Financial markets don’t hang around. Primed for UK government U-turns, they leaped on the first reports that Liz Truss is now getting down to the task of deciding which tax measures – with the freeze on corporation tax to the fore – will have to be junked from the mini-budget. The pound rose by two cents against the dollar.
Gilts, or government IOUs, were also in demand on the whiff of a return to a version of fiscal responsibility. The yield on the 30-year gilt, which had been screaming crisis at 5.1% only 24 hours earlier, descended to 4.5% – to the great relief, one assumes, of the governor of the Bank of England, whose vow to stop buying gilts next week now looks slightly more credible. The message to the UK from markets was unmistakable: here is your escape chute, now please take it.
Over in Washington, Kwasi Kwarteng insisted he was going nowhere and that “our position hasn’t changed”, but the jig is surely up. A U-turn is being priced in, and the market action will be furious if expectations are disappointed. International investors simply won’t fund the chancellor’s original mini-budget on terms that make sense for the government; the price in higher borrowing costs, for households and businesses, would wipe out any benefits from the hopeful go-go growth stuff.
The next stage in the market end of this drama will inevitably be a demand for quick resolution. The 31 October date for the next fiscal event is too far away and George Osborne’s point is almost unanswerable: “Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini-budget,” said the former chancellor.
Quite. Never mind the hit to political egos and careers, the whole process will go down easier without another round of gyration in gilt prices. Time to get on with it.
Climate minister flunks test on Bulb nationalisation
Given all of the above, one assumes Jacob Rees-Mogg, business secretary and occasional Guardian columnist, hasn’t had time to get his head around the lessons to be drawn from the nationalisation of Bulb a year ago. Instead, the climate minister, Graham Stuart, was rolled on to give the government’s official response to good recommendations from the business select committee a couple of months ago. On two fronts, Stuart flunked it.
Why, we’ve all been wondering, didn’t the government order the administrators of Bulb to put hedging contracts in place to cover Bulb’s forward energy purchases? All energy supply companies hedge – it is how the industry works. When gas prices climbed even higher after Bulb’s failure, the costs to the public purse rose massively.
Actually, we know why the government hesitated. The Treasury deemed hedging to be “too risky”, Kwarteng told the committee in May when wearing his former ministerial hat. So, given that the approach backfired, the real question is whether the government would do things differently if it finds itself nationalising another energy company? Stuart just gave a non-answer about Bulb’s power purchasing strategy being kept under “close and constant review”.
Worse, he dodged the pressing question of who will pick up the tab for rescuing Bulb. Since £4bn is a credible estimate of the final loss before the likely sale to Octopus Energy, it’s not a trivial matter. The liability can either be swallowed by the public purse, or ministers can exercise their right under the “special administration regime” to shove the cost on to everybody’s energy bills. If it’s the latter, it equates to about £150 for every household.
Again, the government ducked for cover in its formal answer. It intends to use “the shortfall mechanism placed on suppliers”, which is another way of saying a levy would be added to bills; the only qualification is that the timing hasn’t been decided.
Come on, it would be absurd to hit consumers with the cost of Bulb’s blow-out when ministers are desperately trying to remove items from bills. As the committee chair Darren Jones said, it would also be regressive; better to take the hit via general taxation.
Many reforms to the energy market are complicated – not least the vital question of where to set the revenue cap on renewable and nuclear generators so that it extracts a fair deal for consumers but also encourages investment. Bulb is supposed to be the easy bit. The government needs to rethink.
