The Brexit libertarians are in control of our destinies for at least the next two years and already the extent of the threat they pose to our wellbeing and security is becoming clear. The prime minister, Liz Truss, may have swallowed her own words of just a month ago that she was against “handouts” to launch the biggest handout in our history, but that was to buy her and her acolytes the political breathing space to launch their programmes. The energy price cap might have been a breathtaking U-turn, but it had a darker purpose.
The intent was betrayed by the chancellor Kwasi Kwarteng’s summary sacking of Sir Tom Scholar, one of our best and most dedicated civil servants, now former permanent secretary to the Treasury. Kwarteng’s thinking was revealed when he blamed “the same old economic managerialism” for leaving Britain “with a stagnating economy and anaemic growth”.
“Bold action,” he suggested, was an imperative to relieve this “toxic combination”: “Cutting taxes, putting money back into people’s pockets and unshackling our businesses from burdensome taxes and unsuitable regulations.” Only thus could investment and growth be unlocked. Better that, he added, than “burying our heads in a redistributive fight over what is left”.
It is unsubstantiated hogwash – ideological faith triumphing over evidence and reason. In these terms, Scholar, exemplar of the alleged old economic managerialism, had to go. We are on an economic fairground ride led by fairies and fools.
Of course, the two-year £2,500 price cap is welcome. It will lift from millions of people the threat of desperate choices over warmth or food. It will also lower the peak inflation rate by up to 4% and so lower debt service costs in a full year by around £20bn – a quarter of our national debt is represented by bonds indexed to the level of inflation. It will also partially avert the risk of a dangerous wage price spiral. But those were the reasons Labour first advocated a price cap. The libertarians only changed tack when they realised that resisting and sticking to their preferred response of tax cuts and minimalist rebates risked them being politically overwhelmed.
But you don’t win wars and reset economies with daffy libertarianism. Europe is in a de facto war with Russia over Ukraine, as it threatens a price cap on Russian gas. Putin responded by saying in Vladivostok that at the limit Russia will export nothing – no gas, no oil, no food – to Europe. This is economic rather than battlefield war, but it is war nonetheless. Britain’s energy policy is not serious, it betrays the cause.
Energy policy in a time of potentially prolonged supply disruption has to be designed for the long term; has to protect business as much as consumers; has to be financially sustainable and avoid the risk of blackouts. The government plan fails on all counts.
Crucially, it is not financially sustainable: Britain’s national debt, as the Trussians continually say, is the lowest in the G7 bar Germany so there is scope to borrow. But the dollar, yen and the euro are the world’s reserve currencies and Canada runs a balance of payments surplus. Britain is alone, outside any of the major trade blocs, with a weak, legacy economy and a chronic international payments deficit. It cannot sell at least £100bn of extra public debt a year to protect living standards rather than raising investment without the threat of further sterling weakness or an enforced jump in interest rates.
Financial sustainability could have been addressed in a number of ways. A further windfall tax could have been imposed on the extraordinary profits in the energy sector. In addition, for the duration of the Ukraine war, all gas and oil from British fields should be required to be sold to the government on a cost-plus basis rather than distorted international prices. Consumers could have been told to tighten their belts with ministers giving a lead and a rationing system rolled out if needed. There should be a state-led crash programme of building onshore and offshore windfarms, – the fastest and lowest cost route to boosting energy supplies – along with accelerating the home insulation programme.
For libertarians, every such measure sticks in their craws. Thus they propose untargeted, if generous, help for households but, because even they recognise the near open-ended costs, they have limited the help to business to six months. Scared of what may follow, business will batten down the hatches so that Kwarteng cancelling the proposed corporation tax rise will have zero effect on investment. It is also aware of the risk of blackouts this winter, unrelieved by the uncertain prospect of fracked gas on stream in a decade.
At least when Britain was in the single market it was linked via undersea interconnectors to Irish, Dutch, French and Belgian grids; it was also linked, in a special deal, with Norway. The price was set in the single market and electricity flowed freely as capacity ebbed and flowed between the networks.
Now Brexit Britain has devised a bureaucratic and expensive auction system instead, raising the price of electricity and exposing us to supply shocks. In addition, the US energy secretary, Jennifer Granholm, has required all US refineries exporting petrol, diesel and distillates to build up their reserves rather than exporting – coinciding with the Russia switch-off. This is another threat to supply.
Before these challenges, the EU had been building up its gas reserves in a process in which we should have taken part. But it was only in late August that Centrica got the go-ahead to reopen its Rough gas storage facility in the North Sea; and this can only be brought back into service slowly. This winter, it will only be of marginal help.
Thus libertarians manage energy crises and fight wars. To plan, to use state power, to tax, to regulate, to build reserves and to work with fellow Europeans are all anathema. The same philosophy that goes nowhere will inform the tax-cutting “fiscal event” later this month that will further inflate our national debt to no purpose. Growth is the result of well-marshalled and imaginatively directed investment by the public and private sector in an interdependent relationship – not making so-called individual “wealth creators” even richer via tax cuts.
The entire project will fail. The pity is that whatever damage it will do to the Conservative party, the rest of us are condemned to live through the same disaster.
• Will Hutton is an Observer columnist
