ALEX BRUMMER: When it comes to economic illiteracy, Keir Starmer’s plan is in a class of its own
Sir Keir Starmer has spent most of his near two and a half years as Labour leader seeking to slay the ghost of his far-Left predecessor Jeremy Corbyn and his magic money tree.
Yet stung by criticism of Labour’s lack of policies to deal with an escalating energy and cost of living crisis – and last week’s jibe by Gordon Brown that crises ‘don’t take holidays’ – Sir Keir appears to have rushed back from sunnier climes to unveil an ill thought-out policy to freeze energy prices.
If it were to be implemented it could bankrupt most of the energy suppliers, end consumer choice and run up bills for the taxpayer as large as those used to save the jobs of Britain’s workforce during the pandemic.
When it comes to economic illiteracy, it’s in a class of its own.
So what exactly is Sir Keir proposing?
The energy shortages triggered by Russia’s barbaric war on Ukraine is projected to lead to fuel bills for a typical household rising to £3,600 in October and £4,300 in January 2022.
Sir Keir Starmer has pledged to freeze the energy price cap to help struggling families. Pictured right, meeting Dave Church and his ten-month-old daughter Ellen during a visit to Exeter to discuss the cost of living today
The Labour leader wants a freeze on the price cap for six months at a reported cost of £29billion, to be financed by ‘retrospective’ taxation in the shape of windfall taxes on the big energy companies.
At first glance it looks seductively simple and is very attractive because every consumer benefits. According to one poll yesterday, three in four Tory voters back it.
And certainly, the huge profits reported earlier this month by oil firms BP and Shell and energy suppliers Centrica (owner of British Gas) and Germany’s EON – a major UK supplier – are enticing prey for Labour.
These, however, are the very same firms that Britain is counting on for investment in the nation’s energy security and the transition to a carbon-free future.
What’s more, taxing oil producers retrospectively would betray a core principle of British public finance that what is past is past.
It would also turn the UK into a pariah state for foreign investment and see the dozens of smaller independent drillers around Britain’s coastline leave in droves and not come back.
And ‘cannon-balling’ cash at every household in the country via the price cap freeze – including those who can afford to take some of the pain – would be a waste of resources.
Starmer’s approach also flies directly against advice from Washington-based economic enforcer, the International Monetary Fund.
The IMF advises advanced nations to focus assistance on those most needing help with ‘well-targeted support’ for households squeezed by higher food and fuel prices.
One only has to look across the Channel to see what happens when governments seek to bail out everyone’s household energy bills.
French investment in nuclear power (which provides 70 per cent of its electricity needs) means that in contrast to most European governments, it is less dependent on Russian oil and gas supplies. As a consequence, the French inflation rate in July 2022 stood at 6.1 per cent, less than half that projected by the Bank of England for the UK this autumn.
Sir Keir appears to have rushed back from sunnier climes to unveil an ill thought-out policy to freeze energy prices. Picture shows the rise in energy prices
Nevertheless, president Emmanuel Macron has protected consumers temporarily from higher household power bills by ordering the nation’s dominant supplier, Electricite de France (EDF), to absorb higher energy costs rather than passing them on to customers.
Faced with the possibility of financial collapse as a result, EDF has been taken back into public ownership, prompting CEO and chairman Jean-Bernard Levy to resign.
It could be argued that the Tories have been slow in responding to the crisis and certainly Labour, the Lib Dems and much of the media have been critical of No 10. But until a new prime minister takes over on September 5 there is no real point in spelling out detailed policies to alleviate winter energy bills.
Yet, according to a paper prepared by the influential Institute for Fiscal Studies (IFS), the Tories can be trusted to do the right thing on the cost of living/energy crisis just as they did in the pandemic.
It shows that the £24billion of assistance to households has been well targeted at those who need it most so far. While middle and higher-income earners will all benefit from £400 to £500 of support, they will still suffer a fall in inflation-adjusted incomes.
In contrast, the package announced in May would mean that an out-of-work single parent with two children would see their real income maintained for this year despite their standard benefit increase of 3.1 per cent being far below the headline rate of inflation.
The Labour leader wants a freeze on the price cap for six months at a reported cost of £29billion. Sir Keir is pictured left with Steve Race, the Labour Parliamentary candidate for Exeter during a visit to discuss the cost of living today
The job of the next PM is to make sure such well-targeted support is maintained. The IFS reckons the poorest 20 per cent of the population will experience a further 18 per cent rise in energy costs in October (because they spend a higher proportion of their income on utility bills and are more likely to be in fuel poverty) against 11 per cent for the richest.
This perfectly illustrates why committing taxpayers’ cash to every household, by freezing the cap as Sir Keir suggests, would be such a misuse of resources.
Indeed, as the head of the IFS Paul Johnson has pointed out, such a policy could only be a temporary fix for six months and could be as costly as the £70billion spent on furlough.
The suggestion that this could somehow pay for itself, by reducing the interest-rate bill on inflation-linked government bonds (gilt-edged stock), is pure fiction. The debt will still be there once the frozen cap is lifted.
And the impact of freezing the cap would be devastating for the fragile finances of energy distributors. Among the 60 new players in the market, 30 have already gone to the wall, and in several cases the Government has been left paying the bills.
In short, what Starmer is outlining is a plan to take control of the whole industry – nationalisation by the back door, betraying all those Labour voters and supporters who rejected public ownership when they elected Tony Blair for three terms in government.
The job of the Tories is to minimise the unnecessary subsidy of fuel bills for those who can most afford it and make sure the less well off, the elderly and the infirm are fully compensated this winter so terrible trade offs between food and keeping warm are avoided.
Boris Johnson and his Cabinet recognised the need to skew assistance to the most needy. In contrast, the Starmer approach would put free market capitalism, investment and the durability of the public finances at acute risk.
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