OBR forecast of £99bn as I have argued before for this year’s deficit looks too low and needs to be adjusted. Without policy stimulus the economy will slow too much which will cut revenues and raise spending. With a policy stimulus which now seems likely some of the slowdown will be offset but there will be greater borrowing to cover the stimulus costs of helping people with their energy bills.

If the government decides on a large increase in state borrowing it will need the goodwill of the Bank and the markets to finance its needs. Raising the money from the long bond market is not inflationary. If rates go too high in the process that will impede growth. If Sterling falls too far that will import more inflation. There need to be sensible limits on public spending and borrowing.

 

 

 

 

 

 

 

 

Below you will find my latest Conservative Home:

Venezuela has been brought low by printing lots of money, by price controls and nationalisation. A potentially rich country with the world’s largest oil reserves, Venezuela has seen its income per head fall from $12,000 in 2011 to just $1877 last year after a decade of price controls and nationalisation.

Zimbabwe, once a relatively prosperous agricultural state with plenty of food has seen its income per head fall to $1362 a head and lived through food shortages. Compulsory land transfers and price controls have not been kind to the economy.

Sri Lanka  has been less extreme but has seen its income per head fall to $3698 last year and experienced food and other shortages as controls have been used. As a Professor at Colombo University wrote of their price control “it has never sorted out our supply shortages, but is has eliminated the quality goods from the market, and it has created a black market for good quality products, and it has not helped in any way eliminate poverty”

Food riots, protests against government, high inflation and damaging price controls have created misery in each of these potentially successful countries. Price controls have taken too many goods off the shelves, have bankrupted businesses that could otherwise have supplied more, have driven foreign companies out and put off more investment in capacity to supply. They have bred black markets, fostered smuggling subsidised and price controlled goods out of the country to sell at better prices elsewhere and prevented imports.

Why do so many people think they would work? Why will they not study what happens when they are used widely in inflation ridden economies?

Let me begin by making it clear I do want government to ensure everyone has sufficient money to be able to keep warm and do their cooking this winter. That is best done by allowing people to keep more of their income through tax cuts , or by giving people more in benefits to cover the bills who cannot earn. This blog is about the underlying problem of high prices and how you solve them.

Most people want there to be an easy answer to the ultra high prices of energy. Some say just stop any price increase for any energy sold to anyone. Some say control the prices of oil and gas that producers  from  UK reserves can charge us. Some say stop the renewable producers charging the same price for their electricity that the gas based producers have to charge now the gas price has gone up. Maybe there is a way to do the latter that the industry would accept, but they do need to be able to make a profit on their investments and need some long term visibility on contracts. The first proposal would stop all price rises. The second and third would stop some of the price rises, but would leave us paying the new high prices for all imported fuels and for the items of domestic production they leave out.

All these schemes mean government to a greater or lesser extent stops price doing what price will always do, balancing available supply with available demand. Higher prices now surging if left in place  will solve the imbalance. All those in business or on better incomes  who can economise on their power use will now do so, reducing demand. The state will need to rein in its extravagant use of energy by reviewing its over night street lighting, its heating and lighting of little used offices and the rest. Better off households will reach for the thermostat or timers to slice a bit off their past use. So demand will fall.

More importantly the price signal will incentivise businesses to put in more capacity to produce energy. Oil and gas producers will be encouraged to bring forward marginal new prospects that used to be uneconomic for development. Renewable investors will have more profits to plough back into additional capacity or into all important storage. In the short term energy companies will sweat their current assets more to maximise output. In the medium term they will add to their stock of producing assets and in the longer term the whole industry stands a better chance of achieving major commercial throughs with nuclear, battery, hydrogen and other technologies.

If you stop the energy industries in the UK earning the extra revenue from high global prices you will divert profit and investment capital away to countries that do allow them the benefits. If you stop them charging world prices they will divert as much of their current product as possible to markets where they can charge more. Anyway you look at it, price controls prevent more supply and impede lower demand from energy saving. It is no accident that the countries that have relied most on price controls are often those in the lower income bands worldwide, short of domestic supply.  I will deal with those who think that means the answer is nationalisation in a later blog. That too would make the position worse.

I read various bizarre articles defending the Bank of England’s independence against an imaginary threat from Liz Truss. I only know what she has said in public, where she issued no threat to Bank independence. She said she favoured a review of the Bank’s mandate to see if it met best standards in the world of independent Central Banks, and to find out what can be learned from the Bank’s failure to forecast or prevent the high inflation we now suffer. The inference was she wanted a tougher Bank,  not a Bank that printed more money and artificially depressed interest rates to suit the government.

The articles are bizarre because they always ignore the radical change to Bank policy launched by Mr Brown and Mr Darling and continued by all subsequent PMs and Chancellors. They agreed with the Bank a policy of creating more money and buying up state debt to keep rates down. Right from their start of this policy it has been a dual control policy, with the Bank needing the consent of the Chancellor and requiring a full Treasury guarantee or underwriting of the transactions. As this policy has dominated money policy between 2008 and 2021 we cannot say the Bank was then genuinely independent. It does have and did have throughout the sole power to fix the official interest rate. No-one in this debate is recommending taking that power away.

Going forward I would like to see the Bank introduce quantity of money and circulation of money as important information to monitor and take into account when settling interest rates. It has proved difficult to control inflation whilst allowing a large increase in the money supply triggered by substantial Quantitative easing. The Bank may not want to go back to strict money targets that were used in the early 1980s to end the last big inflation, but monitoring money and showing an awareness of its importance might  help them  make better calls. The current money figures show they have  now reined things in considerably. They do not need to overdo the tightening from here to make the opposite error to being too loose as they were in the previous two years. The IMF does usually call for monetary discipline when it puts in a recovery programme for a state that needs financial help.

When Rishi Sunak announced a £400 payment to every electricity  bill payer I was concerned about that way of offering some relief. I would have preferred tax cuts on energy which would directly cut the CPI/RPI measurements of inflation. The government thought these cash payments might qualify as reductions in energy bills and help the CPI figure. Instead after considerable delay the ONS has decided to call them “current transfers” to households that do not cut the price of power.

They rightly go on to remind us they have the legal power to make a judgement about such matters, They say “Decisions on whether to include rebates, subsidies and discounts in our consumer prices inflation statistics are taken on a  case by case basis”. As these £400 payments cannot be withdrawn and spent on anything else but take the form of a cut in the electricity bills that need to be paid there is a perfectly good case to say this is a cut in the price of electricity for all users.

All this matters. Allowing the full bill cost to boost the CPI without allowing for the discount that is available means we face higher inflation with all the knock on effects. This decision will increase public spending and the deficit given the way some spending items are directly linked to the inflation index. It raises the repayment amount for indexed debt.  The Treasury should have asked the electricity companies to put it on bills as a discount to the price of power, which is what it is. A sum equivalent is  payable by the Treasury to the companies as a subsidy. This is another missed opportunity.