UK Energy Relief Plan Will Lead to Higher Interest Rates
The proposed package will do little to curb inflation while repeating the problems wrought by large government spending during the pandemic.
British Prime Minister Liz Truss has a plan to alleviate the energy crisis.
Photographer: Markus Schreiber — WPA Pool/Getty Images
A key part of new Prime Minister Liz Truss’s plan to counter the effects of the UK’s energy crisis is to cap for two years the amount that households pay for electricity and six months for businesses. What’s shocking about the proposal is not that it was made, but that the government gave no indication of how much it will cost. My back-of-the-envelope calculations puts it at 150 billion to 200 billion pounds ($175.3 billion to $233.8 billion).
There is much not to like about this “relief” package. History is littered with failed experiments in such price controls. Contrary to Truss’s claims, it will not bring down inflation except in a narrow mathematical sense. In the short term, the government’s actions will keep the consumer price index lower than where it would be otherwise. If the costs of consuming electricity are capped for two years, then parts of CPI that are affected by that will drop to zero, perhaps less if energy prices fall. Some economists think CPI may drop by half for the legislated period.