What an almighty mess the British economy is in. To quote just a few of the stories from this week alone: inflation surged on Wednesday to a fresh 40-year high, and the Bank of England governor, Andrew Bailey, warned that it faced its “largest challenge” in keeping prices under control, and interest rates could rise next month by half a percentage point. Meanwhile, economists at UBS Global Wealth Management believe 99% of British workers are getting worse off, their pay not keeping pace with the price of food, energy and petrol.
The seriousness of this moment cannot be overstated. By the end of August, the energy watchdog Ofgem will set its new price cap for fuel bills. On current market trends, it is likely to push the yearly limit for the average household energy bill to a whopping £3,244. That is a 65% rise on the current cap, so a family paying £100 a month will pay £165. Market analysts believe it could easily keep rising into the new year. This will more than swallow up the government’s planned energy grant of £400. And where energy prices go, so too do food prices and the cost of other goods and services. For a government that has spent most of this year in crisis management and that will emerge in September with a new prime minister and cabinet, dealing with a policy agenda so urgent and all-encompassing will be as overwhelming as bailing out a dinghy in a hurricane. The most likely outcome must be that it will sink.
Away from Westminster, an unprecedented number of households will spend this winter choosing between freezing and starving. Many more will have no choice but to cut back on refilling the car, and buying items of school uniform or nappies. The personal-finance expert Martin Lewis is not indulging in hyperbole when he warns of civil unrest, of families just not paying their utility bills. Post-crash Britain has not had a can’t-pay-won’t-pay protest akin to the gilets jaunes of France but – after 15 years of repeated squeezes on living standards, the turmoil of Covid and the ignominy in which Westminster is now held – the prospect of one should concentrate the minds of politicians and policymakers.
What is so worrying is that the UK’s political and economic class seems to be viewing this new situation through the same old scratched and befogged lenses as always – and suggesting the same old failed solutions. On Threadneedle Street, Mr Bailey warns of a wage-price spiral – even while wages are falling. He and his team are raising interest rates, which will do nothing to suppress the rise of global oil prices but will choke off demand in the UK.
On Whitehall, ministers and Treasury mandarins seem unable to see that what is needed right now is spending, directed first at the poorest households in the UK and then to offer public sectors a fair pay rise. Instead, they are offering austerity and meagre pay rises that will have to be paid for by cutting public services.
Bleak as all this sounds, it is worth remembering one thing: the UK and Europe have come through worse situations in the past 100 years, and they have done so by breaking with economic and political dogma. That is what is needed right now: an end to Thatcherism on autopilot and an active, imaginative, compassionate state.
• This article was amended on 22 July 2022. A reference to “UBS Investment Bank” was corrected to UBS Global Wealth Management.
