The Coming "Fiscal Event"
So, we know that there is an upcoming "Fiscal event" planned for this month. I have heard many people misunderstanding this fiscal event as the tories are calling it. So I'm here to talk about it.
I think the first thing we need to talk about is what exactly is a Fiscal Event? I mean, it's not an emergency budget, it can't be, I mean a new national budget would require the sign-off of MPs. I would mean we have four days of debate in parliament discussing various parts of the new budget, known as resolutions, and then after this, a finance bill must be passed by both houses of parliament to take effect.
In my opinion, if it quacks like a duck, swims like a duck and flaps like a duck. It's probably a duck. But no, this is not a budget, despite the fact that it will have wide sweeping changes to the economy, from taxes to levies, spending to borrowing. This... event, will be the largest reshaping of the economic landscape of Britain we have seen since the introduction of furlough payments.
Many people are calling it for what it is, a mini-budget. In my opinion, if The Right ahem... "Honourable" prime minister Liz Truss believes she at least has the backing of her own party, as we all know she doesn't have the backing of the country. Then she should tell her new Chancellor Kwasi Kwarteng to present the budget as a budget and see what the house has to say.
Because I don't think the house would back her on this, I don't think she can clear command the house, or even enough of her own party to get through what she has announced so far. Increased spending on the back of lower taxes is a hail mary. If it works, and that is a big if, it could stimulate the economy. Possibly... Maybe...
But if it goes wrong, and it will almost certainly go wrong, it will continue to fuel the inflation that we currently are seeing in the UK to levels we haven't had for half a century. On top of that, we will see masses of people below the poverty line at levels not seen since Margret Thatcher was occupying number 10.
To me it looks like she is betting the house and hoping it pays off, it's a long shot, if it does, she may just last, but if it goes awry, I can't see her lasting into next year. But this is only my opinion, what do you think? Can she pull it off, will the hail mary work? Let me know in the comments below.
-Spec.
My understanding is that the emergency 'fiscal event' is saying there will be an announcement on budget by the end of the month, after the observed period of mourning (Operation London Bridge/Spring Tide/Unicorn, government plans for suspended activity after the Queen's death). After this we should see what the actual change in fiscal policy is. All that I'm aware of is Truss's intention to cap energy costs to £2500 per household, annually. I'm unsure how this will be put into effect, but I can only assume there will be energy shortages resulting in many homes without utilities. If this doesn't happen, then we may see households over consume energy on the promise they won't have to pay more (which could attract attention from crypto miners, particularly). For the government to keep its promise (which is a hilarious concept), they'll need to borrow some money. I'm barely aware of how that functions in the U.S., so I don't want to speak out of depth on how it works in the UK, but my understanding it that this borrowing (by selling treasury bonds, or whatever silly word you Brits have for it) will reduce the available total float of dollars (or rather, pounds) which strengthens the currency. Blah blah, supply, demand, scarcity, whatever. Now that there's less dollars available to borrow, it costs more to borrow, so interest rates rise. Higher interest rates hurt projected growth, and hinder the ability of employers to hire and pay workers. This can lead to a recession, or an economic downturn, resulting from crushed aggregate demand caused by this tighter job market.
ReplyDeleteYou see its weird. We call it an energy cap but it isn't really a hard cap. It is an estimated cap based on the average household in the uk. It's a per unit price cap that *should* add up to the 2500 cap over the year. But if you use more power than average it will be higher. Ours will be higher as both me and mum are home most of the time so we use more energy than the average household where they usually go to work and don't use much energy while away from home.
DeleteHowever, this borrowed money isn't meant to be parked at the Treasury, it's going to be used to cover energy consumption costs, which will only reduce inflation as long as that cash isn't moving back into the economy. So this transfers wealth to the energy companies, and through them, to the energy resource suppliers (Norway, Russia, the US, whoever you get your oil and gas from). Also, these sold bonds will eventually mature, and those who purchased them will expect a larger return, and this increase in cash will have to be made up somewhere (taxes).
ReplyDeleteThe idea of endlessly consuming energy on the government's dime is only possible if the energy supply is there. The government has little control over the supply of energy, so they have to focus on curbing demand. One way to kill demand is to put a cap on consumption, which could be enforced with rolling blackouts, disabling utilities to those who are over consuming, or other limitations on utility service. Another way to kill demand is to get rid of the consumers altogether, and with war currently being waged between close neighbors, the possibility that energy demand in Europe may come crashing down unfortunately can't be dismissed entirely.
Assuming demand won't implode due to loss of energy consumers, I still look to the rest of the Europe and how they fair facing the energy crunch with their economies in a very similar standing. Germany in particular is a massive energy importer, getting much of their energy from Russia and France (fact check me, I may be misremembering). As an energy importer, they're poised to take a beating from the energy crisis, and their economy will be one to watch. If they manage not to kill all their citizens through armed conflict, freezing, or starvation this year, I expect them to have a substantial bill to pay. They'll need to do some energy subsidies as well in order to keep the country and economy afloat. The UK may be able to react to Germany's fiscal decisions this year to maintain the pound's superiority over the Euro.
Lastly, immigration may impact the ability for the UK to manage this energy crisis. As war continues in Europe, refugees will be displaced. Apart from refugees, if the UK is seen in a significantly more advantageous position than other European countries, it may become the destination not only for refugees from the war, but also immigrants seeking economic asylum and financial stability. This could further strain the ability of the UK to keep the lights on, as the number of energy consumers increases. More people means more workers, and more workers increases the pressure to create more jobs, which should result in lowering interest rates in order to stimulate job growth.
I'm tired, and I've been rambling for a while now. So to conclude, Yes, I think Truss can pull it off and keep the lights on, but the impact of these decisions will be felt by everyone in the UK, and they'll be left with the bill.