Kudos to Gordon Brown. The former Labour Prime Minister and Chancellor is at least coming up with bold ideas to tackle soaring energy bills. Unfortunately, his ideas are not new, and they are not good ones either.
Brown’s starting point is that the energy price cap should be ‘suspended’ before the results of the latest review are announced on 26 August, which presumably means that the cap would be frozen at the current level. Ed Davey, speaking for the Liberal Democrats, has also called for the rise in the cap to be scrapped.
This would obviously be popular, but it would still be poor economics. Global energy prices have jumped because supply and demand are out of balance. Market signals need to be allowed to work properly, increasing the incentives for producers to raise output and for consumers to economise, where they can.
Of course, many households are already struggling to pay their bills and the pressure on their budgets will only increase. Nonetheless, the sensible way to deal with this is by topping up incomes with targeted support, and tax cuts, rather than clumsy interventions to fix prices for everyone.
The risks to the supply side also need to be taken seriously. If the cap is frozen, many more energy suppliers will go bankrupt. The large increase in the cap to be announced this month is almost entirely due to the surge in the wholesale price of energy, especially gas. It is not because the businesses that actually supply households are making exceptional profits.
Brown has three answers to this, but none stack up. One is to increase taxes on those companies that are now making lots of money – the upstream producers and refiners – and use the additional revenues to subsidise the energy suppliers.
Ed Davey has gone a step further and proposed an increase in the existing ‘windfall tax’ on North Sea oil and gas producers, from 25% to 30%, and backdating it to last October. Since this supplementary tax is applied on top of the usual headline rate of 40% for these companies, this would mean that their profits would be taxed at a punitive 70%.
This would send a terrible signal to any business thinking of investing in the UK. Economists are split on the merits of ‘windfall taxes’. A truly ‘one-off’ levy could be a relatively efficient way to raise more revenue, because it would effectively be a tax on past investment rather than on the profits from decisions yet to be taken.
But most would agree that ad hoc and haphazard taxes, especially when applied retrospectively, would increase business uncertainty and lower the expected returns from future investment too. This is exactly the opposite of what is needed now.
Brown’s second proposal is a complete dog’s breakfast – reminiscent of his clunkiest interventions as Chancellor. He has suggested that the government should ‘assess the actual costs of the energy supplies being sold to consumers by the major companies; and, after reviewing the profit margins, and examining how to make standing charges and social tariffs more progressive, negotiate separate company agreements to keep prices down’.
This is a right muddle. Crucially, the Ofgem price cap is already based on an assessment of the ‘actual costs’ of supplying energy, including a small profit margin. As such, the cap already forces companies to ‘keep prices down’.
Who then is the government supposed to ‘negotiate separate agreements’ with? I assume Brown means the upstream energy producers, but they are operating in global markets. Is he saying that the government should negotiate with BP, or Shell, to buy oil and gas at a discount to the world price?
Finally, Brown suggests that if this plan (whatever it may be) does not work, the government should consider all the options used with the banks in 2009, namely ‘guaranteed loans, equity financing and, if this fails, as a last resort, operate their essential services from the public sector until the crisis is over’.
Again, what does this mean? If he is only talking about the energy suppliers, none of these ideas would reduce the price at which they have to buy energy in global markets. Guaranteed loans would simply allow them to smooth costs over time. Equity financing would just pass the burden of the losses to the general taxpayer (as France has done, wrecking its energy sector in the process).
This leaves ‘temporary’ nationalisation. But this would not solve the basic problem either. Merely taking energy suppliers into public ownership would change nothing.
This could only ever work if Brown were really talking about nationalising the upstream producers, which raises a whole new set of issues. The biggest players here include global companies who derive only part of their revenues (perhaps 10%) from the UK.
Is Brown suggesting that the government takes over their whole businesses? If so, at what price, and where would the money come from? For example, the combined market capitalisations of BP and Shell is well over £200 billion. Or is he just proposing to trample over the property rights of those who currently own these businesses?
And how ‘temporary’ would this nationalisation be? The government held onto its stake in Lloyds Bank for nearly a decade after the global financial crisis, and is still a substantial shareholder in NatWest (formerly RBS).
In the meantime, nationalisation could reduce the incentives to increase productivity and cut costs, while saddling businesses with all sorts of conflicting objectives. The track record of state-run companies – across a wide range of sectors – is dreadful.
In short, Gordon Brown is offering nothing new. The long-term problem in the energy sector has not been too little state interventions, but too much. His proposals – and those of Ed Davey – would only make the crisis worse.
This article was first published in the Daily Telegraph on 12th August 2022