Truss Energy Shambles

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Yves here. It looks at if new UK Prime Minister Liz Truss is managing to undershoot even Donald Trump low points, and right out of the box too.

Remember the Trump tax bill? It was an early initiative, designed to secure his position with the Republican party (remember he was then and still is attempting a hostile takeover). The business press roundly criticized the announcement for vagueness. I dimly recall that it was Power Point level sloganeering, when tax and budget types expect far more detail even at the outset. Tax goodies are a Team R speciality, so a slipshod performance here was seen as particularly bad.

It was also a black mark for Treasury Secretary Steve Mnuchin (but provided early confirmation of our view that Mnuchin didn’t have the chops to be Treasury Secretary).

However, the tax lobbyists for years had been waiting for years for an opportunity to advance many pet ideas, so they had lots of draft language to toss over the transom. The Trump Administration made ample use of it.

Here the Truss “plan” for energy sounds even more hand-wavey than the Trump initial tax splat. And there’s no army of waiting interest groups to help her figure out which oxen to gore.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I intended to write a review of Truss’s energy plan yesterday, but events got the better of it.

The most appropriate thing to say is “what plan?”

Truss made the biggest spending commitment she is likely ever to make, but could not tell us what it will cost and will not do so for a month.

For those already in fuel poverty, or near it, this will undoubtedly continue under this plan. Without significant changes to benefits that will be very much worse in 2023/24.

The wealthiest get an absurd and unjustified level of support under the plan, which increases inequality as a result.

Business, public services and charity are in limbo, having no clue as to what help they will get, and with it then only being available for six months at most when households will get support for two years. This seems too little to stave off recession.

Fracking is in, as is oil and gas extraction. It is as if we have no climate crisis. Energy efficiency and renewables – together the cheapest, quickest and most effective way to deliver energy efficiency – were ignored, entirely. This was gross irresponsibility.

And how any of this will be funded we do not know, except there will be no windfall taxes on profits arising from the exploitation of war, which is quite extraordinary and was well dealt with by Keir Starmer.

To describe this as a plan would be too kind. It was nothing of the sort. It was a shambles, issued after she had the whole summer to work out what she would do.

As portents for the Truss premiership go, this was bad, and it followed her first rebuke from the Speaker, who described her government as incompetent.

Truss now gets a respite. After months without government, parliament will not now sit for the ten days of official mourning for the Queen. Then there will be the party conference break. To say government has departed the UK would not be unkind. To suggest Truss did not play her first day well would be generous.

What a shambles.

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15 comments

  1. PlutoniumKun

    From what I’ve seen, its very hard to see how this will work, especially when it comes to trying to figure out who the various caps apply to. Just looking at the BBC’s summary, there are huge areas of uncertainty. I really wonder if this was cooked up by a bunch of political interns rather than anyone who knows how the billing system works.

    One obvious problem is that it could potentially make things worse on the demand side. If you already spend less than the cap, you have no incentive to save energy. The published figures indicates a cap of £1750 for a flat is about twice what I pay in Ireland for my apartment (even allowing for recent big increases). If I lived in a similar apartment in the UK, I’d have very little incentive to reduce energy use, especially at peak periods.

    Reply
  2. Stephen

    Am not sure I even understand this “plan”, or maybe I am too shocked.

    It sounds like they are capping the prices users pay, paying the energy companies for the now very high marginal cost of the least efficient producer per the regulatory regime and then funding this through government “borrowing” or money printing.

    So we lose a user price signal to support any form of volume reduction, everyone gets the subsidy irrespective of income / needs and we help the domestic upstream energy producers to earn windfall profits. This is Boris Johnson style policy making, only on an even bigger scale.

    Have I missed something?

    I avoid UK mainstream media now but the few headlines I saw seem to be in congratulatory mode over this mess. Agree too with the article that real political conflict is now pretty much on ice until it is nearly Christmas.

    My understanding of what might be driving this (other than Truss being totally stupid and incompetent, which does not need stating) is that over the weekend the European demonstrations and wavering support for the Imperial War seemed to be worrying our mad government. So they have introduced a policy to put off any visible pain from the war for six months (businesses) and two years (consumers). It is yet another example of kicking a can down the road; an increasingly common feature of the west.

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  3. The Rev Kev

    I saw Liz Truss in Parliament absolutely refuse to consider windfall taxes on the profits of oil corporations as if it was a heresy or something. So from what I have read, they are going to borrow the money from the market to pay for energy relief for households. This in a time of rising interest rates which does not sound like a wise idea.

    Truss and the Tories may have a bit of a respite but it will not last. I would guess that things are on hold with the public until the funeral of the Queen is over and then it will really start up. Maybe more so because the weather may have turned much cooler by then. As the pressure ramps up, that is when people will turn out onto the streets.

    I think that Scholz has announced that he will put Bundeswehr soldiers in the streets next month to keep order in case of unrest as ‘Ordnung muß sein’. Truss may want to do the same but as the British Army has only 80,000 members and the population of the UK is about 67 million, they may have their work cut out for them. That is, unless they side with the protestors.

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    1. Polar Socialist

      The Heer only has about 63,000 personnel, whereas the German population is 83 million. So Truss seems to have better boots-to-paupers ratio at her disposal.

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      1. The Rev Kev

        Wikipedia is telling me that the Bundeswehr has about 184,000 personnel but as you say, it is still a low boots-to-paupers ratio.

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        1. Polar Socialist

          That is, of course, correct. But since you were talking about British Army, I assumed only the land forces component of Bundeswehr would be a suitable comparison.

          Pilots and submariners would anyway be too expensive specialist to be risked in a hand-to-hand conflict with properly equipped anarchists.

          Back to the actual topic, it seem that most western European countries have put their riot polices in good use at one time or the other. So it may still be some way to go until the helping baton of military will be required.

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          1. JTMcPhee

            Are there any “properly equipped anarchists” in the mix? That are not either agents provocateurs or under the Gov’s gaze and throttle?

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    2. Stephen

      Truss is a neo liberal, of course.

      She studied PPE at Oxford and is a Chartered Management Accountant, features I happen to share with her. Her pre politics career was relatively short but started at Shell, and then proceeded to Cable & Wireless, where she was Economics Director.

      Her background is the classic one that would see all possible reasons to avoid taxing upstream energy companies for windfall profits. Ordinarily I would too but we really are in extraordinary times and the theory of second or third best is relevant. There needs to be some mitigation of unearned corporate upside rather than just assume that ordinary taxpayers should foot the bill, which is what this scheme says. The government is just hiding and delaying the way that ordinary taxpayers will fund the war.

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    3. Boris

      I think that Scholz has announced that he will put Bundeswehr soldiers in the streets next month to keep order in case of unrest as ‘Ordnung muß sein’.

      Sorry for contradicting you, but Scholz has not announced anything like that. It is a rumor spread mostly by right-wing scources, based on one thing that is really happening: the Bundeswehr is doing a bit of restructuring, creating a new Command to coordinate military help in cases of natural catastophies called: „Territoriales Führungskommando der Bundeswehr“. This new Command has no new authority to act, it will just do what the BW always could do, and using the military against civil unrest has very high legal, constitutional, hurdles.
      I utterly loath our current german government, but Im very, very sure there will not be any military in the streets to act against the protest that will come.

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      1. The Rev Kev

        I certainly hope not. I’m thinking here of how the French were trying to crush the Yellow Vests a few years ago and hope that Scholz is not thinking along the same lines. Certainly the British government would bring police out onto the streets to crush protestors. Scholz is getting pretty desperate now and desperate people do stupid things. Remember, he is willing to see Germany become de-industrialized rather than change course which would also mean him getting the boot. So you ask yourself just how much damage is he willing Germany to receive because for him, it’s worth it? The Germany that I visited was very sensitive about things like using troops for civil actions but things have changed over the years about what is and what is not permissible.

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  4. JW

    Sorry but this is disingenuous . The cap is unit cost, ie p/kWh for gas and electricity. So large users will pay a lot more than one-bed flat for instance. The £2500 figure is the estimated cost of the average household gas and electricity consumption in a year after the application of the wholesale gas price subsidy.
    The p/kWh for gas is likely to be about 10p/kWhh and for electricity about 37p/kWh depending on the outcome of modeling undertaken by the regulator this month.
    The actual money will flow from the Treasury to subsidise the input price of LNG gas delivered to power stations and the gas transmission system. It will be added to government debt. Which is not usually clever but if as expected the result of the subsidy results in a decline of CPI, the interest cost could be covered by the reduction on index linked bond interest rate payments.
    Its probably the least worst sticking plaster solution available. As long as supply is actually increased and the also announced ,and ignored in this article, cfds at lower prices and longer duration for unreliables and nukes are negotiated, it might just be OK.
    I strongly suspect Deiter Helm had a hand in this, not someone ‘wet behind the ears’.

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  5. Revenant

    Unreliables! I like it. How will the deplorables heat their hovels? With the unreliables.

    This may involve Dieter Helm but our friend John Mills was just appointed the civil servant in charge of hot potatoes (one for each family member, nutritious *and* a hot water bottle, pray there is no blight this winter…), aka Director General, Energy Supply and he is no fool. He read SPS (Social and Political Sciences) and then an MPhil in Criminology.

    Bizarre Guardian puff piece about the appointment here. Not sure who was being signalled to, normally senior civil servant appointments are fodder for the Times but they wrote nothing about him:

    https://www.theguardian.com/business/2022/jul/10/how-to-keep-the-lights-on-uk-gears-up-for-worst-case-energy-scenarios

    However, if Liz Truss had any gumption, she would accuse the unreliables of war profiteering and rip up the marginal price energy system. Do it for Ukraine, Liz! You could kneecap Labour with a concrete material benefit for Red Tories that EU membership would forbid *and* deliver a more sustainable energy system into the bargain.

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    1. JW

      If the new cfds are negotiated well, financially they have a similar effect of diluting the effect of the marginal price, the unreliables and nukes get paid something more like cost plus.
      Madelaine McTernan to run the contract negotiations with energy suppliers ( wholesale not ‘electricity retailers’). Ex Freshfield, Lehmans, Credit Suisse M&A. If she has had energy experience in those roles she might be a good pick.

      Reply
  6. Alex Cox

    Murphy writes, “there will be no windfall taxes on profits arising from the exploitation of war, which is quite extraordinary and was well dealt with by Keir Starmer.”

    What does he mean by this? Is he saying that Sir Starmer has called for a windfall tax on war profiteers? Starmer has done no such thing. He has proposed a windfall tax on oil companies. Of course, oil companies profit from war, but there are many other profiteers: BAE Systems, Airbus, Rolls Royce, PW Defence, Babcock, et al. Since he is not in office what he says is irrelevant. He has form, and if a Starmer government were ever elected we know what will happen to his promises and proposals.

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  7. sadie the cat

    Can someone please explain how “windfall profits” are calculated. The figure of 170Bn over 2 years has been mentioned but how is that figure derived?

    However they are calculated, if they are unearned, then I agree w/ taxing them.

    Also, if the consumer price is capped and the government pays the difference between the supplier’s price and the cap, doesn’t that create an incentive for the suppliers to keep upping their prices? No cap on them. It seems unseemly that they would but what’s to stop them?

    Reply

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