Are you ready to take cold showers to do your bit for the war effort? Protestors in Berlin have been holding up placards suggesting they’d sooner do so than use Russia’s gas. Boris Johnson has called on the British public to make similar sacrifices, solemnly telling us that we need to drop cheap Russian energy and ‘accept that such a move will be painful’. The government will spend billions to help ease that pain, he says, but ‘none of us can afford to carry on like this for long’.
On the surface, it sounds like the start of an honest conversation: telling voters that the cost of living squeeze we’re experiencing now has only just begun. Or might the PM be getting ready to blame Russia’s war against Ukraine for price rises that were going to happen anyway?
Just as it was difficult to disentangle the economic impact of Brexit and Covid, it’s now tough to distinguish which price hikes are down to Putin’s war and which are the inevitable economic consequences of the past two years. Oil prices might make for a straightforward case: the fluctuation of the price of a barrel, hitting a record peak of $130, is directly linked to the US’s ban on Russian oil and much of the world’s decision not to buy Urals. But little else is easy to explain.
Managing without Russia’s energy supplies will indeed cost Germany’s economy dearly: it imported a staggering 32 per cent of its gas from Russia in December (compared to Britain’s 3 per cent) and wants to reduce that by two-thirds over the next year. That will involve big sacrifices.
But Britain’s energy prices were skyrocketing before any economic sanctions were issued. The energy crunch, exacerbated by global economies coming back online after lockdowns, saw Ofgem hike April's energy price cap by 54 per cent, while the energy price cap put dozens of companies out of business. By early February, Chancellor Rishi Sunak was announcing £9 billion worth of subsidies, targeted to 80 per cent of households throughout the country.
Higher prices would normally be hard to explain for a Tory party committed to keeping living costs low. ‘But the war has changed the narrative in a number of ways,’ says one Tory MP. ‘Not only is partygate out of the news, but the cost of living crunch can also now be blamed on something out of our control.’
Joe Biden has decided to adopt a similar strategy. He talks about ‘Putin’s price hike’ and told House Democrats last week that ‘inflation is largely the fault of Putin’ – despite inflation hitting a 40-year high long before the sanctions began. It’s not obvious Americans are buying this. Biden’s massive borrow-and-spend package was long seen as an inflationary risk: so much so that the goal of Sunak’s Budget in March last year was to make the UK economy robust enough to withstand Biden’s money printing machine. The Biden administration has had a boost in the polls thanks to swift and decisive action on Russia, but the economy hovered near the top of the list of voters' concerns before the sanctions. And there it remains.
In Britain, inflation has been outpacing official forecasts for months – and was expected to hit 7 per cent even before Ukraine was invaded. One Secretary of State expects the headline rate to hit double digits before the end of the year.
Then there are the costs wholly in the government’s control, including the National Insurance tax hike that comes into effect next month. The 2.5 percentage point rise was sold in the name of the Covid crisis. The announcement, which broke the Tory manifesto pledge not to raise taxes, was made last autumn, as Britain was coming out of the emergency phase of the pandemic. It was framed as providing money to help the NHS play catch-up on waiting lists. In truth, the money is long-term funding for the Prime Minister’s social care plans, which protect the assets of the wealthy without the guaranteed addition of a single bed to the care system.
Sunak will present a mini-Budget next week. It was always going to be a challenge, even before war struck. Debt servicing payments are increasing by billions of pounds month by month, as inflation takes its toll. Any space he was hoping to use for tax cuts was already dwindling due to rising energy costs, and he’ll have to be more cautious still. Goldman Sachs predicts bills of £4,000 for the average household if Russia decides to cut off Europe’s gas supplies completely.
And he’ll be under pressure from his own party, and boss, to frame this all in the friendliest terms possible. That, for Johnson and Biden, has meant blaming their economic woes on Russia. It might work; and no doubt Russia’s war is a serious, and increasing, part of the problem. But rising prices aren’t a recent phenomenon: they were being shaped by government decision-making long before sanctions hit.