The big advantage is that it would also reduce overall inflation, which with energy bills frozen and, as promised, VAT on energy costs removed, would soon begin to undershoot the Bank of England’s dire predictions.
The Liberal Democrats have already proposed just such a course of action, and the former prime minister, Gordon Brown, something similar. Depending on where the price cap is set, however, the costs would be off the scale.
The Lib Dems have estimated the cost of capping energy bills at the current average of around £2,000 per household at an eye watering £42bn in the first year. Assuming wholesale gas prices stay where they are, this sounds about right. But at more than half what was spent on furlough, that’s one hell of an outlay. For how much longer can the public finances keep absorbing these crisis driven support schemes?
Thinking in the Truss camp is nevertheless surprisingly relaxed about such matters. Strongly rising inflation is leaving tax receipts in far better shape than generally anticipated. As reported by the Telegraph last week, high inflation is turbo charging the so-called “fiscal drag” associated with freezing tax allowances until 2026, yielding possibly as much as £30bn in additional tax as more and more people are drawn into higher income tax brackets, or four times the amount initially forecast by the Office for Budget Responsibility. Higher inflation is also putting rocket boosters on VAT receipts.
The extra borrowing required for Ms Truss’s tax cuts, and to fund mooted price controls on energy bills, may not in such circumstances be as much of a worry as it seems.
Historically, bouts of unanticipated inflation have benefited the public finances, allowing successive governments to “inflate away” much of the debt from World War 2. That in any case would be the gamble. What are the chances of it working?
I’m not saying it won’t, but we should be careful citing historical experience; it may not be much of a guide this time around.
And it’s not just because higher inflation raises the costs of servicing the Government’s mountain of debt – instantly through the stock of index-linked gilts, now a quarter of the total, and via higher interest rates, then slowly but relentlessly through central bank reserves, which thanks to quantitative easing now stand at nearly a quarter of GDP.
Higher inflation also means higher spending, at least in nominal terms. It’s a good sight easier to cut taxes than roll back the spending commitments of the state.
Liz Truss will probably beat Rishi Sunak, but she will lose the next general election & Latest News Update
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