Just two days after taking office, the new Prime Minister Liz Truss made a 180-degree turn on gas and electricity rates. In a message on the House of Commons Truss announced that it would freeze the rate increase for two years after having flatly rejected a proposal made to that effect by Labor two weeks ago. “This government is going to give a new guarantee on prices that will give security to the population and lower inflation,” Truss told parliament.
The ceiling of the electrical expense that was going to go from almost two thousand pounds (2,300 dollars) to 3,549 pounds per year (about 288 dollars per month) as of October 1 will now be 2,500 pounds per year. As an additional and segmented measure, the government will provide aid of around 400 pounds which, in practice, would leave the benefited sectors, which have not yet been precisely defined, at the same tariff ceiling that is in force now.
The cost of the measure will exceed 100 billion pounds at a time when the British public debt has been steadily increasing (40% of GDP with Dave Cameron (2016), 60% pre-pandemic, more than 90% today). The alternative, however, was that millions of people would fall into energy poverty (paying more than 10% of their income for electricity and gas) and absolute poverty (destitution) and that thousands of companies would go bankrupt.
Who pays?
Labor had proposed a rate freeze in mid-August that was rejected by Liz Truss that she was campaigning to convince the Conservative Party that she was the successor the country needed. In this, the turnaround has been spectacular and in full view of the world, although the Truss freeze is less than that proposed by the Labor leader Sir Keir Starmer. The big difference between the two is in who is going to finance this aid package.
In the version of the new prime minister, it will be financed with debt that will be paid with general taxes, that is, by all taxpayers. The Labor leader is instead proposing a special income tax for energy companies that have reaped huge profits since the war in Ukraine, something Truss has flatly rejected. “The prime minister knows that he has no choice but to come out with an aid package, but this comes at a cost and that is the real question to ask, who is going to pay for it? The same Treasury estimates that energy companies will have a special profit of 170 billion pounds in the next two years. She is going to let these companies continue to get rich off this special rent and let the workers pick up a tab that will be paid for decades to come,” Starmer said.
In the independent Institute of Fiscal Studies they pointed out that The aid benefited the richest much more than the population as a whole, adding a weight to the public debt that will be very costly for a government that is facing crises on many fronts. According to one estimate, with the current escalation of energy prices added to the inflationary spiral, thousands of small and medium-sized companies will go bankrupt. The owner of a small local bakery chain in the north of the country, Louise Costello, told “The Independent” that help “is too little too late.” The company had to close three businesses after the electricity bill went from £19,500 a year to £105,000, an increase of 438%. “We have been in this situation for months waiting for help from the government. This is too late for me and many other businesses,” Costello told the newspaper.
From the extreme neoliberal right, which until now supported Truss without reservation, also criticized the aid. “It is better to attack this problem with a segmented social benefit and a reduction in the tax burden because the cost of this package will be between 90 and 170 billion pounds. Price control does not work. Eliminating that key signal that is price and subsidizing energy will inefficiently use energy, prolong the crisis and stifle investment,” said Andy Mayer, an analyst at the Institute of Economic Affairs.
drop the pound
Unlike other times when the entry of a Conservative was welcomed by the markets, this time there was a marked fall in the value of the pound which fell to its lowest level since 1985 against the dollar.
The 180-degree turn on tariffs did not extend to the rest of Truss’s economic program, which continues to be based on the mantra chanted by the Conservatives since the 1980s.: lower taxes to increase investment and produce a trickle down effect on the rest of society. None of this has happened: the United Kingdom is the country with the lowest level of investment among its G7 peers and inequality and absolute poverty have grown in the last 12 years of conservative government.
Truss’s proposed £27bn tax cut will mostly benefit corporations and wealthier households. The Truss corporations will abolish the tax increase that was to take effect from April from 19 to 25 percent, the first increase in 47 years. The increase in social security that has been in force since April of this year will be eliminated for the entire population, a measure that, according to the Resolution Foundation, will benefit the richest 5% much more than those with less income. “Low-income British households are today 22% poorer than their peers in France and 21% poorer than in Germany,” notes the Resolution Foundation.
Critics abound with economists and establishment media. “Truss has five economic hurricanes: energy tariffs, inflation, recession, rising interest rates and falling pound. The priority of the population is public services, the National Health Service. Even among many conservative voters there is no desire for a laissez-faire agenda. They want less taxes, but they don’t want them to benefit those who have more. They want the state to intervene to improve public services, combat rising costs of living, and promote regional and social leveling. They want a salary increase and they don’t want deregulation of the labor market. This agenda is going to force Truss’s hand”, predicts Robert Srimsley in the “Financial Times”.
In summary, the alternative for Truss is to make other 180-degree turns, to which she does not seem very inclined at the moment, or to succumb to a crisis beyond her strength, something that goes against the political instinct of survival. In the 80s, her model, Margaret Thatcher, said before the criticism she received about her ultra agenda that “the lady is not for turning” (the lady was not going to change course). Times have changed: Liz Truss has no room for such intransigence. She or she spins or sinks.