The likely impact of the Russian invasion on U.K. living standards has not yet been appreciated. Sanctions on Moscow will have to be prolonged to be effective and there will be a domestic price to pay. Never mind swatting the oligarchs – that’s putting pleasure before business – both the U.K. and the European Union should reduce their dependence on gas supplies from Russia. The harder and the earlier the blow to Putin’s petro-state, the better.
Although Russian gas accounted for less than 4% of Britain’s imported supply last year, the think-tank Energy and Climate Intelligence Unit estimates that Moscow receives 2.3 billion pounds ($3 billion) a year from Britain, the equivalent of 6.3 million pounds a day, revenue that will help fund Vladimir Putin’s war machine. Perhaps concerned about slowing the nascent recovery from the Covid-19 epidemic, the government has so far resisted targeting Russia’s energy sector. Wholesale gas hikes are already poised to add 500 pounds per year to the average household bill under April’s new price cap, with more to follow in the Autumn. Centrica Plc, owner of the largest energy outlet, British Gas, is in talks to end its deal with Gazprom PJSC, the major Russian supplier. Both BP Plc and Shell Plc are also running ahead of No. 10 in cutting their ties to Russian partners.
There are bad economic times round the corner for Britain. Inflation looks set to peak at 8%, ahead of Treasury forecasts, and the increase will likely stick around for longer. The prophets of doom are harking back to the oil shocks of the 1970s, when price rises generated by the OPEC cartel created the ugly phenomenon of stagflation. The industrial turmoil that followed broke two British governments: Johnson is a keen student of history.
In last year’s budget, Sunak froze income tax allowances and thresholds. A 1.25% rise in payroll taxes to fund national insurance on employers and employees will come into force just before taxpayers go to the polls in May’s local elections, seen as a mid-term test of the government’s – and Johnson’s – popularity. The right wing of the ruling Conservative party wants the rise scrapped, or at least postponed until next year. Food prices are likely to rise further, given Ukraine’s oft-forgotten role in providing cheap grain to the world.
Hawks are now calling for a rise in defense spending, too. The peace dividend following the end of the Cold War cut the proportion of U.K. gross domestic product devoted to the armed forces to 2% from 4%. Some Tory fire-eaters want it pushed back up to 3%, if only to give the U.K. an edge over newly belligerent Germany. The government has a raft of new spending commitments to improve the health service and social care. It has also promised to ‘level up’ the gap between the post-industrial north of England and the prosperous south. Something has to give.
Last month – pre-invasion – Chancellor Sunak set out his stall in his Mais lecture, traditionally the occasion to establish the key themes of government economic policy. He cited a Labour prime minister who once said that anyone who increases productivity does “a more essential service to his country than the whole race of politicians put together”. Yes, but how?
Hailing artificial intelligence as the general purpose technology of the future, Sunak declared himself “an optimist”, about Britain’s long-term growth prospects as long as the state makes conditions right for investment, people and ideas. In the short term, sounding like Margaret Thatcher in her prime, the chancellor ruled out both the unfunded tax cuts favored by his leadership rivals – “I am disheartened when I hear the flippant claim that ‘tax cuts always pay for themselves’. They do not,” he said – and the higher public spending called for by many in the Labour opposition.
Sunak’s third path to growth follows the original Thatcher formula of raising taxes to balance the books in the midst of economic difficulty. Inflation hawks may cheer him, but his critics complain that the U.K. is stuck in “a high-tax, low growth” trap.
Sunak is chancellor, not prime minister. And his boss Boris Johnson is not Margaret Thatcher, but rather a leader of flexible principles who instinctively favors higher spending. The effects of the war in Ukraine have the makings of a perfect economic storm. The prime minister had better prepare his party and his country for the worst.
More From Bloomberg Opinion:
• You Can’t Just Take a Russian Oligarch’s Townhouse: Chris Hughes
• Six Scenarios for How Putin’s War Could End: Andreas Kluth
• What Investors Need to Remember About Volatility: Stuart Trow
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Martin Ivens was editor of the Sunday Times from 2013 to 2020 and was formerly its chief political commentator. He is a director of the Times Newspapers board.