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British Prime Minister Boris Johnson. Picture: REUTERS/TOBY MELVILLE
British Prime Minister Boris Johnson. Picture: REUTERS/TOBY MELVILLE

It is rare to see the Labour Party offer such a fulsome embrace of a set of Conservative policy announcements. Then again, opposition leader Keir Starmer’s shadow bench was really cheering Boris Johnson’s government adopting Labour calls for a windfall tax on energy companies and more help for consumers hit with cost-of-living increases. Democracy in action. 

Chancellor of the Exchequer Rishi Sunak had no qualms appropriating the policy, nicking Labour’s idea but giving a Tory spin, calling it an energy profits levy to distinguish it from the opposition’s windfall proposal.

The political rationale for the hastily cobbled-together package is clear. After months of bruising revelations and investigations into Partygate, the government is desperate to change the subject and be seen to be addressing real voter concerns, notably the effect of surging inflation and what the media has dubbed the cost-of-living crisis.  

But the idea that the hurried measures will boost consumer confidence or avert a recession is dubious. The substantial package announced on Thursday feels like fiscal policy defence, a panicky chess move intended to protect the king but not really advance the government’s own position.

On the plus side, the new spending should make a difference to the average household’s energy costs. The package includes a lump-sum payment of up to £650 (R12,800) for some 8-million families already receiving benefits, with payments also for pensioners and disabled persons. Most of the support lands in the fourth quarter, when Britain’s energy regulator Ofgem is expected to raise the price cap to £2,800, an increase of over £800. 

But tinkering with taxes and exemptions is risky business. Before introducing his tax, Sunak had argued that it would hurt investment. So he is offering energy companies a chance to offset the 25% levy against investment. As BP CEO Bernard Looney has noted, investment plans in the industry are made well in advance, so it’s not clear how well that will work. There’s also a moral hazard risk: Will investors be so sure there won’t be other windfall taxes in the future to plug holes? 

It’s also not clear the measures will be sufficient to boost consumer confidence, which has slumped to its lowest in four decades, below even the levels of the last four recessions. One reason is that the cost of increased energy prices to UK households is about £55bn; Sunak’s relief doesn’t begin to cover that (as he more or less acknowledged). 

A purchasing managers’ index suggests companies are also expecting a rough ride.

Sunak’s hope is that the £15bn package of relief — which, at 0.6% of GDP is still substantial — will help avert a recession this year. That’s debatable. Bloomberg Economics expects GDP to contract 0.4% in the second quarter of the year, then grow 0.3% and then fall in the fourth quarter again. The bobbing and weaving may not technically amount to a recession (defined by two consecutive quarters of falling GDP), but that’s also largely academic.

“There’s no point in saying a contraction isn’t a recession on the grounds that it’s not two quarters back-to-back, when the average person is 5% poorer,” notes Mark Bathgate, an independent economic consultant. Meanwhile, it’s likely to aggravate inflationary pressures and add to pressure on government finances. 

Even if the new energy levy raises the whole £5bn, it still pales against the extra spending. Sunak also promised to increase benefits and pensions in line with September inflation, which is expected to be about 10%. That means the government will be writing a big cheque —  potentially dwarfing the entire package and financed presumably by borrowing. (Borrowing costs are already up fivefold over the last 12 months.) With Britain’s tax burden already the highest its been since 1950, the government can’t exactly go back to taxpayers.

Britain is obviously facing a supply-side crisis that defies easy solutions. Brexit factors are also contributing to increased costs. Subsidising demand is not going to be the answer, however, and will have its own unintended consequences, not least in creating the expectation that more handouts will have to follow.

Johnson wants to fight the next election showing progress on his main manifesto pledge to rebalance the wildly unequal UK economy — what he calls “levelling up.” There is no amount of government spending (short, perhaps, of the €2-trillion — $2.14-trillion — Germany spent on reunification over the course of more than two decades) that will achieve that. Johnson and Sunak desperately need to find a formula for economic growth. 

The tax-and-spend trap is clearly an uncomfortable place for Sunak, who still wants to be seen more in the mould of a small-government chancellor. But populist policies are now the government’s calling card and harder to distinguish from the opposition. Instead of Singapore-on-Thames — the unrealistic vision Brexiters tossed in the direction of Brussels during fraught exit negotiations — the UK is looking a bit more like Belgium-on-Thames on his watch. No wonder the Labour benches looked smug.

More stories like this are available on bloomberg.com/opinion


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