As Labour heads to Liverpool this week, Andy Burnham has promised to deliver “stability” in the public finances; but the economic backdrop is anything but stable. The longer the US-Israeli war on Iran persists, the more likely it is that UK consumers will have to swallow higher mortgage rates and energy bills – just as the government is wrestling with its own surging borrowing costs. We are only a few weeks into the three-month period tracking energy price moves that the regulator for Great Britain, Ofgem, will use as a basis to set the energy price cap in January – but it’s been a pretty bleak period so far, with the cost of a barrel of crude above $100 for much of that time.
Based on the pricing in energy futures markets, the Bank of England reckons Ofgem could increase the energy price cap, which sets the maximum energy rates paid by homes on standard tariffs, by an eye-watering 24% in January. At the same time, the Bank’s policymakers – from the governor, Andrew Bailey, down – have repeatedly signalled that while they are reassured high energy prices have not yet fed through into wider inflation, they can’t hold off from raising rates for much longer. Or as his deputy, Sarah Breeden, who like Bailey did not vote to raise rates in September, put it: “The more sparks we’re throwing in the tinderbox, the more likely we might have to turn the hose on it.” Donald Trump made clear over the weekend that he has no intention of staunching the flames himself, by bringing the conflict to a close.
Such a situation almost certainly won’t happen – the economy would probably be clobbered into submission long before they got there, and inflation with it. But Bailey and his colleagues are widely expected to make a start in November, the week after John Healey’s first budget. Policymakers will also have to reckon with the impact on prices of what is expected to be the most powerful El Niño weather system in 1,000 years, which as well as being devastating to human life, is likely to drive up the cost of important foodstuffs.
Burnham has made offering the public a “breathing space” from higher costs a hallmark of his early weeks in power, with sensible but modest policies, such as the £2 bus fare cap. A new iteration of the Tories’ help-to-buy scheme for first-time homebuyers will follow at the budget, he announced this weekend. But while these offerings show a government keen to help, they risk being overshadowed by the wider picture.
With the threat of a surge in energy bills looming, the government is keen to avoid announcing a large new support package, conscious of the cumulative cost of Labour’s interventions over the last year. These include the £2.3bn Rachel Reeves spent on lowering energy bills – including by shifting some green levies on to general taxation – and his own VAT cut on domestic electricity, which the Treasury has yet to explain how it will fund. Yet if, as Trump has hinted, the conflict continues until after the midterm elections in early November, global oil and gas prices could remain high for many more weeks – locking in a sharp rise in bills for UK consumers in the new year.
Economists are urging Healey to be bold on energy in the budget, rather than wait and hope. Experts at the research and innovation foundation Nesta are calling for a gas price stabiliser, for example, that would cushion the blow of higher prices now, at the Treasury’s expense – but bring in additional revenue as market prices dropped in future. Any policy that cuts utility bills has the added bonus of bearing down on inflation, helping ease the pressure on the Bank to act.
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