For much of industry,
the competitive benefits of devaluation will more than offset higher energy costs.
The hardest effects will be felt by domestic consumers, especially the poorest.
There are a few weapons that could be deployed to help the poor, but they will
not reach everyone and are far from an ideal solution.
With the prospect of the UK leaving the EU, the slide in
sterling was both predictable and predicted. It began on the night of the
referendum and has gained more momentum with the growing belief, not only that
exit is now very probable but that it will involve leaving the single market
and the customs union, disadvantaging many of the UK’s key export earning
sectors.
The calculus that underpins market sentiment on sterling is
simple. The UK currently runs a big
current account deficit at around 7% of GDP. This has hitherto been balanced by
foreign direct investment and borrowing.
The impact of Brexit has been threefold:
·
A severe threat to Britain’s service industries,
especially financial services
·
The prospect of both tariff and non-tariff
impacts on UK exports to its largest single market, the EU
·
Evidence that foreign firms, most notably
Japanese companies, may hold back on investment in the UK and move many of
their activities elsewhere
These factors together have the potential to make it
substantially harder to balance the books, and this is now reflected both in
sterling and in the slowly rising cost of government borrowing. A fall in the
exchange rate both provides an additional incentive for UK manufacturers to
export and acts as a major brake on UK demand for imported goods, as these
become harder to afford. It is therefore a necessary part of making adjustments
to the UK economy.
This will de facto mean a cut in living standards. That is
unavoidable. In current conditions the
rising price of imports seems unlikely to set off compensating wage increases
and an inflationary spiral, but the effects may be both severe and immediate,
and the energy sector will be in the front line. The most clear cut impact will
probably be through the impact on imports of gas. A 20% devaluation (around the
level at the time of writing) means that imported wholesale gas will cost an
extra 25% in terms of UK sterling. Given that wholesale costs account
for about 40% of the retail price, this is likely to feed through as a 10%
increase in prices to ordinary consumers. Other factors, not related to Brexit,
will probably increase this figure further, to around 12%. Effects on retail electricity prices are
likely to be more muted but will still be significant.
Industry too will have to pay more for its gas and electricity,
but for those who compete in international trade, this will be of much less importance
than the competitive benefit conferred by devaluation. Inter alia, as I
anticipated in an earlier
comment, this could transform the prospects for Welsh steel.
Fuel Poverty
Inevitably fuel price rises, like food prices, bear most
heavily on the poorest, for whom they are a much higher proportion of total
income. This ought to be a major concern. Various approaches can be considered
for alternative domestic tariff structures that avoid subsidies to utilities
from the public purse, but they usually require a cross-subsidy between
consumer groups.
One is the concept of lifeline tariffs, in which the first
“block” of energy is provided either free or at a heavily discounted rate, but
with a premium rate attaching to higher levels of consumption. Although this is
superficially attractive there are some practical problems. One is that the
correlation between income and level of consumption is far from perfect. Poorer
consumers are not necessarily low volume consumers. Volume can depend on family
size, fuel choice, nature of their dwelling, etc. To illustrate the imperfections of what ends
up a scattergun approach, a lifeline tariff is almost bound to benefit second
home owners.
A more promising approach is the promotion or subsidy of
energy efficiency schemes that will reduce consumption but this approach too
may not be adequate for the problem, as it is neither an instant solution nor is
it likely to cover all cases of fuel poverty. So there is no simple answer to
the problem. At root it is a problem of poverty rather than a problem of energy
per se, and we have to accept the fact that the costs of energy are likely to
rise above current levels (from what is likely to prove to have been an
unsustainable historic low), from devaluation and for other reasons. Lifeline
tariffs may be worth an experiment, and energy efficiency is a good thing per
se, but otherwise this suggests that the problems of fuel poverty have to be
confronted at source, ie poverty, rather than through additional interventions
in the energy sector.
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