That’s the situation facing the two candidates who want to be the country’s next prime minister, yet neither Liz Truss nor Rishi Sunak seem to have grasped the scale of the problem yet, at least publicly. Truss’ contribution to the debate was a plan to reverse the rise in national insurance contributions introduced by Sunak as chancellor and brought into force in April. This would save the average worker – someone smack in the middle of the income distribution – £170 a year. As Sunak’s team rightly note, this would not be “listening to the sides” given the potential £1,600 per year increase in the energy price cap. For his part, Sunak left himself open to the same “not enough” category with his proposal for a one-off cut in VAT on domestic energy bills this winter. This would save the average household £160 a year. Sunak’s £15bn package at the end of May cut bills for all households by £400, with extra payments of £650 for 8 million of the poorest households. This, however, was based on an energy price cap expected to be around £2,800 a year, rather than the figure of around £3,600 which will be announced by regulator Ofgem later this month and will come into force in October. A lot more help would be needed and if it weren’t for the fact that Boris Johnson is a lame Prime Minister, a new package might already have been announced. Unfortunately, there is not going to be the immediate emergency budget that Gordon Brown is calling for, with action delayed until Truss or Sunak move to Downing Street in September. But it would provide a much-needed confidence boost if the foreign secretary and the former chancellor jointly announced that a generous package – for both consumers and businesses – would be brought in whoever wins. Quite rightly, much attention has been paid to the plight of households, but far less attention has been paid to the pressures already on struggling companies. According to energy consultancy Cornwall Insight, some businesses face a fivefold increase in their energy bills in October. A tsunami of corporate failures is approaching.
The Tories are mad about the Bank of England rate hike
Debate over what to do with the Bank of England has heated up after it predicted the economy faces 13% inflation and a prolonged recession. If Andrew Bailey thought the speculation would die out quickly after last week’s half-point interest rate hike, he couldn’t have been more wrong. Tory critics, mostly Truss supporters on the right of the party, are mad at the governor and are demanding a change in the way Threadneedle Street is run. What they have in mind is not entirely clear. It no longer appears to involve the Treasury regaining control of interest rates after a 25-year hiatus, but may include a different target to make large overruns in inflation less likely. One prevailing idea is to replace the current 2% inflation target with a target for nominal GDP – the size of the economy in cash. Nominal GDP is made up of two parts: the real expansion of the economy and the rise in prices – so the Bank will effectively be told to set interest rates to control the overall amount of spending rather than hitting an inflation target. Nominal GDP targeting is not a new idea and there are reasons why it has been rejected as an anchor for monetary policy in the past. An estimate of the trend growth rate of the economy must be made, and this will depend on the length of a period under consideration. In addition, GDP figures are constantly revised as more information becomes available to the National Statistics Service, so that the Bank strives to achieve a constantly moving target. A better place to start would be to look at the Bank’s nine-strong monetary policy committee, which lacks business experience and unorthodox thinkers. Appointing a few members of the awkward group – be they hard-line monetarists, hard-line Keynesians or some other discipline entirely – would help the blunt criticism that the Bank suffers from groupthink.
