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Expected energy help ‘very poorly targeted’ says IFS boss; oil prices hit nine-month low – business live | Business

IFS director: expected energy support package ‘very poorly targeted’

A leading economist has expressed concern that Liz Truss’s plans to freeze energy bills will benefit affluent people more than the less well-off.

Paul Johnson, director of the Institute of Fiscal Studies, described the support package, expected on Thursday, as “very poorly targeted”. He told BBC’s Today programme on Wednesday morning:

If this is a straightforward bill freeze then the majority of the money will go to better-off people who use more energy. So this is very poorly targeted. Not only is it poorly targeted, but it also means that we don’t see the full price signal, that actually across the world people need to see.

The reason that gas prices are so high is because there’s less gas around and if the world doesn’t use more gas over the next year then we’re going to run out.

Finding a way of targeting it to the many, many millions who really need it, without giving it to the many, many millions who don’t, appears to be something that has stumped the Treasury and the government for finding a mechanism of achieving that.

Johnson also said that the UK government can afford to borrow £100bn to tackle the cost of living crisis, although the amount may well rise to an “awful lot more”.

We can afford to borrow that amount. We’re still managing to borrow relatively straightforwardly on the international markets, although the interest rate we’re having to pay is rising quite fast: it’s gone above 3% for the first time in more than a decade and that’s still relatively low in historical terms.

The big question here is: ‘Is it going to be £100bn? What is the exit strategy from supporting bills?’ My guess is it might end up being an awful lot more than that unless we react quite quickly to make it a better system.

Is it the best way of spending the money? I rather suspect it is an inevitable way in the short run if everybody who needs help is to get that help, but I do think it’s incredibly important that the government thinks through and gets to a better or more targeted way of supporting us as we get through to next winter. Otherwise, we’re going to be on the hook, potentially, for an awful lot more money, for an awful lot longer.

This year and next the government will be spending about the same amount, £100bn, just on interest, on servicing its debt, the IFS director said. A lot of that is index-linked debt and should fall once inflation comes down.

IFS director Paul Johnson.
IFS director Paul Johnson. Photograph: Felix Clay/The Guardian

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The Bank of England governor has also defended the Bank’s mandate and its record over the last decades.

Asked about the Liz Truss’s pledge during the Tory leadership contest to review the mandate of the Bank of England, and whether the mandate is outdated, Bailey said:

The inflation target…. has proved to be very successful. In 25 years since this regime came into existence… inflation has averaged pretty much exactly on target.

This is by far the biggest sock we are facing during the life of that, but it does not suggest that the regime has failed. What it suggests is that the regime now has to do its work and respond to a much bigger shock and we are confident that it will do so.

Predictably, Bailey was guarded in his comments about the expected government’s energy support package.

It’s not for us to comment on what fiscal policy will be and we will wait and see what it is… but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to in, in a sense, frame policy and that’s important.

It’s important that there is a clear way forward on policy… That will be important for markets to understand what is gong to happen.

Andrew Bailey, governor of the Bank of England, and some of his senior team are being quizzed by the Commons Treasury committee. Mel Stride, the Conservative committee chair, asked about the Goldman Sachs forecast that inflation in the UK could reach 22%.

Huw Pill, the Bank’s chief economist, did not dismiss the forecast, and said it was “plausible” (without formally endorsing it).

But, he said the new prime minister Liz Truss’s expected freeze on household energy bills could lower inflation in the short term, relative to the central bank’s latest forecasts published in August (which had inflation peaking at just over 13% in the fourth quarter, and remaining at “very elevated levels” throughout next year).

Pill told MPs:

Net-net on the implications for headline inflation in the short term, I would expect that to see a decline.

Bailey is being asked about “wobbly” debt markets and sterling. On the exchange rate, he pointed out that the dollar is strong against all currencies.

We have had volatile markets in the last six weeks or so.

We are seeing extreme volatility in energy markets.

I would say on the exchange rate, there are other factors, dollar specific factors. The US, the Federal Reserve is in a different situation… They are dealing much more with bringing under control a demand shock and taking aggressive action in response to that.

The UK is heavily exposed to gas prices.

He refuses to say whether the market volatility is being caused by the expected energy support package from the government, estimated to be worth £100bn (or £150bn, according to the Financial Times).

Tory thinktank: 1m more people to slide into poverty even with energy bill freeze

More than a million more people will slide into poverty this winter – even if the government freezes energy prices at current levels, a conservative think tank has estimated.

The Legatum Institute, headed by Tory peer and former government advisor Lady Stroud, calculated a price freeze would still push 1.3m people below the poverty line – though it would also shield 1.45m people from a “once-in-a-generation” rise in poverty, reports our social policy editor Patrick Butler.

The analysis suggests that even if action is taken to blunt the impact on consumers of soaring energy prices, many will still struggle with rising costs in other areas such as food, clothing and transport, partly as a result of below-inflation benefit increases.

Stroud said:

It is good to see that Liz Truss is taking this seriously and looking at energy price freezes. This will shield nearly a million and a half from poverty this winter. But if Liz Truss wants to stabilise poverty at pre-pandemic levels, she will need to go further and introduce a 10% uprating of universal credit as existing inflation will still hit the poorest hardest.

The institute used methodology developed by the respected Social Metrics Commission. Earlier this year Stroud set up an independent cross-party poverty strategy commission and criticised the government for lacking the will and ambition to tackle rising hardship and destitution.

Putin blames Germany and western sanctions for Nord Stream 1 shutdown

On the energy front: the Russian president Vladimir Putin said today that Germany and western sanctions were to blame for the Nord Stream 1 pipeline shutdown, and that Ukraine and Poland decided on their own to switch off other gas routes into Europe.

At an economic forum in the eastern city of Vladivostok, Putin said Gazprom could resume flows through Nord Stream 1 if a key turbine was returned to Russia, Reuters reported.

He also said that Russia will post a budget surplus this year, even though the economy is track for a contraction. He said the surplus would total 1.5 trillion roubles in 2022, while GDP would fall by “around 2% or a little more”.

The cost of insuring exposure to Britain’s sovereign debt has risen to levels last seen in June 2020 when markets were recovering from the Covid-19 rout, as Liz Truss started her first full day as UK prime minister and held her first cabinet meeting.

Five-year credit default spreads climbed to 27 basis points from 25 bps on Tuesday, according to data from S&P Global Market Intelligence.

Yesterday, when Truss was appointed by the Queen at Balmoral, long-dated government debt had its sharpest sell-off since the Covid pandemic started, pushing yields on 10-year gilts to their highest since 2011 at around 3.15%. Today, they have fallen back to 3.025%.

Tory peer rejects fracking, calls for renewables investing

A Tory peer has said that investing in renewables is the best way out of the energy crisis – and rejected the idea of a return to fracking, as it would not reduce the price of gas.

Lord Deben, chairman of the UK’s independent Committee for Climate Change, told BBC’s Today programme:

If you want to get energy bills down, you produce your energy in the cheapest possible way and that happens to be by renewables.

It’s not a sensible system to say, ‘because the price of gas is very high, we should produce more gas’ because the price will be the same, it’s a world price. What you need to do is to produce as much as possible in the cheapest possible way and bills will fall much below what they would otherwise be.

He also said fracking would not help solve the energy crisis.

The price of gas is not affected by the relatively small amount that we can get, in addition from the North Sea or indeed from fracking. This is an international price and we would be paying the same price for we got out of the fracked gas as we are for the gas we’re using now.

There is no sliver of cigarette paper between the fact that if you want to deal with climate change and you want to deal with the cost of living crisis and oil and gas prices, you have to do the same thing.

Renewable energy and energy efficiency, they are the answers.

Lord Deben, Chair Committee on Climate Change.
Lord Deben, Chair Committee on Climate Change. Photograph: Dorset Media Service/Alamy

BCC chief calls for emergency business grants

Shevaun Haviland, director general of the British Chambers of Commerce, has called on the government to give the energy regulator Ofgem more powers, cut VAT on energy bills and introduce emergency business grants.

She told BBC’s Today programme:

We’re really delighted to hear the government talking about helping businesses, that’s really good to hear. What we want to see is things that can be put in place quickly.

We’d like to see Ofgem given more powers to drive more competition in the market. We’re seeing nearly 50% of our members being moved off fixed rate contracts onto variable rate contracts.

One of our manufacturers has had their bill moved from £140,000 a year to £706,000 a year. He has to sign a contract and doesn’t know how he’s going to pay it. That’s eye-watering increases and of course you cannot plan ahead.

Quickly, we want to see a reduction in VAT on energy bills for businesses. They currently pay 20%, we want that brought down to 5%.

One of our manufacturers said because of their energy bills, cash flow is really difficult. That means they can’t use cash to buy raw materials to make products even though they have a really strong order book. So they [businesses] need emergency grants quite quickly to to help them keep the doors open.

We need them to get help through this winter.

But she said there needs to be a longer-term energy plan as well.

Shevaun Haviland, director general of the British Chambers of Commerce.
Shevaun Haviland, director general of the British Chambers of Commerce. Photograph: Yui Mok/PA

Electricity prices in the UK have risen a lot more than in other countries, where governments have taken action to cushion the impact on households and businesses.

Europe’s stock markets have opened lower, with the UK’s FTSE 100 the worst-hit index.

The blue-chip index has lost 77 points to 7,221, a drop of nearly 1.1%. Germany’s Dax fell 0.6%, France’s CAC and Italy’s FTSE MiB are both down 0.7% and Spain’s Ibex slid 0.6%.

The pound is also under pressure against the dollar and the euro, trading at $1.1492, down 0.2%, and at €1.1606, down 0.17%.

IFS director: expected energy support package ‘very poorly targeted’

A leading economist has expressed concern that Liz Truss’s plans to freeze energy bills will benefit affluent people more than the less well-off.

Paul Johnson, director of the Institute of Fiscal Studies, described the support package, expected on Thursday, as “very poorly targeted”. He told BBC’s Today programme on Wednesday morning:

If this is a straightforward bill freeze then the majority of the money will go to better-off people who use more energy. So this is very poorly targeted. Not only is it poorly targeted, but it also means that we don’t see the full price signal, that actually across the world people need to see.

The reason that gas prices are so high is because there’s less gas around and if the world doesn’t use more gas over the next year then we’re going to run out.

Finding a way of targeting it to the many, many millions who really need it, without giving it to the many, many millions who don’t, appears to be something that has stumped the Treasury and the government for finding a mechanism of achieving that.

Johnson also said that the UK government can afford to borrow £100bn to tackle the cost of living crisis, although the amount may well rise to an “awful lot more”.

We can afford to borrow that amount. We’re still managing to borrow relatively straightforwardly on the international markets, although the interest rate we’re having to pay is rising quite fast: it’s gone above 3% for the first time in more than a decade and that’s still relatively low in historical terms.

The big question here is: ‘Is it going to be £100bn? What is the exit strategy from supporting bills?’ My guess is it might end up being an awful lot more than that unless we react quite quickly to make it a better system.

Is it the best way of spending the money? I rather suspect it is an inevitable way in the short run if everybody who needs help is to get that help, but I do think it’s incredibly important that the government thinks through and gets to a better or more targeted way of supporting us as we get through to next winter. Otherwise, we’re going to be on the hook, potentially, for an awful lot more money, for an awful lot longer.

This year and next the government will be spending about the same amount, £100bn, just on interest, on servicing its debt, the IFS director said. A lot of that is index-linked debt and should fall once inflation comes down.

IFS director Paul Johnson.
IFS director Paul Johnson. Photograph: Felix Clay/The Guardian

High energy prices leave their mark on German industry

High energy prices are leaving their mark on German industry. Data just out shows that industrial production in Europe’s biggest economy fell 0.3% in July from the month before, compared with a 0.8% rise in June.

According to the statistical office, the relatively small number of school holidays and holiday leave prevented an even larger decline in production compared with July last year. Production in industry excluding energy and construction was down by 1%.

“Is this the first gust of wind preluding a perfect storm?” asks Carsten Brzeski, global head of macro at ING.

German industry is clearly suffering from disrupted supply chains on the back of the war in Ukraine, the aftermath of pre-summer lockdowns in China, low water levels in the main rivers and increasingly, higher energy prices. The statistical office released additional data showing that production in the energy-intensive industrial segments declined by more than the broader industry. Production in this area has dropped by 6.9% since February 2022.

For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a ticking time bomb. With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading. In this regard, it is remarkable that the government’s third relief package presented on Sunday provided only very limited support for this segment of the economy.

Looking ahead, shrinking order books since the start of the Ukraine war, the well-known supply chain problems (both international and domestic) plus high uncertainty, high energy and commodity prices and potential energy supply disruptions will not make life any easier. Judging from the first macro data for the third quarter, the German economy has not fallen off a cliff at the start of the third quarter but is rather sliding into recession.

Introduction: Oil prices fall to nine-month low; Halifax warns of ‘challenging period’ for UK housing market

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

House prices in the UK rose by 0.4% in August, against a 0.1% drop in July, as Britain’s largest mortgage lender Halifax warned of a “more challenging period ahead”.

The annual rate of growth eased to 11.5% from 11.8%, suggesting the heat is slowly coming out of the market. Figures from Halifax show a typical UK property now costs a record £294,260. Wales is still showing the strongest annual growth in the UK, at 16.1%, while London recorded its highest annual rate in six years, at 8.8%.

Kim Kinnaird, director of Halifax Mortgages, said:

While house prices have so far proved to be resilient in the face of growing economic uncertainty, industry surveys point towards cooling expectations across the majority of UK regions, as buyer demand eases, and other forward-looking indicators also imply a likely slowdown in market activity.

Firstly, there is the considerable hit to people’s incomes from the cost-of-living squeeze…While government policy intervention may counter some of these impacts, borrowing costs are also likely to continue to rise, as the Bank of England is widely expected to continue raising interest rates into next year.

With house price to income affordability ratios already historically high, a more challenging period for house prices should be expected.

Meanwhile, crude oil prices have fallen to their lowest level since before Russia invaded Ukraine in late February, as China’s zero Covid policy and expectations of more interest rate hikes around the world fuelled concerns over a global recession (which would reduce demand for oil).

Brent crude, the global benchmark, is down $1.56 to $91.27 a barrel, while US light crude has lost $1.68 to $85.2 a barrel.

China’s exports and imports lost momentum in August as surging inflation held back overseas demand and fresh Covid curbs and heatwaves disrupted output. Exports rose 7.1% in August from a year earlier, a big slowdown from July’s 18% gain, official customs data showed. Oil imports fell 9.4%.

This led to a smaller trade surplus of $79.4bn, compared with $101.3bn in July, which was a record for a single-month goods trade balance for any country.

Liz Truss became the UK’s new prime minister yesterday, when she met with the Queen at Balmoral. She insisted the UK will “ride out the storm” of the worst cost of living crisis in a generation as she launched her premiership with a brutal cabinet clear-out.

Kwasi Kwarteng has been appointed chancellor, the second-most powerful job in British politics. During his stint as business secretary, Kwasi Kwarteng clashed with Rishi Sunak over how best to oversee the UK economy. Today, he walks into the office recently held by his former rival, taking charge at the Treasury under his longstanding political and ideological ally Truss.

The Agenda

  • 9am BST: Italy retail sales for July

  • 10am BST: Eurozone second-quarter GDP, third estimate (forecast: 0.6%)

  • 1.30pm BST: US trade for July

  • 3pm BST: Bank of Canada interest rate decision

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