Why help with energy bills could come at a cost

0:02Sky News, the full story first.

0:11The government should think long and hard about another energy handout. And this is why.

0:24Hi everyone, Neil here. Just wondering if, like me, you've noticed that the Iran war is causing energy prices to spike. Well, don't you worry, because here comes Sir Keir Starmer. It's moments like this that tell you what a government is about. This government will always support working people. That is my first instinct, my first priority, to help you with the cost of living throughout this crisis. That was him speaking in Downing Street, and as often with this PM, the detail was largely absent. But he did certainly lay the ground for another round of relief from what could very soon be almost unthinkably high household energy bills.

1:08The question is, should he? Which, I admit, initially sounds pretty daft. Obviously, a government should help out when things are as bad as they are. But consider the scale of the national debt, the amount of money the government owes. Any intervention on energy would drive it higher still. And right now, repaying just the interest is already costing us more than the education budget. Our economics editor is Ed Conway. And look, let's start with the situation in the Straits of Hormuz. Clearly, it is having an impact not just on petrol, diesel prices, but energy prices in general. What sort of effect has it had so far?

1:45Ed Conway:It's massive. If you kind of remember that energy is kind of tantamount to everything when it comes to economic activity, want to do anything, you basically are either physically burning some sort of fuel to make it happen, or you're reliant on power. They're reliant on kind of fiber optic networks. They're reliant on semiconductors to listen to this podcast. And pretty much all of that stuff, one way or another, depends somewhere along the chain on something like oil and gas. And what's happened is the world is significantly short of the oil and gas it needs to function right now. So there are various analogies.

2:20Ed Conway:There's not enough blood going through the patient, there's not enough food passing through the organism. And that is why we're starting to see prices going up. And they continue to go up for as long as you have this disruption in the Strait of Hormuz, which is why this is so destabilising for pretty much every sector of the economy and pretty much every part of the world. How grim could it get? I went past a petrol station the other day, and I saw, I think, diesel coming, if not to 170. Very, very close to it. Prices did get higher after the invasion of Ukraine, so in 2022. And when there's less of something, that's what economists call a supply shock.

2:58Ed Conway:So basically, you don't have as much of the stuff as you need. And then all of a sudden, the price of that goes up. And all of a sudden, you're reminded about your vulnerabilities. And we in the UK are very dependent on imports. We're dependent on imports of all sorts of things, including petrol, including jet fuel, including all sorts of different items that some of which might have come from Qatar in the past. They're not coming anymore, at least they're not at the moment. And so for as long as that's the case, these prices just ratchet up. And I've seen all sorts of forecasts. I was just looking at one just now saying that very plausible if this goes on for months, that you're going to see oil prices getting up towards$200 a barrel.

3:32Ed Conway:So they're currently kind of around 100. It's grim and it's miserable. Like everyone else, I'm very conscious of the level of fuel that we've got in our car right now, as I take kids into school and think, oh God, okay, I'm going to have to fill up on Friday, I think. And does that mean what the price is going to be doing by that? I mean, I am pretty conscious of economics all the time, because it's my job. But most consumers don't have to think about this stuff. And I think the reason that inflation is quite an invidious experience is that it forces you to be very conscious of price, because you see it going up and you start to have to arrange your life around it.

4:07All of which is why we saw the Prime Minister Secure Starmer in the Downing Street briefing room yesterday. And you always know when the podium comes out and he's got the oak panels behind him, it's something important. And the whole theme of what he was talking about yesterday was, look, I understand how bad things are. The government stands ready to help. I'm just wondering in what form that sort of assistance might be other than a straight handout from the government.

4:32Ed Conway:There is a playbook because it was very recently, obviously, that we went through something very similar with Ukraine and gas prices going up after that. What happened that time was there were caps on your kind of unit price of energy. And it was terrifically expensive, like really expensive. We'd just gone through COVID. And that kind of ratcheted up the national debt by an extraordinary amount. And everyone thought it was kind of unprecedented. And then all of a sudden, on top of that in 2022, you have this period where energy prices are basically capped in the UK. And it costs billions, tens of billions of pounds and it has left a permanent mark on the public finances.

5:09Ed Conway:We have a national debt that is 100 % of GDP at the moment. I mean, if you cast your mind back to the era of when Gordon Brown was Chancellor, at that point, everyone thought that anything over 40 % was bad news, like scary and bad news. And it's 100 % of our gross domestic product. So that's a big deal. Just explain for me what you mean when you say national debt and when we're comparing it to gross domestic product, you know, essentially the output of the country, why that comparison is valid. National debt is the total lump of debt that we as a nation still owe to lenders around the world. And the reason you look at it, rather than saying it's, I don't know how many trillions, it's two and a bit trillion at the moment, rather than saying it's X number of pounds, a more useful way of getting your head around it is to compare it to the size of the total GDP, which is basically gross domestic product.

6:04Ed Conway:That's just the total amount of income we earn as a country each year. There's nothing definitive that says 100 % is terrible, 40 % is great. But broadly speaking, the more you have to pay in debt interest, it starts to bear on your ability to finance the state. Like right now, our debt interest costs are really high, and they are much higher than they've been for a long time. And that has a real impact. We're paying more on that than we pay on schools. I just remember a time where we were told by economists, by people at the Treasury, that thinking about the nation's finances in terms of your personal finances, that debt is a bad thing wasn't necessarily always the correct way to go about it.

6:40Because if you can borrow cheaply, borrow now, spend now, reap the benefits later.

6:44Ed Conway:As a nation, we have the ability to issue debt. So the government can borrow however much it wants to. It kind of borrows that money on financial markets. And at the same time, we are issuing our own currency. The difficulty is, in the past, governments that have ended up with enormous amounts of debt have often also used the lever that they can kind of print their own currency. But I mean, the famous example is kind of Weimar Germany or Zimbabwe, where you've ended up with hyperinflation because the government's gone, OK, we've got a lot of debt. How do we pay off that debt? Oh, we print more money.

7:21Ed Conway:And it's a balancing act. Those two things involve a kind of balancing act. Are we heading towards a Zimbabwe, Weimar Republic-style situation with the UK's finances? No, because the Bank of England has a remit to try and keep inflation as close as possible to 2 % and has to do whatever it needs to do with inflation, with interest rates to keep it at that level. So in theory, you have the Bank of England on one side, trying to keep inflation down. And then you have the government on the other side kind of spending and doing what it wants. In theory, the two things are supposed to kind of balance each other out.

7:51Ed Conway:But we are at a point where national debt is getting higher and higher. The amount that the state spends is getting higher and higher. The amount that it taxes is getting higher and higher. And we are in somewhat uncharted territory. It's not clear at the moment how long you can just go on raising the tax bill and raising the spending until there's a moment where people are like, well, I just don't want to pay taxes anymore. I'm going to move somewhere else or I'm just not going to work as much. And then you end up kind of depressing the economy. These unexpected things always seem to come along at the worst possible moment.

8:25Ed Conway:And this is the case again. I get the impression, Ed, that there is now an expectation on the part of the public that at times like this, you will see state intervention. Actually, it's kind of backed up by a poll, a YouGov poll this morning. Do you support taking action to reduce energy prices for the least well-off amongst Labour supporters? 84 %? Yes. Amongst Conservative supporters? 61 %? Yes. Even reform, 57 % of majority of their voters think this sort of intervention is a good idea. And when you have that expectation of state intervention from the body politic, I wonder whether this is less a decision on fiscal terms and rather a nakedly political decision for Zakir Starmer and Rachel Reid.

9:06Yeah, I think there's this difficulty. Of course, there's a sense that something must be done.

9:12Ed Conway:If energy prices stay high right now, we are going to have a massive hit to our standard of living again. And I think it's understandable that people would want to have some help in that situation. of course, like we all do. The difficulty is, who is going to pay for that in the long run? And if you end up paying for that through higher debt, that means future generations will end up paying it. And if you end up paying it through higher taxes, then people paying taxes are going to pay for it. And the difficulty is, I'm sure the same people who answer in the survey that they would like to have some help with their bills, I'm sure a lot of those people would also agree that it's right that people pay higher taxes as a result.

9:51Ed Conway:What they might be a bit more hesitant about is them paying more taxes for it. We heard Sir Keir Starmer also talking yesterday about acting in the national interest. So in your view, is it in the national interest to have an energy bailout and higher public debt or no bailout, everyone putting on jumpers in the interim, but national debt not affected so significantly? Wow. I mean, that's a good question, isn't it? You're putting me on the spot. I think that capping energy bills for wealthy households seems to be a slightly crazy idea. The national debt is greater this time around than it was last time around.

10:34Ed Conway:At some point, we as a nation have to to pay for the fact that we are importing a lot of oil and gas from elsewhere. I'm not, thank God, having to make policy and I don't have a kind of passionate view on this, but it seems kind of logical that for the less well-off households, there should be some energy price help. For better off households, I think it's, I would say, much less strong case there, because otherwise those better off households, okay, will be getting a subsidy from future generations. And I don't want to have to pay higher bills. You don't. Most of us don't. We as a country don't want to, but the country has to pay for it somehow.

11:18Ed Conway:And I think there's a deeper and I think really good conversation about why on earth weren't we trying to improve our energy independence years ago? Just on that, Ed, I mean, is this all then an example of politicians being too short-termist in their thinking, perhaps even a bit too reactionary, a bit too knee-jerk. As you say, if we had sorted out our energy security around, I don't know, maybe the time of Russia's invasion of Crimea, or at least started thinking about it, 12 years on would be in a far better place. Completely. If we had sought to build nuclear power stations sooner and quicker and tried to buy them in bulk rather than the slightly slapdash way that we've done it, then we would have more energy independence now.

12:05Ed Conway:It wouldn't solve everything, but it would really help. If we had a plan in terms of the North Sea that was more long-termist, then we might have more oil and gas coming out of the North Sea right now, because there is stuff there. But the way that it's been taken out, it's very much not thinking of future generations. We were once, back in the 1980s, the fifth biggest oil producer in the world. In the world. There was more oil coming out of this country than there was coming out of Iran or Iraq in the 1980s. And even in the year 2000, we were the ninth biggest oil producer in the world, in the world.

12:43Ed Conway:But the reality is we took all of those revenues from the North Sea at that point. We didn't squirrel them away and put them into a special fund like they have in Norway. We just put them into the general tax kind of pot and spent them. And the upshot of that is it meant for quite a long period of time in the late 90s and the early 2000s, we didn't have to pay as much tax as we would have otherwise had to pay. But no one knew it was happening at the time. We just thought, oh, this is great. Everything feels quite good right now. Now, we're facing the flip side of that, where we don't have as much as we did before.

13:16Ed Conway:We still have quite a lot by other country standards. We don't have as much as we did before. And as a result, we don't have that windfall of tax revenue coming through. and we are having to reckon with the fact that we are not energy independent anymore. We should have been thinking about this stuff long ago and we're confronted with this again and again as a reminder of the lack of planning of previous generations. What then do you say to those who make the argument, and there are an increasing number, that at a time like this when there are problems with the cost of energy, rather than us all outstretching our hands and expecting some sort of assistance from the government, We suck it up.

13:54We cancel our Netflix subscriptions. We don't go on as many holidays. We pop on a few extra jumpers and we just tough it out. What do you make of that view? We as a country are less well off because of what's happening in Iran.

14:09Ed Conway:That's the unfortunate truth of it. We are less well off because we're having to pay more for our energy. Someone has to either make sacrifices or find a way of trying to finance it. So all of these things are converging. We have weaker economic growth. We have a sudden energy price shock. We're an energy importer at the same time. And we have a far bigger kind of total national debt than we ever had before. Put all of those ingredients together. And you wouldn't say that the obvious response to this is that everyone in the country should get a generous bailout. It's the opposite. As miserable as it is, we've got to somehow finance this.

14:48Ed Conway:It's a question of who is going to finance it. And putting it all into borrowing basically means, OK, our children are going to pay for this rather than us. Ed, thanks very much indeed. We've become used to emergency fixes. So much so, there's now an expectation of government help. Another bailout might keep the lights on, but it won't fix why we keep ending up in the dark. Real leadership would mean planning for shocks, not just subsidising those who genuinely can't afford the hit. Until then, the rest of us might want to keep that extra jumper handy because short-term politics has a long-term cost.

15:26That's your lot for today. Do get in touch with your thoughts. And just a heads up, if you've got any questions for our defence analyst Michael Clarke about what's going on in and around Iran, fire them in. Why at Sky.UK. We'll be speaking to him later this week. We're back again tomorrow.