The Government’s financial regulation agenda

Has the Bank of England got it wrong? Raising interest rates to try to control inflation because wages are rising is a mistake, argues Geoff Tily, the TUC’s chief economist. Pay growth continues to slow, not accelerate, and is well below inflation (as the latest figures show.) Oxford economist Simon Wren-Lewis points out that aggregate demand in the UK economy is still very weak; as inflation hits real incomes, higher interest rates could tip the economy into recession. 

• Profits matter, not just wages. The Governor of the Bank, Andrew Bailey, was criticised by both businesses and unions for calling for ‘moderation in wage rises’ to curb inflation.The FT’s Martin Sandbu pointed out that there are two ways businesses can hold price increases down: curbing wages or reducing profit margins. Bailey’s comments revealed “a blind spot in most economic policymakers’ mental model of the economy. It is so ingrained to ask how wage demands affect inflation that it is easy to miss the equivalent question about margin and profit protection.”

Corporate power = inflation? Concentrated corporate power is a key factor in rising prices and ‘is almost never discussed’, says Popular Information’s Judd Legum. Corporations are not forced to raise prices to stay afloat, but instead are able to raise prices and maintain large profits due to their large share of market power, he argues. 

• Price hike winners. Groundwork’s Lindsay Owen collates a list of quotes from CEOs who have been ‘bragging about hiking prices while hiding behind "inflation”’. Examples include vaccine manufacturer Johnson & Johnson hiking prices despite huge earnings from Covid-19 vaccine sales, telling investors that the need to ‘address suffering and death’ is behind its ‘optimism’ for its future prosperity. 

Price controls. Voters support the idea of governments capping the price of food and other essentials to combat the cost of living crisis, according to a new poll by Opinium. 71 per cent of voters backed such measures, with just 7 per cent opposed. Support came from across the political spectrum, with Conservative voters even more likely to support price controls than the general population. NEON’s Dora Meade has more on the numbers here. 

• Don’t call it a cost of living crisis. Economist Gary Stevenson argues in his latest video that the phrase ‘cost of living crisis’ suggests a natural disaster. Inflation has actually been caused by a huge increase in asset wealth among the very rich over the past two years as a result of quantitative easing. 

The Conservative Party and net zero. Conservative MPs and peers in the Net Zero Scrutiny Group (NZSG) have recently stepped up their activities, warning that net zero ambitions will make people ‘colder and poorer’. Environment NGOs are worried that the Prime Minister’s political weakness will lead to concessions on green policies. The Green Alliance’s Shaun Spiers writes on the growing rifts in the Conservative party in this area.  

• Fracking. Following his resignation from the Government, Lord Frost has become a vocal opponent of the Government’s net zero plans. Last week he joined other MPs and peers in calling for an end to the Government’s moratorium on fracking in the UK. Fellow Conservative peer Zac Goldsmith hit back at claims that fracking would reduce reliance on Russian gas, pointing out its major environmental costs and lack of public support: only 18% of the population are in favour. 
• New oilfields. The Telegraph reports that six North Sea oil and gas fields are set to be given the green light this year, as Cabinet figures resist measures needed to hit the Prime Minister’s net zero target. E3G’s Euan Graham unpicks the story.
• The Conservative case for net zero. Conservative MP Philip Dunne says that the energy crisis is not the fault of net zero targets and that in the long term, it will protect the UK from energy price shocks. 

Corporate Climate Responsibility Monitor. The NewClimate Institute has launched a Corporate Climate Responsibility Monitor, assessing the ‘net zero’ and ‘carbon neutrality’ targets of 25 major companies. It finds that of the companies investigated, most lack transparency and their targets are undermined by excluding emissions from reports. (Twitter thread summary here.) 

• Banks still investing in fossil fuels. The biggest banks in Europe are still investing huge sums in oil and gas despite net zero pledges, according to new analysis by ShareAction. HSBC, Barclays and BNP Paribas have provided £24 billion to fossil fuel companies looking to expand production, less than a year since pledging to target net zero emissions.

Windfall tax. Tax Justice UK added its voice to calls for a windfall tax on oil and gas companies, noting that BP made £18,000 in profits per minute in 2021. Campaigners argue that a tax could be used to fund ‘proper support’ for people struggling with rising energy bills. 

• The fightback. A windfall tax on the huge profits of energy giants like BP and Shell will unfairly impact the ‘retirement plans of many millions of ordinary workers’ writes Ross Clark in the Spectator. The IEA’s Julian Jessop argues that setting a precedent for a windfall tax will reduce companies’ incentives to invest as they anticipate higher taxes in more successful years. 
• The rebuttal. In the Guardian, economist (and New Economy Brief editor) Michael Jacobs explained why these and other arguments against a windfall tax were very weak. He noted that Margaret Thatcher was the first to introduce a windfall tax, on the banks in 1981. See this thread for more on windfall taxes and pension funds.

Public ownership. We Own It has launched a campaign calling for energy companies to be brought into public ownership to combat rising bills. Their demands of the government include a ‘permanent windfall tax’ and the introduction of a new state-owned renewable energy company. 

Energy price cap. Citizens Advice’s Alex Belsham-Harris looks at Ofgem’s past failures to regulate poorly run companies and how it could have avoided supplier exits from the market due to energy price cap costs. 

Mapping the climate movement. Activist Natasha Adams has mapped the UK climate movement. She draws eight key recommendations for climate organising.

Gigafactories. The government is falling behind on plans to build an electric vehicle battery industry, finds Sky News’ Ed Conway. With global production of electric vehicles growing rapidly, the government has set aside £500m to support investment in new battery plants. But the UK lags behind other countries in developing this sector, a problem exacerbated by Brexit.

• The Humber Refinery. Whitehall is paying too little attention to the Humber Refinery and its potential for industrial strategy, says Conway in a long but digestible thread: ‘If one were genuinely interested in industrial strategy one would be pondering why this place ships graphite coke to China to be turned into anodes, which are then imported back as a Chinese product [batteries]. Why aren't we doing that here, in a low income corner of the north of England?’ IPPR’s George Dibb said the answer is that industrial policy is too focused on the principle of ‘comparative advantage’.

Shrinking the state? Members of the Prime Minister’s new Downing St team have been setting out his priorities. Chief of Staff Steve Barclay MP says that ‘cutting back on the size of the state must be a priority’ following the pandemic. Head of Policy Andrew Griffith MP said the priorities were to ‘grow employment, tackle the NHS backlog, control our borders, make streets safer, bring down the cost of living and return rapidly to the point when we can cut taxes’. Observers noted that levelling up and net zero were not included.