The government is making contingency plans for power cuts this winter as it finally wakes up to the reality of what the next few months will bring.
Britain is experiencing a cost of living crisis. There is also a housing crisis and an energy crisis. Weeks without rain in southern England mean there is a looming drought crisis. The NHS is only one serious outbreak of Covid-19 away from tipping point.
These crises are all distinct and special in their own way, but they also have a common theme: an investment failure that goes back decades. An obsession with efficiency has meant that infrastructure has been dug into the ground rather than improved. Cost reduction was given higher priority than capacity building.
Take the NHS. International comparisons show that Britain has one of the lowest numbers of hospital beds per capita of any western country, the lowest number of intensive care beds and one of the lowest occupancy rates for highest beds. The problems with this seat-of-the-pants approach were brutally exposed by the arrival of the Covid-19 pandemic in the spring of 2020.
Or take water. Since 1990, the UK’s population has grown by around 10 million to 67 million, but not a single new reservoir has been built in the past three decades. More than 200,000 miles of water pipes date back to Victorian times, but water companies are replacing them at a rate of 0.05% per year. This compares to a European average of 0.5%.
Then there is the state of the country’s housing stock. A report by energy company EDF found that nearly 60% of the 21 million homes in England and Wales did not meet insulation standards until the mid-1970s or earlier, costing households up to to £930 a year in higher energy bills.
In the early 1970s, the lights went out when the miners went on strike. If they go out again this winter, it will be because domestic capacity is not sufficient and the supply of imported energy is insufficient to meet demand.
Britain is of course not the only country facing the possibility of energy shortages. Germany, for example, is much more exposed to the whims of Vladimir Putin. Even so, there is a trend here – a trend in which a mistaken belief that everything will turn out fine eventually has replaced long-term planning and strategic investing.
Let’s be clear, this is not just a government problem. Britain has the lowest corporate investment rate of any G7 country and one of the reasons for this is that the private sector has tended to prefer dividend payments and share buybacks to higher spending on new kits.
Confusion is the country default. The absence of real slack in the system only becomes truly apparent in times of national emergency. Like now, for example.
What can the UK learn from the US battle against inflation?
Inflation in the UK is still far from its peak, but in the US there are signs that it may have peaked.
The latest data from the world’s largest economy showed the leading measure of annual cost-of-living increases falling from 9.1% to 8.5%, while core inflation – excluding energy and food – remained unchanged at 5.9%.
Both metrics were below analysts’ expectations and the news had a predictable effect: Wall Street stocks rallied sharply on hopes that the Federal Reserve – the US central bank – would slow the pace of US rate hikes. interest.
There is definitely a reason the Fed is doing just that. The U.S. economy contracted in the first two quarters of 2022 and declining labor force participation is evidence that labor demand is weakening.
But Fed Chairman – Jerome Powell – will take more conviction that the battle is won. Interest rates will rise again next month, although probably by 0.5 percentage points rather than 0.75 points. Wall Street expects borrowing costs to rise two more times before the end of the year, bringing them to around 4%.
Paul Volcker, the former Fed Chairman, who in the early 1980s engineered a monstrous recession to squeeze inflation out of the system, would no doubt be impressed by the determination of his successor.
Powell says he wants to see a period in which the United States grows at a rate below potential and he risks over-delivering. By this time next year, it’s likely the Fed will be more concerned about rising unemployment than inflation. This also applies to the Bank of England.