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Face the reality of the UK energy crisis

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The grim news about the UK economy continues to grow. Last week, the Bank of England predicted a 15-month recession with inflation peaking above 13%. Energy price caps, which limit how much you can charge at home, are expected to soar up to 80% in October from current record levels, leaving many with a serious choice between heating and eating out during the winter. Mortgage and rental costs are also on the rise. But there is still no clear and realistic short-term cost-of-living strategy when the most vulnerable people need the most, with governments still ignoring the scale of the problem and paralyzed awaiting the outcome of the Conservative leadership primary.

The UK is facing its worst stagflation since the 1970s. Low growth and high inflation. Reliance on natural gas imports and the slow recovery of the workforce means that UK inflation is a poisonous mix of the energy-driven pattern facing continental Europe and wage pressures operating in the US. Underlying the BoE’s exhaustive forecast was the grim calculation that interest rates would need to be raised enough to cool the job market and investment to lower inflation, and that it was creating a recession in the process.

With central banks facing the risk of consistently high inflation, fiscal policy will have to be prudent to offset the cost of living crisis when resources are scarce. Weak growth will reduce the fiscal leeway the Treasury was able to have, and the government has already promised a whopping $37 billion across various cost-of-living packages. Moreover, efforts to support households through tax cuts or direct payments will further fuel inflation, which will in turn be met by tightening monetary policy.

So, just like the BoE, governments have to do their own grim calculations about how to share the pain of sky-high inflation. Conservative leadership candidates have refused to face this reality, but whoever wins will have to. As prices rise, after-tax household income is projected to decline the most in real terms in more than 60 years. Soaring energy and food prices will continue to hit the most vulnerable, so targeted support for them should be a priority, even if inflation is a margin.

It is important to withdraw funds quickly and efficiently. Energy rates could reach 4,300 per year by January after they decide to pass on the wholesale price increase sooner. Liz Truss preferred to avoid lure to households, reverse increases in national insurance and abolish green levies. Along with the VAT cut on energy, Prime Minister Rishi Sunak has hinted at extending the direct payment he gave as prime minister.

Lowering your levy and energy VAT puts more money in your pocket, but you’ll only be tinkering with the brink of trouble. Reversing national insurance increases could provide more benefits to high-income earners. Building on May’s Sunak support package that includes payments to asset-verified beneficiaries along with people with disabilities and pensioners may be the most viable immediate solution. We need to scale up (based on roughly 2,800 energy price caps) and set better goals. Additional payments to wealthy households would also be difficult to justify.

All packages should come with an effort to conserve energy and curb demand during the winter. As bills are expected to remain high through next year, the overall structure of price caps and assistance to the poor must also be reviewed. It is time for both candidates to face the reality of the crisis and make plans for action. It will be the most pressing item on the tray for anyone taking over in September.

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