The Unbearable Glibness of GBeing

Labour wins, but with an energy policy based on the fantasy of "greener and cheaper" the UK will lose bigly

As ever, a post I started writing about two weeks ago got overtaken by other time committments. However, on this occasion I’m glad of the delay because I can weave in elements from a speech given just yesterday. Good things come to those who procrastinate.

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Given that most OECD countries have similar economic issues, it is perhaps surprising to see that as Europe¹ takes a sharp turn right, the UK hangs a left.

The recent European and French parliament elections, have been much discussed, and are politically complex. To add to the complexity, voters tend to vote based on single issues, whether that be the economy, immigration, the environment etc. Thus, it is hard to make generalizations. That said, one clear loser in the elections was the Greens, as “climate angst” slipped (way) down the priority list - leading to much anguish in the staff-rooms of major newspapers. Notwithstanding the polarizing question of immigration, the of cost-of-living, and specifically energy had an interesting correlation: in France, the further voters lived from a railway-station the more likely they were to vote for the right-wing RN party.

LinkedIn Post

Contrarian UK

So if Europe is getting a dose of energy pragmatism, why has the UK decided to embrace the environment-friendly, energy-daft Labour Party? Simply put, the Conservatives were too long in office, too many scandals, and have nowhere to hide on “results”. After 14 years in power, if the country is crumbling, its hard to blame anyone else and you are totally unbelievable when you say “only we can fix it”.

But the real problem in the UK is that the two-and-a-half party system has, in fact, been a uni-party system, with only minor policy differences. Energy policy drives economic success, and as I have noted previously, the 2019 election was one in which I felt totally disenfranchised. We were offered various shades of Net-Zero Green: Boris was going gangbusters towards hosting COP26, and the Labour and LibDems were both vying to be Greta’s BFF. There was no one to vote for if you cared about energy reliability and security.

So the 2024 election swing to Labour is a lot of people simply voting not-for-the-Conservatives. Some people may even believe Labour’s election manifesto pledges….

Household Budgets

Margaret Thatcher was undoubtedly very polarizing, but long before Modern Monetary Theory was fashionable, she was already discrediting it. The simple homily of how all the complexities of a country’s economy could be thought of by analogy to a household budget.

• Don't be scared of the high language of economists and Cabinet ministers, but think of politics at our own household level.

  • Speech to Bexley Conservative Women (15 September 1949)

• The Government should do what any good housewife would do if money was short—look at their accounts and see what was wrong.

  • Speech at her adoption meeting as Conservative candidate for Dartford (28 February 1949)

https://en.wikiquote.org/wiki/Margaret_Thatcher

Not unlike a household, if spending is greater than revenues, there must be borrowing to plug the gap. A small amount of debt is efficient, but as the amount of borrowing increases, so the credit worthiness decreases: any further debt becomes more expensive. In a household, when more debt is not possible, you have two options - decrease spending or increase revenues.

Budgets Don’t Balance Themselves

Decreasing spending is obvious, but never popular. Households “tighten their belts”, countries cut services. That said, there is a difference between cutting government bloat and cutting services.

Those outside Canada may have missed this gem from the Finance Minister, when commenting on a very-real cost-of-living crisis: “Can’t afford to eat, well just cancel your Disney+ subscription…” (My paraphrasing).

What about increasing revenues? For a household this might be looking for a better paid job, adding an evening or weekend job, or selling off the family jewels for a one-off boost. Ultimately, it is worth remembering that in most* countries the government doesn’t have any money - government revenue comes from taxing its citizens and its companies. But taxation beyond a sense of what is reasonable disincentivises work, incentivises avoidance and leads to flight of capital and talent. (c.f. The Laffer Curve). * I said “most” countries - hold that thought.

What about borrowing? Borrowing works fine, until you are seen as a credit risk. The UK has already been down that route with the Truss-Kwarteng mini-budget of September 2022. The mini-budget aimed to create a more vibrant economy by slashing tax rates. In the short-term, lower tax-rates directly reduce government revenues, and in 2022 necessitated up to £72bn of new borrowing . The bond markets saw increasing credit risk and wanted to be paid more - pushing up the cost of borrowing.

Sky News

At the same time, the international money markets took the same view and dumped Sterling.

Sky News

Many will argue that a country is not like a household, because a country can print more money. Whilst this is true, printing money has clear effects - inflation and depreciation of the currency. The (probably flawed) logic of the “more money” approach is that stimulus jump-starts the economy, and subsequent vitality of the economy can negate the stimulus. Modern Monetary Theory². Spend more to be wealthier.

As I mentioned last week on LinkedIn, the French elections are a run-off between the spend-more left and the spend-more right. The centerist “let’s try and live within our means” inevitably loses the popularity contest, which is a shame, because just like a household, a country cannot keep spending indefinitely. And no, budgets don’t balance themselves.

Loves Labours Lost

Labour’s plan for “GB Energy” is an exercise in wishful thinking, flying in the face of history and physics. The idea of being a Renewables Superpower is alluring on many levels; who wouldn’t want to be wealthy and green. Emotional dopamine, economic poison.

Borrowed from this LinkedIn post.

Whilst the above is focused on just the new GB Energy, the Labour manifesto has extensive spending plans, even if their “flagship” £28bn Green Investment Plan took a £20bn haircut between campaign and manifesto.

That said, there is no faulting their ambition:

“The party has said there will be no return to austerity and its economic approach will be governed by fiscal rules requiring a balanced budget, with day-to-day costs met by revenues, and debt to be falling as a share of the economy by the fifth year of the forecast.” (Reuters)

In practical terms the aim is to improve the National Health Service, Education and increase spending on Defense to 2.5% of GDP (unless of course GDP shrinks and the 2.5% target is met without any increase in actual spending…). Oh and the small matter of “doubling onshore wind, tripling solar power and quadrupling offshore wind.” (idem)

Now recall this: “[Labour’s] economic approach will be governed by fiscal rules requiring a balanced budget”?

Given that borrowing is expensive, and any significant approach to the international markets is likely to re-ignite the Truss-Kwarteng effect. this, there must be revenues to pay for this right?

“It has pledged not to raise taxes "for working people", with no increase in the basic, higher, or additional rates of income tax, National Insurance, or VAT. It will cap corporation tax at the current level of 25%.” (idem)

In the absence of debt and any new tax, where might additional revenues come from?We can ignore potential additions from the punitive windfall tax on O&G because there will be no revenues from O&G in a few years as the industry atrophies.

“The party has also pledged to close loopholes which allow some so-called 'non-dom' wealthy people who live in Britain to avoid paying tax.” (idem)

So the “Balanced Budget” involves the fiscal equivalent of looking down the back of the sofa for spare change, and no ideas on revenue generation apart from “hoping” for economic growth.³

As the UK O&G industry shuffles off this mortal coil, two things will happen

1. The UK will have to import more and more oil and gas, giving revenues (and tax income) to various nations, friendly and unfriendly, and adversely affecting the UK’s balance of payments.

2. The UK will continue to subsidise wind and solar, because otherwise they don’t work.⁴

Wallace and Gromit

In my humble opinion, the UK is an economic death spiral, and the “belief” that investing heavily in renewables will only serve to accelerate the decline. Green energy is not cheap, there are no millions of well paid jobs at the end of the rainbow, and certainly no taxes or royalties. Spend more to get poorer.

True North Strong and Free

Canada has already gone this route with the profligate Trudeau administration. To be fair, part of Canada’s increased debt was due to Covid stimulus, but most of it is related to the expansion of government, allegations of graft, and vast “green” subsidies. According to the polls, the Conservatives are 15-20 points ahead, but if elected, will clearly inherit a country in economic chaos.

So let me leave the last words to Pierre Poilievre - leader of His Majesty’s Loyal Opposition from his speech yesterday at the Calgary Stampede:

We're going to we're going to axe the [carbon] tax because the foundation of everything we have in this economy everything we eat, everything we use, has to go by truck or train everything that comes off the farm field has to be taken using machines powered with diesel and gasoline the oil and gas industry in this country is not the enemy and when I'm prime minister I will Champion Canadian energy.

Instead of creating more cash we're going to create more what cash buys; grow more food build more homes and produce more Canadian resources; here in this country. We know how to do it, we need to unleash the unmatched might of the free enterprise system we'll have fast permits, low taxes and more competition to drive this economy forward and produce the things that make life materially beneficial to every single person and that starts by unleashing the production of our resources…

..we're going to turn dollars for dictators into paychecks for our people. Bring it home.

We're going to get rid of the money printing but how we need to bring in a common sense law that runs the finances of the nation the same way that single moms small businesses and seniors run their own household finances.   

To undo some of the damage that doubling the national debt in just 9 years has done, Canada has the option of increasing revenues: not by taxing its citizens and companies to death, but by using its vast natural resources.

Some countries can increase revenues, others can dream.

1. (also NZ, and probably Canada, and maybe the USA)

2. MMT is also a useful acronym for Magic Money Treee - surely just a coincidence?

3. Not that closing this loophole is a bad thing, quite the opposite, but it is not going to move the needle.

4. OK so thats a big statement, but even if there are no direct subsidies, which there are, simply having a merit-order is a subsidy, as is socializing the cost of reliability and security. We are a million miles from wind and solar contributing billions to the economy in taxes or royalties. Ain’t going to happen.