The government is drawing up contingency plans for power cuts this winter as it finally wakes up to the reality of what the next few months will bring.
Britain has a cost of living crisis. It also has a housing crisis and an energy crisis. Weeks without rain in southern England mean there is a looming drought crisis. The NHS is only one serious Covid-19 outbreak away from crunch point.
These crises are all distinct and special in their own way but they also have a common theme: a failure to invest stretching back decades. An obsession with efficiency has meant infrastructure has been run into the ground rather than upgraded. Cost-cutting has been given a higher priority than capacity building.
Take the NHS. International comparisons show Britain has one of the lowest number of hospital beds for each head of population of any western country, a smaller number of intensive care beds, and one of the highest bed occupancy rates. Problems with this seat-of-the-pants approach were brutally exposed by the arrival of the Covid-19 pandemic in the spring of 2020.
Or take water. Since 1990 the population of the UK has risen by about 10 million to 67 million but not a single new reservoir has been built in the past three decades. More than 200,000 miles of water pipes date back to Victorian times yet the water companies are replacing them at a rate of 0.05% a year. That compares with a European average of 0.5%.
Then there’s the state of the country’s housing stock. A report by the energy firm EDF found almost 60% of 21m homes in England and Wales only met insulation standards of the mid-1970s or earlier – costing households up to £930 a year in higher energy bills.
In the early 1970s, the lights went out when the miners went on strike. If they go out again this winter it will be because there is not enough domestic capacity and supplies of imported energy are insufficient to meet demand.
Britain is, of course, not the only country facing the possibility of energy shortages. Germany, for example, is much more heavily exposed to the whims of Vladimir Putin. Even so, there is a pattern here – one in which a misguided belief that everything will turn out well in the end has taken the place of long-term planning and strategic investment.
Let’s be clear, this is not only a government problem. Britain has the lowest rate of business investment of any G7 country and one reason for that is the private sector has tended to prefer dividend payouts and share buy-backs to higher spending on new kit.
Muddling through is the country’s default setting. The lack of any real slack in the system only really become apparent in times of national emergency. Like now, for instance.
What can the UK learn from the US’s battle with inflation?
Inflation in the UK is still some way short of its peak but in the US there are signs it might have topped out.
The latest data from the world’s biggest economy showed the headline measure of the annual increase in the cost of living falling from 9.1% to 8.5%, while core inflation – excluding energy and food – remained unchanged at 5.9%.
Both measures were lower than analysts had been expecting and the news had a predictable effect: shares on Wall Street rallied strongly on hopes that the Federal Reserve – America’s central bank – would ease back on the pace of interest rate increases.
There is certainly a case for the Fed to do just that. The US economy contracted in both the first two quarters of 2022 and a falling participation rate is evidence that demand for labour is softening.
But the Fed’s chairman – Jerome Powell – is going to take more convincing that the battle is won. Interest rates will still go up again next month, although probably by 0.5 percentage points rather than 0.75 points. Wall Street is expecting borrowing costs to be increased twice more before the end of the year, taking them to approximately 4%.
Paul Volcker, the former Fed chairman, who in the early 1980s engineered a monster recession to squeeze inflation out of the system, would no doubt be impressed by his successor’s determination.
Powell says he wants to see a period in which the US grows at a below potential rate and he is at risk of over-delivering. By this time next year, it is likely the Fed will be more concerned about rising unemployment than inflation. That holds true for the Bank of England too.
