24 October 2022

Middle class welfare on steroids is no solution to the energy crisis


When former Prime Minister Liz Truss announced her two-year Energy Price Guarantee, some of us noted with concern that this middle class welfare on steroids was a very expensive way of tackling the problem of higher energy prices. Towards the end of her month in power it seems her second Chancellor agreed, promising to review the scheme and propose something more targeted and hopefully fully funded by April. It seems likely that this approach will survive this week’s new leadership excitement.

The advantage of the Truss scheme was political clarity. Everyone, rich or poor, business or homeowner, could be reassured their bills would not rise by more than double the amount they paid in 2021 – and probably less, given a demand response to what are still much higher prices. The disadvantage remains that most of the people receiving it don’t need it. It’s a curious moral choice to force unborn taxpayers to pay for heating hot tubs and swimming pools for the well off today, even if it also covers those in genuine need. And even with the Government’s intervention, the price caps incentivise energy use beyond where it should be when gas is some 5-15 times more expensive than normal.

Curiously, it’s one of Sunak’s last acts as Chancellor that is bringing this point home to people. His £400 rebate scheme provides £67 of relief a month for six months. The first repayments have appeared on bills, and people are raising questions, particularly on social media and talk radio. We have affluent commentators and proud pensioners ‘who have never taken a pound of welfare in their lives’ asking how they can give it back. There are new campaigns urging people to donate the money to fuel poverty charities. These activists are doing what the Government should have done in the first place by using targeted welfare, not price controls, to address the problem.

This is a welcome mirror to behaviour we often see with champagne socialists – the people who demand higher taxes for everyone yet seem curiously reluctant to voluntarily donate money to the Government. Instead we are seeing an enthusiasm for reversing an unjust policy through personal acts of charity. It’s very small ‘c’ conservative, and bodes well for the political climate of acceptance come the spring, when it is likely the cap will be amended, at least for the better off and businesses with low exposure to energy bills.

But that is not guaranteed. The Conservatives, in power for 12 years, have grown indolent on cheap money, conditioning the public to expect the state to bail them out from every crisis with borrowing. This is less modern monetary theory  – the idea that if the state borrows to invest, it will never run out of money – than mañana mañana theory: the idea you can borrow with impunity and the markets will be OK with that forevermore. It was this that did for Truss.

The Government has only now started the work required to restore sound money – recognising that with a desire for future lower taxes, comes first the need for a smaller state, and the resolve to make those hard calls in the teeth of opposition from vested interests and hysterical MPs.

The next Prime Minister is, therefore, unlikely to repeat the universal cash transfer come April. It will though not have been a total disaster if it helps seed the ground for the hard choices to come.

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Andy Mayer is Chief Operations Officer at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.