Friday , August 12 2022
Home / Economy / A predicament in three parts

A predicament in three parts

Voiced by Amazon Polly

There was always something Marie Antoinetteish about the UK government’s decision to appoint a tech millionaire as its “cost-of-living Tsar,” but then critics have renamed SW1 “Versailles on Thames” for good reason.  Anyway, no sooner had Mr Buttress got his feet under his new desk than he has sparked controversy.  The answer – which, apparently, no economist or policymaker in the realm had spotted – to the cost-of-living crisis is for businesses to cut their prices… if only someone had thought of it earlier!

The representatives of Britain’s businesses have been quick to hit back, as Michael Race at the BBC reports:

“The Federation of Small Businesses said asking struggling companies to ‘soak up additional costs just isn’t realistic’…

“Martin McTague, national chair of the FSB, said most small firms were ‘well beyond the point of being able to absorb extra costs without passing them on, which is often a last resort… Asking this group to soak up additional costs just isn’t realistic, especially when so many are worried about basic survival, and have already cut all expenses, even necessary ones, to the bone.’”

According to business leaders, it is for government rather than businesses to act to curb rising prices:

“Mr McTague argued there was ‘much more the government could do to help’, such as reducing VAT rates to lift more small firms out of business rates, ‘rather than just a marketing campaign using taxpayer resources to put government branding in shop windows’… Meanwhile Kate Nicholls, chief executive of industry body UK Hospitality, said bars, hotels and restaurants were ‘already highly price competitive’ while it was also facing ‘colossal input costs that make price reductions extremely difficult’.

“’Energy costs are up 74%, goods 55% and labour up 54%, for example,’ she said. ‘While government efforts to help consumers are always welcome, the reality is that just one in three hospitality businesses are now profitable.’”

The bigger criticism is reserved for the government itself:

“The boss of Wetherspoons, Tim Martin, said the campaign proposal was a ‘classic example of tinkering, instigated by ministers who really don’t understand money’.  ‘The main economic critique of this government is that it doesn’t have an overarching plan, but just reacts to events, like a doctor who only treats symptoms, not the cause,’ he added.”

The UK government for its part is attempting to hold pay increases below inflation in an attempt to avoid a 1970s-style price-wage spiral – with the prime minister arguing that there is no point giving public sector workers an inflation-busting pay increase.  Johnson’s comments echo those of £500k-per-year Bank of England governor Andrew Bailey earlier in the year, when he came under fire for urging Britain’s workforce to forego pay increases following TUC leader Frances O’Grady’s insistence that “Britain needs a pay rise.”

Meanwhile Britain is experiencing a wave of strikes as railway workers, postmen, university lecturers and legal aid barristers stage walkouts over falling pay and conditions.  As Jonathan Moules at the Financial Times reported last week:

“More worrying for the government, the demands for significant wage increases are spreading across other key professions. The UK’s main teaching unions are threatening to strike in the autumn if the government cannot provide an inflation-busting 12 per cent pay rise for their members.

“Rolls-Royce’s attempt to allay its workforce’s concerns about the rising cost of living with the offer of a 4 per cent pay rise and a £2,000 cash lump sum rebounded on the engineering group when it was rejected by the Unite union, which represents thousands of the company’s staff.”

Which brings us full circle back to David Buttress’s attempts to encourage businesses to find ways of absorbing their rising input costs in order to cut prices to the end consumer.  And this tells us that we are stuck in a predicament – something that cannot be resolved – rather than a problem – for which solutions might exist.

After decades of neoliberalism, most businesses have already squeezed out the inefficiencies and are now operating hyper-efficiently.  Indeed, many – particularly small – businesses are coming to the end of the cash they had in the bank.  And with interest rates being raised in a vain attempt to make imported oil and gas cheaper, banks are more reluctant to lend to businesses which were already struggling to service existing debt.  Rising interest rates also have the perverse effect of sucking investment capital away from the productive sectors of the economy and into unproductive financial assets.  So that companies that might otherwise lower their costs through automation – using cheap machines to replace expensive workers – are far less likely to attract funding.

Nevertheless, Buttress has a point insofar as it will be those businesses which can keep prices down which are most likely to survive the unfolding depression.  This is because – despite the media claims of a “summer of discontent” – Britain’s remaining – mainly public sector – trade unions are a mere shadow of their 1970s power and, crucially, are negotiating from a position of weakness.  Railway bosses, for example, will have saved millions of pounds in wages and fuel costs during last week’s stoppages – which, in a new age of working from home were far less disruptive than expected.  But the loss of earnings for workers already facing an eye-watering cost-of-living increase are unsustainable in the long-term.  And insofar as workers are not in a position to force wages up, then demand across the economy is going to collapse.

Indeed, the discretionary sectors of the economy have already been hammered, with business insolvencies in May running 80 percent higher than in May 2021, as consumers switch their spending to cover the rising price of essentials like food, household energy and fuel.  Indeed, inflation in these discretionary sectors of the economy has already fallen close to its pre-pandemic levels.  The headline 10 percent inflation figure is almost entirely due to the increased cost of food (fertiliser and imports), gas, electricity, petrol, diesel and second-hand cars – all items that neither the state nor the central bank can do anything about, and which will only reverse as a result of widespread “demand destruction” – i.e., mass company closures and unemployment.

The short-term means by which the state might intervene to reduce the cost burdens on businesses and households alike is to make big cuts to indirect taxes like VAT, energy standing charges, and fuel duty, together with direct taxes like the UK’s antiquated business rates.  Given that, for example, duty and VAT account for half of the price of petrol and diesel in the UK, a big cut could wipe out a large part of the inflation currently besetting the economy – including the knock-on rising shipping and delivery costs faced by most UK businesses since the lockdowns ended.  Government has already done something similar on a small scale by providing rebates on the Council Tax paid by Britain’s households – although this is largely an attempt to avoid having to raise the Universal Credit rate, which was cut by £20-a-week once the lockdowns had ended.

The problem for government though, is that it is already facing tax shortfalls just at the point when inflation and rising interest rates are driving up its repayments to the holders of government bonds.  For those readers not familiar with the way currency is created, taxation comes at the end of the process rather than at the beginning as so many of us were brought up to believe.  That is, government issues IOU’s (bonds) in exchange for currency held by banks and other approved investors.  The interest and the final repayment of these bonds comes from the taxes levied on businesses and households.  But at a time when business failures are high and household income is being squeezed, government is facing difficulties raising the taxes it needs.  Cutting taxes still further risks deterring potential bond investors, thereby lowering the value of the Pound.  This, in turn, results in higher inflation as the cost of imports – upon which the UK is heavily dependent – rises even further.  So that, while it is true that the UK state could make some temporary tax cuts, its more pressing problem is finding ways of replacing the anticipated tax income which will not be paid.

Put simply, all three actors in this unfolding drama – Businesses, Households, and Government – find themselves locked into predicaments – Insolvency, Unemployment/Under-employment, and Tax-shortages – for which there are only least-bad choices and no easy ways out.  And viewed from within, the problem for each appears to be the fault of one or both of the others.  The stark reality though, is this is what an economy in overshoot looks like. 

We passed the point of peak oil in November 2018 and are now experiencing the impact of “peak everything” as the true energy cost of our consumption comes home to roost.  The only theoretical solution would be for clever people somewhere either to find another massive deposit of cheap oil that we somehow overlooked, or to develop some yet-to-be-invented cheap and abundant energy source to replace oil (clue – it isn’t wind, solar or biofuel).  These highly unlikely options aside, the only choice before us is to shrink our economic activity sufficiently to bring it into line with the energy available to us.  All else is merely a squabble over who is going to eat the losses.

As you made it to the end…

you might consider supporting The Consciousness of Sheep.  There are five ways in which you could help me continue my work.  First – and easiest by far – please share and like this article on social media.  Second follow my page on FacebookThird, sign up for my monthly e-mail digest to ensure you do not miss my posts, and to stay up to date with news about Energy, Environment and Economy more broadly.  Fourth, if you enjoy reading my work and feel able, please leave a tip. Fifth, buy one or more of my publications

Check Also

The great unravelling

Real life Bond villain Klaus Schwab has become the focus of ridicule following crude attempts …