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24 May 2022

The Business End: Cost of living crisis . . . the reasons

Derry's Must-Read Business Column with John McGowan

Surge in calls to SVP as people struggle to meet rising cost of living

There is not one business or family in the North which isn't affected by the cost of living crisis. Before we consider potential remedies to resolve this it's worth remembering why we are here.

Brexit:

Prices began to rocket in shops for clothes, food and many other everyday items in mid-2021. Many of us remember the shops in GB showing empty shelves as retailers struggled to source suppliers willing to deliver to GB. As the folly of Brexit became apparent prices started to go up.

I can also remember many employers last year complaining how difficult it was to get staff and that wage demands were therefore pushing costs and prices up.

Again, another Brexit issue which has still to be resolved. So, remember folks, these price increases started as a direct outworking of Brexit and 2019 when Jeffrey Donaldson was asked if he could live with himself if 40,000 jobs were lost, he said 'Of course I can live with myself.'

The report pointing out the 40,000 potential job losses was in fact complied by Senior NI Civil Servants. The clip where he says this to Emma Barnett on BBC 5 live is available online.

The reality in the North was that the NI Protocol shielded us from a lot of the supply issues that GB got and therefore a large element of food inflation. It didn't however shield us from wage inflation caused by the loss of Free Movement of people within the EU.

And remember Brexit is forever, so as other global pressures begin to recede the cost/supply pressures which pushed prices up in 2021 prices up aren’t going anywhere.

The parties who campaigned for Brexit (DUP/PBP) want you to forget about this Brexit effect on prices. The phrase 'it hasn’t gone away you know' springs to mind. Protecting the NI Protocol protects us from job losses, price increases and a hard border on this island.

It’s also worth remembering the Office for Budget Responsibility (OBR) in 2020 put a cost of £1,200 per person due to the economic drag of Brexit. That’s £100 a month on every adult.

Post Covid:

Another factor in the mix is, of course, Covid. When the world slowed down the demand for energy slowed as did the supply. Put simply, lockdowns and social restrictions over the last two years when so many industries and events ground to a halt lead to a huge decrease in demand.

When restrictions eased demand jumped with travel and hospitality leading the charge.
With gas it's very difficult to suddenly increase supply to meet demand so prices jumped. There is also the deliberate (and correct) move away from hydrocarbons.

This makes it difficult to predict with certainty what gas you need. For example, in the third quarter of 2021 the UK generated 38% of his electricity from renewable sources. In 2020 it was substantially higher. Put simply if the wind doesn’t blow you need to order gas and at short notice that spike in demand costs a lot.

As you can see there is a clear 'Green agenda' which is important for the survival of this planet but until there is a lot more done to fund more larger offshore wind farms our exposure to sudden energy shocks (if the wind doesn't blow) will always be there.

Energy Costs:

The Tories promised everyone cheaper energy bills after Brexit but before this current crisis energy prices have steadily risen.
Between 2015-2019 energy prices rose 40%. Wholesale gas prices now have already risen 300% higher than the beginning of 2021. It's worth noting that the big six UK energy firms have made £7 billion in the last five years.

Shell globally made £14.2 billion in 2021 versus £3.57 billion in 2020. It seems 2021 was a great year for Shell and a terrible year for their customers struggling to warm their homes or fill their cars.

Ukraine:

Last, but not least, is the genocidal attack on Ukraine by Russia. We all watched this war unfold on our televisions and as sanctions were announced hitting a major oil and gas provider (Russia) prices began to rocket.

It's difficult to see how this won't continue to affect energy prices for a while, as many countries in the EU rely on Russian gas which is delivered by pipelines which run through Ukraine and other countries. There is an energy dependence which isn't easy to reduce overnight.

It's clear many EU countries are no longer comfortable with dependency on Russian gas/oil and will seek a different provider or solution. This is going to cause additional energy inflation.

Inflation:

All the above events have caused inflation to hit 5.5% in the 12 months to January 2022. The recent surge in energy if it continues will take it to 7-8% in 2022/3. Pay awards have been much lower than that and this drives up the cost of living.

The April rise in energy will further hit people in the pocket. Many will point to a National Living wage rise of 6.6% in April to £9.50 an hour which is higher than existing inflation however the rising cost of energy will drive most prices up. For many the new increase in minimum wage will be wiped out by £700+ increase in energy bills in April.

So, these are some of the reasons why we have a cost-of-living crisis. As I said it kicked off with Brexit and was turbo-charged by the energy demand post-Covid and supply line problems. The war in Ukraine has further exasperated the problem.
As we head into an election there will be two clear campaigns.

Firstly, there will be the 'blame game.' People will blame Stormont. They will blame individual parties. Expect a 'it's all their fault' campaign.

My advice is to reflect on what I have written. In many ways we have never seen an event like Brexit followed up by a Global Pandemic and topped off by a war in Ukraine.

The people who campaigned for Brexit have to admit it hasn't helped and when many of the other global issues pass the UK will still be outside the EU.

We can only hope the NI Protocol protects us from the worst effects of price inflation. I am not a huge fan of Stormont but on this current crisis it really can't be blamed.

As we sit today every country in the world faces these same real problems. Inflation in the USA is 7.9% and Germans are paying more for fuel than people in the North.

The second campaign will be just as vocal and will focus on the solution. Every political party knows people are suffering.

Every councillor or MLA is speaking daily with constituents on these issues. We know it hurts the elderly, the sick and people on lower incomes more than people who have higher incomes. We also know that many families with two adults working are also struggling. This crisis hurts everyone. The solution shouldn't leave anyone behind but often resources are scarce so hard decisions need to be made.

So, what should we do? There are some short-term actions and some medium term actions. Without trying to pass the buck it's clear the UK Govt need to step in and do several things. In the short term (and I mean now)they need to:

1. Step in with a windfall tax on all UK energy companies

2. Halt the increase of 1.25% NI contributions

3. Reinstate the £20 UC top up which stopped in the Autumn

4. Reduce the Govt duties/tax take on petrol /diesel immediately

5. Reduce VAT on energy bills and intervene directly to bring bills down

All the above need to be done immediately and will cost billions of pounds. The UK government spent £490bn on Covid measures between 2020-22. It wrote off £4.9 billion of Covid loan fraud in Jan 2021. If it can write off nearly £5bn of loans to business, then it can intervene to bail people out who are struggling to feed their families or heat their home.

In the medium term we need to ramp up our investment in Renewables. We should aim to be a net exporter of wind energy.

The Govt in the 26 counties of Ireland have committed to a target of 80% of energy generated by Renewables by 2030. We should aim even higher.

The main problem with the solution is the cost of it and the inability of any of the Devolved Assemblies in the UK having the money to pay for it or the powers to do it.

Stormont cannot levy energy companies. When a canvasser suggests that as the magic bullet to this crisis, please ask them how. Stormont cannot cancel the 1.25% increase to National Insurance contributions.

This is a tax by the UK Govt. The same for the £20 UC uplift and the VAT and Duty reductions. Only the existing Tory Government with its huge majority can makes these interventions and ease this crisis.

Anyone says different is talking nonsense. There is of course £300m in Stormont to allocate which requires the DUP to nominate a FM. The fact they left the Executive to force the UK Govt to scrap the NI Protocol and heap further misery on us and a hard border doesn't bode well.

If the DUP are happy to tolerate 40,000 job losses to persue a Hard Brexit then not helping people heat their homes isn't going to bother them. And be under no illusion that although that would help it would only be a quick fix. If you took for example the total £300 million and allocated an Energy Voucher scheme it would be approx. £400 per household. Bear in mind we could be six months into a two-year cost of living squeeze. Whilst a welcome bonus it certainly isn’t the answer. And this assuming all the £300 million is used for this and none diverted towards health spending.

I suppose my point is the crisis is global and requires Westminster to react and support families through this.

And, finally, there is another solution which gains momentum daily. The answer is Unity for this island. I say that as an unapologetic Irishman who sees our economic future much better served from Dublin than Belfast or London. Imagine our local politicians were linked to the TDs in the Dáil and had their hands on the real levers of power. We could as a people across all political persuasions elect politicians who make the decisions.

At present, we go to London with a begging bowl and get £10.billion to do a £15bn job. We can't raise taxes and we get what the British award us.

With Unity we could strike a windfall tax on utility companies.

We could adjust duties/VAT rates. We would be masters of our destiny.

We could also be part of the other Green Revolution on this island which is embracing Renewables.

We could, as elected reps look after our citizens rather than tip a hat to a failed economic model of begging from the British Exchequer. Just last week we saw Sinn Fein Leader Mary Lou Mc Donald lobby for a 20 cents cut per litre on fuel and immediately the Government reacted. Having real power to help all our citizens on this island with an immediate return to the EU should appeal to everyone suffering in this crisis.

So, hopefully, this war in Ukraine ends soon and energy markets can stabilise. Let's hope the current Tory government see sense and do something to help all families struggling.

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