Liz Truss should let the energy market do its job – The Telegraph

We have a macroeconomic problem requiring macroeconomic solutions. Distorting the energy price mechanism won't solve this crisis
With the energy price rise warned about for months now confirmed, some economists are warning that inflation will be over 18 per cent by the new year. The Bank of England has forecast five consecutive quarters of recession. When Liz Truss becomes Prime Minister in just over a week’s time, what should she do about it?
This is a macroeconomic problem – inflation, recession and in due course perhaps unemployment. So it should have a macroeconomic solution. The Government should set aside proposals to prevent energy prices rising. High energy prices are the market’s way of telling us there isn’t enough energy and we need to create more and use less. If we try to suppress that signal all we will achieve is to force energy rationing.
Instead, the response should be fourfold. First, with inflation so high the annual schedule of uprating for benefits (and perhaps other things as well, such as rail fares) is not frequent enough. Low-income households cannot be asked to survive until April on nearly one fifth less money in real terms. Benefits and benefits thresholds will have to rise to reflect inflation (and some anticipation of future inflation) in October.
Next, interest rates will have to rise to bear down on inflation. They are already rising, but they will have to rise more rapidly.
Third, with inflation so high many workers and firms are going to have to negotiate wage rises. The Government needs to help that process occur more smoothly by setting the Bank of England a credible and realistic set of short-term inflation targets, telling it what inflation rate it needs to achieve in 2023 and 2024, and then enforce them.
Fourth, to assist the economy through the recession there should be a reduction in the extent to which taxes are rising. Taxes are scheduled to reach their highest level for forty years. That might be the right answer in due course (unless we can find a way to get NHS spending down), but just as recession bites we can defer some of that rise, temporarily.
Proposals to subsidise energy bills to stop energy prices rising so high would cost many tens of billions of pounds. If we have such vast resources available it would be better to use that money for deferring tax rises for households and business or perhaps even for some temporary tax cuts. We obviously have to raise benefits for low-income households but for average income households benefits and energy price subsidies are not nearly such a good answer as tax changes and the smooth management of wage rises through clear and credible inflation targets.
We have a macroeconomic problem. Macroeconomic problems require macroeconomic solutions. Fiddling with individual prices, even if they are energy prices, just distorts the price mechanism and prevents the market from doing its job. Massive state spending on energy subsidies is not the answer. Macroeconomic management is.
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