Last month I went to visit friends in South Africa. One of the more interesting experiences was regular power cuts. Anyone who doubts that the most important factor in energy policy is keeping the lights on should experience regular power cuts. Keeping the lights on will not come cheap! The electricity grid is estimated to require investment of £54 billion to adapt to the changing way electricity is generated and used. Another £2 billion will be needed to restore the Rough depleted gas field off the east coast of England to its use for gas storage. Anyone expecting energy prices to revert to their pre-crisis level is going to be disappointed.
There are a couple of other interesting points on energy. The first is that we are now exporting electricity to Europe in a reversal of the normal flows. The second is that energy rationing in Europe this winter cannot be ruled out. This will have knock on economic consequences for the UK.
Adding to the uncertainty is what the Russians will do with gas supplies through the Nordstream 1 pipeline. It shut down for routine maintenance last Monday. Supplies are reported to have restarted today but at only 40% of capacity. This will place stress on European energy supplies with knock on ipmacts for the UK. UK gas prices are now 3 times the levels of this time last year.
This is not the only challenge to emerge from the EU. As interest rates rise then the debt issues of Italy come back into focus. Italy’s budget deficit runs at 6.1% of GDP, its debt is about 130% of GDP. At the time of writing this the Italian Prime Minister has resigned, this can only add to uncertainty and instability.
This demonstrates just how much the world has changed in a very short space of time. We face greater uncertainty, unpredictability and far more challenges than we thought were on the horizon less than a year ago. Inflation has taken, and appears still to be taking by surprise, far too many people who should have known better. We are struggling to bring it under control. The impact can be seen daily in rising prices.
At the District Council we are far from immune to inflation. Our biggest single cost is salaries and associated costs. We had budgeted for a 3% increase; most councils have budgeted for 2% but we decided to be prudent. Unfortunately I see from today’s paper, the FT, that public sector workers will be offered a 5% increase. The extra 2% will cost us about £1.5 million over the five years of next year’s Medium Term Financial Plan. There is no guarantee that the settlement will not be higher than 5%.
This will highlight the tensions between taxation and spending. With tax take at almost a 70 year high, it is unsurprising there has been a backlash against high taxation. The other side of the coin is that spending will have to be reined in or cut. It simply is not possible to have low(ish) taxes and high spending on a sustainable basis. Far too many people seem to subscribe to the Johnsonian view that one can both have one’s cake and eat it. This is a fantasy.
What exacerbates the tension in the UK is our abysmal economic performance over the past fifteen years. The Economist in June published an article entitled “Britain’s real problem.” Key points were:
- GDP growth now averages 1.7% p.a. compared to 2.7% before the financial crisis
- Productivity growth is 0.7% p.a
- If productivity growth had maintained its pre financial crisis level GDP per head would be £6,700 higher than it is.
Unless our performance improves, it is difficult to see the UK being able to afford, or willing to pay ever higher taxes to support the public sector it has. We currently rank 28th in terms of GDP per head. We are nowhere near as affluent a nation as we would like to think.
The latest data on inflation shows it still rising, now at 9.4%, exceeding projections and, by most estimates it has not yet peaked. It is at the highest level for 40 years. Inflation is pushing up the amount of money the government needs to borrow. The latest figures for June show that borrowing was amere £22.9 billion, £4.1 billion more than last year. Interest payments on debt were £19.4 billion for the month.
We could be facing a “perfect storm”.
One of the interesting asides I picked up at the latest Local Government Association Conference I attended was that Germany spends eight times as much on economic development as the UK. Germany ranks 19th in terms of GDP per head. I wonder why?
Whilst we cannot do much about the national picture, we are determined to do everything we can to create and shape a prosperous future for our District. Growth brings with it more and better jobs and increased tax revenue. The price is more development. The choices, however, are pretty stark; either increased prosperity or slow gentile decline until it’s too late to recover.
Much of the time and energy we spend on cajoling, persuading and convincing key players to invest in the District goes unseen until the final stage. It is this preparatory work, however, that delivers the goods. We make it very clear that we are “open for business”.
The final two sentences from The Economist article put the picture better than I could:
“If Britain is to avoid a bleak future it must grasp reform. That will require a once-in-a- generation show of political courage, persuasion and policy ingenuity. Just like four decades ago, there is no alternative.”
Actually, there is. We can pretend it will all go away. But it won’t.
I need to be clear, I am not saying that today is a rerun of the 1970’s and a return to Thatcherism is needed. What is clear though is that the scale of the issues is similar, if not bigger, and this is against the backcloth of global volatility, uncertainty and unpredictability: Tinkering and minor adjustments are not what is required.
Certainly a challenge for the next Prime Minister and his/her team.
Tony Jefferson
