It’s six months this week since Russia invaded Ukraine and, let’s face it, things could be going better. The conflict is dragging on and the economic costs of the war are rising. Europe has been pushed to the brink of a deep recession by the Kremlin’s weaponisation of energy.
But it is not just that Vladimir Putin has killed off the global recovery that followed the end of lockdowns. Just as significantly, he has also driven another nail into the coffin of laissez-faire economics. For the second time this decade, Britain – along with the rest of Europe – is on an economic war footing. Radical action is needed to prevent an economic catastrophe this winter, just as it was when Covid-19 arrived in early 2020.
Earlier this month the Bank of England predicted inflation, already at 10.1% would peak at 13%. That was before Russia’s state-owned Gazprom announced unscheduled maintenance work on one of its pipelines. Citi, a US investment bank, is predicting the annual increase in the cost of living will reach 18% next year, the highest since the mid-1970s. Britain is still affected by the spiralling global price of gas even though it is no longer importing energy from Russia.
Inevitably, workers are unhappy that their living standards are being hit by rising prices and are seeking higher pay to compensate. There are rolling strikes on the railways. An eight-day dock strike in the UK’s biggest container port, Felixstowe, began earlier this week, as did an indefinite strike by members of the Criminal Bar Association in England and Wales. The Royal Mail is next in line for industrial action.
Meanwhile, the Bank of England is raising interest rates in an attempt to prevent a wage-price spiral. Threadneedle Street accepts a recession and higher unemployment are needed to bring inflation back to its 2% target. There is no question that a winter of misery and discontent lies ahead.
Liz Truss and Rishi Sunak both have plans to help, but in no way do they match up to the scale of this crisis. Somehow or other, the government needs to step in and freeze energy bills, for consumers and businesses. That could take the form of state-backed loans to energy companies. It could be achieved by the government footing the bill, as it did with the furlough scheme. The cost will be enormous, but the alternative is the sort of economic collapse that was avoided by the emergency package of measures designed to mitigate the impact of lockdowns.
Sunak says borrowing tens of billions of pounds to freeze energy prices is a risk, but not nearly as big a risk as letting the energy price cap rise to £3,500 a year in October and to over £4,000 a year in January. The energy companies know that millions of their customers won’t be able to afford to pay their energy bills, which is why they are pressing ministers to act now and act big.
For Truss, the frontrunner to be the next prime minister, this may be hard to swallow. She is an enthusiast for market solutions to Britain’s problems, and seems blissfully unaware of two things: first, that market solutions to the energy crisis will mean the country goes broke; and second that the events of the past two and a half years were a turning point.
For the past 40 years the world has been organised along neoliberal lines. This has involved long and complex global supply chains, privatisation, deregulation, small government, weak trade unions and a dedication on the part of independent central banks to keeping inflation low.
The world that emerges from the chaos caused by a combination of the pandemic and the war will be different. Supply chains are going to be shorter as countries aim for self-sufficiency in food, energy and industrial components. There is going to be a wariness about being over-dependent on autocratic regimes for key commodities. There will be pressure for much tougher regulation of utilities and even renationalisation. Governments will get bigger and a shortage of workers, amplified by an ageing population, will shift the balance of power away from capital and towards labour.
Support for Ukraine remains strong but it is not unconditional. Voters expect governments to step in and protect them from the knock-on consequences of their foreign policy decisions. It is not really tenable for governments to be strongly interventionist abroad and non-interventionist at home. The austerity programmes of the early 2010s were the last knockings of a small-state philosophy that said governments were pretty much powerless in the face of global forces and the best thing they could do was get out of the way.
When the pandemic arrived in early 2020 it was clear the state had a big role to play. Having set a precedent with furlough, voters now expect governments to protect them from the equally serious threat posed by spiralling energy costs. It is no coincidence that a widening of Labour’s opinion poll lead followed the party’s call for a freeze on energy bills. The public is ready for more interventionist economic policies.
That’s not to say it necessarily wants the state to run everything. Nor does it mean that the UK – and other western countries – will be permanently run by left-of-centre governments. Centre-right parties might be willing – as they were in the 1950s and 1960s – to embrace the idea of a mixed economy and a better deal for labour. Ronald Reagan once said the nine most terrifying words in the English language were: “I’m from the government and I’m here to help.” Only the bravest of politicians would repeat that message to a family struggling to pay the gas bill this winter.
Larry Elliott is the Guardian’s economics editor
