Some thoughts on the proposed #energy bill freeze... 🧵

Based on media reports, the idea is to cap the unit cost of energy by subsidising suppliers so that they do not have to pass on higher wholesale prices in full, either to households or to businesses… (1/10)

#energycrisis
On the plus side, this would lift the huge cloud of uncertainty which is now hanging over the whole economy. The peak in #inflation would also be much lower.

With this plan in place, the new government can score a big 'win' and quickly move on to other priorities... (2/10)
But this is another huge intervention which will distort markets even further, mainly help higher users of energy, and could be very expensive.

Consumers will still have some incentive to reduce bills by using less energy, but much less than if prices were free to adjust. (3/10)
A freeze on energy bills would be a blanket subsidy for everybody, and potentially unlimited.

In contrast, #furlough was much better targeted (the government only paid towards the wages of those who were unable to work), and it was capped (at 80% of average earnings). (4/10)
The balance here depends on many unknowns, notably the level at which the price cap would be set, how long it would last, how much this would cost (which would also depend on what happens to wholesale prices over the life of the cap), and how this would all be paid for... (5/10)
My own rough estimate is that fixing at the current (April) #Ofgem cap, for two years, would indeed cost around £100 billion – just for households.

This is based on the latest wholesale prices, which are unlikely to remain this high, but of course we cannot bank on that. (6/10)
There might be some savings to reduce the net cost. If bills were not frozen, the government would presumably have had to provide more targeted support anyway, probably in the tens of £billions. Lower inflation could also reduce the debt interest and social security bills. (7/10)
But fixing instead at the new higher (October) level could roughly halve the cost – say to £50 billion.

This might require some extra top ups for the most vulnerable households. Repeating Rishi Sunak’s package for those on benefits might cost another £10 billion... (8/10)
The other big issue is how to pay for this. Energy suppliers originally proposed a surcharge on customer bills over ten to twenty years.

But it would probably be better (cheaper and more progressive) just to cover this cost with additional government borrowing… (9/10)
Obviously, the bond markets won’t like that. But other countries are also likely to have to do similar things, and a deep recession would be even more damaging in the long run.

This could therefore be the worst plan – apart from the all the others. (10/10)

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More from @julianHjessop

Aug 11
A few features of the #energy market that Gordon Brown (and his many fans here) don't seem to understand... 🙄

1. Energy suppliers are not the ones making big profits. None of his ideas - including #nationalisation - would reduce the prices they have to pay in global markets.
2. The Ofgem price cap is already based on an assessment of the ‘actual costs’ of supplying energy, including a small profit margin. As such, the cap already forces suppliers to ‘keep prices down’...
3. North Sea oil and gas profits are already taxed at a headline rate of 65%. Raising this even further - in an ad hoc way, and retrospectively - would send a terrible signal to all businesses thinking of investing in the UK.
Read 5 tweets
Jun 9
A quick 🧵 on the potential economic impact of the rail strikes.

In short, not a game-changer, but certainly another blow the UK could do without... 🙄 (1/5)

#RailStrikes
Unions must give warning, so there is some time to make alternative plans.

The series of 1-day #strikes (Tue 21, Thur 23, Sat 25) might be less disruptive than a single, prolonged stoppage, because some customers may be able to reschedule their use during the breaks... (2/5)
Some of the costs to the economy could also be reduced by ‘home working’, and by the diversion of leisure spending to other activities.

Nonetheless, there will be significant disruption to passenger traffic, and possibly to freight, including supplies of essential goods... (3/5)
Read 5 tweets
Mar 22
The UK government borrowed about £5bn more than expected in February, as higher debt interest costs offset a rise in tax revenues.

But favourable revisions to past months mean that borrowing is still on track to undershoot the OBR forecast for FY 2021-22 by about £24bn... (1/4)
Looking forward, rising #inflation will keep debt servicing costs high. But OBR analysis (Box 3.2 Oct EFO) has already shown that an inflation shock is likely to reduce borrowing overall, thanks to the boost to revenues, even with much larger hikes in interest rates... (2/4)
#Inflation will surely reduce the burden of #debt relative to national income, especially with real interest rates likely to remain low - even negative - for the foreseeably future.

Indeed, debt has already fallen to 94.7% of GDP, from a recent peak of more than 100%. (3/4)
Read 4 tweets
Jan 14
Just updated my UK #GDP forecasts with today's data... 🤓🧵

Some key points and international comparisons

1. UK economic growth in 2021 is likely to be just shy of 7½%, 1% higher than assumed in the October Budget and 3% higher than the consensus at the start of last year... 👍
2. This means that the UK was almost certainly the fastest growing G7 economy in 2021.

Many like to dismiss this as a 'dead cat bounce' after the relatively large fall in 2020. But the UK still did much better than expected, even taking account of this favourable base effect...
3. To illustrate this, this chart compares different vintages of the OECD's forecasts for last year.

In December 2020 the OECD expected the UK to grow by 4.2% in 2021, and to be outpaced by France and Italy. This turned out to be the biggest forecast error for any G7 economy...
Read 10 tweets
Jun 11, 2021
Some more thoughts on the economics of delaying #FreedomDay (please read the whole thread before shouting at me!).

Keeping the remaining Covid restrictions for a few weeks longer would be unlikely to derail the recovery, but could still have some significant impacts… (1/6)
The sectors that are still severely restricted account for less than 5% of GDP, and most are already open to some degree.

Money not spent in pubs or nightclubs (or holidays abroad) can also still be spent elsewhere in the UK economy... (2/6)
The direct cost of postponing Freedom Day would therefore be relatively small compared to full #lockdowns, probably no more than 2% of GDP, or less than £1 billion for every week of delay.

That’s not peanuts, but nor is it prohibitive. (3/6)
Read 6 tweets
Jun 11, 2021
A bit more on today's UK trade data and the impact of #Brexit...

It helps to look at #imports and #exports *separately* - the stories are quite different.

The relative weakness of UK trade with the EU is mainly on the *import* side, which is only partly Brexit related... (1/6)
A lot is also due to problems in the car sector (e.g. global shortages of parts) and the relative weakness of demand for cars, which we mainly import from the EU, compared to goods we import from the rest of the world (e.g. clothing & PPE from Asia)... (2/6)
There may also be some cases where UK imports from the EU are being replaced by imports from the rest of the world, or local production.

But if consumers were happy buying from the EU before #Brexit, new trade frictions that hinder this are not obviously a 'good thing'... (3/6)
Read 6 tweets

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