Opinion

Prime minister, here’s how much it will cost to save the country this winter

Economist Richard Murphy says Liz Truss needs to spend around £150billion just to give us a chance of making it through the winter

Prime minister Liz Truss

Liz Truss. Image: Tim Hammond / No 10 Downing Street

The winter to come is going to be tough at best, and much worse than that for many. With energy, food, rent and other costs skyrocketing, millions will be unable to pay the bills they will be presented with in the coming months unless the government steps in to help them.

The obvious question is how many millions might need help? My estimate is that this crisis will be almost unmanageable for four in 10 households in the UK. More than that, many households on or around average national income will also struggle with their bills and even some earning well above average will have difficulties.

That will most especially be the case if interest rates double from where they are now, as is predicted, and mortgage rates and rents increase substantially as a result. For the first time that I can recall a majority of people in this country are facing an economic crisis that few have the ability to manage from within their own resources. If ever there was a definition of a crisis requiring government action, that is it.

Things are, however, worse than the crisis facing households implies. It takes little imagination to realise that if households are unable to pay their most basic bills then they will also have little or no money left over to spend on anything else. That means that many leisure, retail and hospitality businesses are going to face massive problems surviving the coming winter as their customers desert them. The fact that these businesses’ energy bills are rising faster than those for households will make matters even more difficult for them. We are already hearing of pubs, cafes and chip shops closing. Things will get very much worse, and unemployment is going to increase rapidly unless action is taken very soon.

So, what can be done? The answer is that whatever she says her Conservative instincts might be, Liz Truss as incoming prime minister needs to act on the most massive scale to save the economy, the country, society and millions of households from ruin. I have suggested that supporting households with their energy bills might cost a little over £40billion a year. Preventing schools, hospitals, schools, public transport, and many other services from failing (plus paying decent pay rises for those working in them) might cost £80bn, while business will need at least £20bn, and maybe much more, of support to stay afloat. Call it around £150bn of necessary spending just to give us a chance of making it through the winter.

This is serious money, but nothing more than was spent to save banks in 2008 and to pay for the Covid lockdown in 2020. In both those cases the government did not turn to taxpayers for the money it needed. Nor did it borrow it from financial markets. Instead it created new money to tackle these crises, with the government in effect borrowing from the Bank of England to spend what was necessary. Quantitative easing disguised, complicated and even confused this process, but the reality is that the government simply shook the magic money tree and created £900bn of new cash to pay for these crises.

This is what the government needs to do again. If it was acceptable to use this mechanism to save Lloyds, NatWest and many other banks in 2008 then it is most certainly acceptable to do so again now to save 10 million or more UK households from debt, cold, hunger and the risk of homelessness that face all of them.

And to put this money creation process in context, less than £50bn of the £900bn of money created has to date been cancelled, because it can’t as such be repaid, for technical reasons. Given the current state of the economy it’s to be hoped that no more will be cancelled for a long time to come. That’s because this money that the government created has become a key part of the money supply that keeps the UK economy going, and inflation means we need more money in circulation now, and not less. The £150bn or more I suggest that the government should spend is, in fact, essential new money to keep the economy and money supply afloat that will never need repayment as a result.

The reality is that we now face a massive crisis but also have a proven way to solve it, using money creation and quantitative easing. No one need be fearful of the winter to come if only the new prime minister uses the tool that has got us through the last two crises. But if she won’t, we are in the deepest of trouble. We can only hope Truss can change her mind. If she does not the consequences are almost impossible to imagine.

Richard Murphy is professor of accounting practice at Sheffield University Management School, and an economic justice campaigner. taxresearch.org.uk/Blog

@RichardJMurphy 

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