Crunch time for the UK: The drastic changes needed to save the economy
Dr Roger Gewolb, fair finance campaigner, business entrepreneur, broadcaster, and geopolitics/economics expert analyses the slowdown in the UK economy and lays out why the essence of growth lies not in economics or politics, but in people.
Last month’s slowdown in the UK economy is having disastrous consequences. August was difficult for the services sector and constant unwarranted increases in interest rates are reducing spending when there is no overspending and cooling the job market and overall productivity. All this factors into a higher cost of doing business in the UK, a major deterrent to growth. Fuel price rises In August were almost the biggest in more than two decades; filling a tank with petrol is now £3.74 more expensive, whilst filling a tank with diesel now costs £4.41 more.
Think Tanks are predicting tens of thousands of insolvencies amongst British businesses due to these high costs and continuing ill-managed Bank of England monetary policy, supported by a Government and opposition that should know better. This on top of Jeremy Hunt’s disastrously timed one-third corporation tax rise on the first of April, to 25%, has created an additional burden for businesses that are naturally passing these costs on to British consumers, further feeding the still raging cost-of-living crisis blaze. And, on top of this, we also have higher energy bills.
If matters appear out of control, they are, and the UK economy is now entering dangerous territory with weak economic growth and sticky inflation weighing on the future of our hoped-for post-Covid economic recovery. We need some drastic changes of direction and probably some new leadership to carry them forward.
The warning signs
Forecasting UK interest rates to peak at 5.5% this month, as too many experts have suggested, is one thing; supporting this as the best strategy to lower inflation is a huge economic mistake. Mr Bailey finally gave a more positive message, when responding to questions from MPs on the Treasury committee, hinting that interest rates were already in “restrictive” territory and that the central bank is “much nearer now to the top of the tightening cycle.”
“It would take only the tiniest of tilts for us to enter recessionary territory,” former BoE Chief Economist Andy Haldane said when interviewed by Sophy Ridge on Sky News Politics Hub this month.
The Bank of England’s Chief Economist Huw Pill claimed that a “higher for longer” approach, rather than sending rates to a steep peak only to lower them shortly after, would be better, and while Bailey is trying to save his inflation failure exposed by Andy Haldane’s claims, the UK economy is still set to flatline for the next six months, which will feel a lot more like a recession for millions of ordinary Brits, whatever waffle the “experts” and politicians try to gaslight us with.
I strongly believe it is time for our “leaders” to rethink inflation and I agree with Haldane when he says that the Government doesn’t look at growth and investment in the right way. They are worried about spending, wages, and public debt, but the right investment programme would produce attractive long-term returns. I don’t believe in big interventionist governments and higher taxes. Still, I believe there is a very easy six-point plan that could save the UK economy, something I have spoken about in several TV interviews.
Untangling energy bills
Stop raising interest rates and bring the rates down, slowly and gradually, as they should have brought them up in the first place, rather than all at once. Introduce a temporary relief on VAT, of 6/12 months. I also believe that the Government could easily reduce the tax on petrol/diesel, that’s a triple tax and it’s far too high and economically damaging. Decoupling the price of electricity from gas will reduce household and business energy bills by a staggering amount immediately (as opposed to interest rate and tax cuts that take a long time to work through.)
In fact, household energy bills won’t be returning to the levels we saw in 2021-22 anytime soon; it is finally time to break the link between gas and electricity prices. Two-thirds of our households’ energy bills are electricity, and as much as 80% of that electricity has nothing to do with gas but is priced off the international gas market price, that Putin of course manipulates. Think Tanks estimate that we overpaid £7.2bn for our electricity in the last two years alone, and one research study estimated that we would knock £1,500 off our energy bills by teatime if we decoupled (this when average energy bills were heading for £4,000 annually.)
The UK Government’s Department for Energy Security and Net Zero launched a Review of the Electricity Market Arrangements (REMA) in July 2022, which would include exploring changes to the wholesale electricity market that would stop volatile gas prices from setting the price of electricity produced by much cheaper renewables. We have yet to find out what kind of proposals for packages of reforms will be put forward, and another consultation should happen in autumn 2023 but there are short-term solutions that have been implemented, like Spain and Portugal have done with the ‘Iberian price cap’ introduced in Portugal and Spain in June 2022, which is a ‘dynamic’ price cap on gas used for power generation and the Electricity Generator Levy in the UK, which works effectively like windfall taxes.
It is crucial to address the issues in the electricity market. Nevertheless, it is unclear if either of the major political parties would be ready to decouple right away. Decoupling can be a viable alternative to the ongoing Electricity Generator Levy that only serves to benefit the Treasury. By making this switch, we can generate £3bn and lower our bills at the same time.
The banks have received the windfall of a huge amount of money thanks to interest rate rises, and the Government should bring in legislation to make banks pass on a sensible proportion of these rate rises to savers. Jeremy Hunt should reverse the massive increase of corporation tax for now.
The truth about consumer spending
As an American Brit, I find myself questioning why most experts believe that the Bank of England has ‘no choice’ but to increase interest rates again, for a 15th consecutive time on 21 September, if the US increases its rate. There are two immense differences between the US and the UK and their respective inflations. Firstly, the US has its own energy supply; the UK does not and is subject to the swings and roundabouts of the international market, especially gas, which is still erroneously linked to the price of our electricity and makes it far more expensive than need be.
The second factor is, as most experts have also pointed out, the “robust consumer spending” prevalent in the United States, where some $1.7trn (£1.3trn) in spare funds has been built up by consumers over the pandemic and is now being spent with alacrity. No one could accuse the United Kingdom of engaging in robust consumer spending today, could they?
The essence of growth lies not in economics or politics, but in people. In this country, many have seen their wages increase, but not enough to keep up with the rising cost of living. Others realise that their jobs are changing, and they need to learn new skills to find better-paying employment. The lack of growth is also making it impossible to invest more money in the healthcare system, schools, and transportation. We have all seen how much more funding they all require. The recent RAAC scandal is just an example, but there is uncertainty about the future of those services, also exacerbated by high inflation, delays in capital investment, and strikes.
Jeremy Hunt recently stated that there will be no tax cuts in his Autumn Budget. Controlling inflation is crucial for the Chancellor and the PM. However, people’s disposable income is decreasing. For instance, the increased pension money due to the so-called triple lock will be offset by stealth taxes. Hunt froze allowances, and as a result, more pensioners will have to pay income tax, which they didn’t have to pay before.
Currently, wages are growing faster than the inflation rate, but the unemployment rate is increasing. On paper, it appears that salaries are now surpassing the rate of price growth in the economy. However, for millions of families who have been struggling to make ends meet due to the energy-driven cost-of-living crisis, this is not the reality. Despite the apparent improvement in salaries, many families are still facing terrible financial difficulties and are at their breaking point. Our Government (and to a large extent the Opposition) steadfastly ignores all this and proceeds each and every day as if all 68 million of us are well-off middle-class citizens like themselves. It’s a joke.
Dr Roger Gewolb is a leading fair financial expert, entrepreneur and broadcaster. He’s also a champion of fairness throughout the consumer finance industry and a regular contributor to some of the biggest media outlets worldwide.