Back in March, just a few weeks into Russia’s invasion of Ukraine, Liz Truss’s future chancellor Kwasi Kwarteng became one of the first cabinet ministers to acknowledge bluntly the costs of the conflict for consumers at home.
“People are willing to endure hardships in solidarity with the heroic efforts that the people of Ukraine are making,” he told MPs. “People understand this in this country, because we’re a generous and giving country.”
He could not have imagined that six months on, the true price of that solidarity would become so unthinkable – with household energy bills set to breach £3,500 – that from his new desk at the Treasury he would be spraying more than £100bn of taxpayers’ money at the energy markets.
Truss’s historic statement setting out an “energy price guarantee”, pegging the bill for a typical household at £2,500, was all but forgotten just hours after she delivered it last week, as political news was silenced by national mourning.
But everything about the announcement was extraordinary. It is likely to be the costliest single policy Britain has ever seen while not at war: a drastic intervention in the energy markets, paid for by taxpayers, for which the Treasury has not yet suggested a price tag.
Yet is being carried out by an avowedly free-market prime minister, who spent much of the leadership campaign attacking “handouts”, and by a party that has spent much of the past decade trying to make sound public finances a key political dividing line with Labour.
And despite the measure’s unprecedented cost, it will still not be enough to protect many households from a grim winter ahead.
“We need a reality check,” says Kate Bell, head of economics at the TUC. “Millions of households still face a huge cost of living crunch. “Energy bills may have been capped, but they’re double what they were last year. And with food and other prices soaring too, workers across the economy are suffering a massive real wage hit. Unless we get pay rising across the economy, working families will continue to face huge pressure on their finances.”
Analysis by the Joseph Rowntree Foundation (JRF) suggests that the move to cap the unit price of energy for households, together with the significant support announced by Rishi Sunak in May, still falls £800 short of covering the rise in living costs likely to be faced by the poorest consumers in the coming months.
JRF’s senior economist Rachelle Earwaker says these people were already struggling, months ago. “We know that back in May, our analysis showed that around 7 million households on low incomes were already going without essentials; more than 5 million were in food insecurity – this was a problem before these energy hikes,” she said.
She added: “That £800 is only as low as it is because of the support package that Rishi Sunak put in in May. That gap is only going to be a lot bigger after April, when that one-off support package runs out. So we’re really going to need additional support for those on the lowest incomes.”
Kwarteng has given no estimate of the costs of the measure, or of separate, ill-defined plans to shield businesses and public bodies from the increase in bills – and Treasury insiders suggest even in his financial statement next week, he may only do so for its early months.
They stress the vagaries of global gas markets – and the government’s hopes of striking long-term deals with some producers to help smooth prices.
Kwarteng, a veteran of a string of battles with the penny-pinching Treasury when he was business secretary, has told his officials to focus relentlessly on growth, not the size of the deficit.
His insouciance about the public finances is surprising coming from the party of George Osborne, who took a very different stance in relation to the ballooning deficit in the wake of the 2007-08 financial crisis. Osborne consistently said financial markets could lose confidence in the government’s ability to meet its obligations, driving up the cost of borrowing and prompting a Greece-style debt crisis.
Labour arguably acquiesced in that framing of the UK’s economic travails. When Ed Miliband missed out a section of his 2014 conference speech mentioning his party’s plans for tackling the deficit, Unite’s general secretary, Len McCluskey, called it a “glaring omission”.
The economist Jonathan Portes, of the thinktank UK in a Changing Europe, argues that Osborne’s austerity was the wrong approach in 2010; but that doesn’t mean Kwarteng’s stance is a good idea now.
Portes says there is a good case for funding much of the energy package through borrowing, but that when combined with Truss’s costly tax cut plans, and a Treasury with no clear plan for “fixing the roof”, as Osborne called it, there is a risk of alarming financial markets.
“We’ve got inflation and interest rates going up. This is the opposite situation, and it’s not the situation where you would ideally want to be borrowing much more, and certainly not promising to carry on doing so for the foreseeable future.”
He plays down the risk of a full-blown market panic but says: “There is a risk that you have continued downward pressure on the pound, and continued upward pressure on long-term interest rates; pressure on the pound makes inflation worse; the Bank of England has to raise interest rates to keep the pound stable – and all of that just makes things worse.”
Such fears have been exacerbated by sterling’s weak performance in recent weeks, hitting its lowest level against the dollar since 1985 on Friday, below $1.14, and losing ground against the euro in recent weeks, too.
Even without a sterling crisis, many economists expect the Bank of England to keep interest rates higher, for longer, as a result of the energy package, which will bring down headline inflation in the short-term, but could also boost demand in the economy.
Whatever the City’s verdict, Truss will be hoping that by getting the big bazooka out to tackle the crisis, she will can take some credit from anxious consumers, for acting decisively.
Sunak saw his popularity with the public soar after announcing the radical furlough scheme to protect jobs during the Covid lockdowns – like Truss’s energy cap, a policy that went against the grain of Sunak’s free-market politics.
James Johnson, of the pollsters JL Partners, suggests Truss may get a fillip in the polls, once the policy receives more public attention when the period of mourning for the Queen comes to an end.
“We’re not going to see a sudden 10-point boost overnight any more because of events – and I actually think we might have done, if it hadn’t been for what happened – but I do think we’re going to see this have an impact on people’s views of her.”
Labour has argued that more of the package should have been paid for with a windfall tax on energy firms, which have generated bumper profits as global prices have surged. Sunak had already imposed a £5bn windfall tax, delicately calling it a “temporary, targeted energy profits levy” to avoid appearing to U-turn; but Labour argued this should be widened dramatically. Truss rejected that, claiming it would “undermine the national interest”, by discouraging investment.
In an indication that Truss’s arrival has sharpened political dividing lines, Keir Starmer claimed: “She wants to leave these vast profits on the table with one clear and obvious consequence: the bill will be picked up by working people.”
One constituency that certainly does not like Truss’s price cap is the free-market thinktanks whose ideas she keenly espouses in other policy areas. The Adam Smith Institute complained that the approach could lead to blackouts, by blunting consumers’ incentives to cut back on energy use, and “subsidises affluent households which use more energy”.
Free-market ideologues will be more cheered by Kwarteng’s fiscal statement next week. It will include Truss’s promised tax cuts – most of the benefits of which go to higher earners – as well as more detail on changes the new government hopes will supercharge growth.
Yet even if Truss’s bold economic changes bear fruit, they will take many months, even years, to do so. Meanwhile, both hard-pressed voters and jittery financial markets are more likely to judge the new regime on how well her £100bn-plus price cap helps the battered UK economy to weather the rocky months ahead.