Ed’s Red, Baby, Ed’s Red

This is a good thing. Not because I agree. You’d all expect me not to particularly, but because it means that finally we can see beyond the vague and wonkish scene setting of Ed Miliband’s previous speeches to the Labour Conference to what he would actually do if he became Prime Minister. Before looking at his speech in any detail, another strong positive from it is that it finally breaks apart the stifling semi-consensus crowding the middle of the political spectrum. That meant that it was too easy to say, as UKIPpers and others were wont to, that all three of the major parties were largely the same so it didn’t really matter which was in power, alone or in coalition. David Cameron’s task next week of putting “clear blue water” between himself and Labour is made easier and the LibDems’ task of attempting to be appealing coalition partners for both Labour and the Tories much harder. If nothing else, Miliband is looking to do something different and carrying through with his promise to take a different direction to the one of the past 35 years. However, merely being different doesn’t mean being good (as the US fast food chain, Arby’s discovered in failing to break the UK market with its slogan of “Different is Good”).

The proposal in the speech which has got the most attention so far is the one to freeze gas and electricity prices to the beginning of 2017. This is proving to be very popular, unsurprisingly enough, because rising energy prices are very unpopular. But, the proposal goes beyond the purely populist or even being part of the general narrative Labour has been slowly seeding during the summer recess of being the Party that will do something about the rising cost of living. After all, it isn’t as if energy prices are something which the current government has ignored, even if it hasn’t apparently been able to do much about it.

The more significant aspect of the proposal is its use of direct price controls. These haven’t been a standard part of government’s economic toolkit since the 1970s when the Prices Commission had the power to investigate and set prices for a wide range of goods and services and many others were under the direct control of government through nationalised industries. Miliband is probably not going to renationalise much, if anything, beyond the NHS (he repeated the earlier promise to unwind the changes made both by the last Labour government and in the Health and Social Care Act of the present one). But, following on from his speech in 2011 which tried to distinguish between productive and predatory businesses, he’s given a clear indication about what he would do to those he deems to be predatory. It was somewhat surprising in this context that he didn’t talk about putting a cap on interest rates for short-term lenders like Wonga, something which the regulations and competition authorities put in place by the last government he was a member of shied away from.

The impact of this is that he has shown himself to be uninterested in whether from the perspective of suppliers the costs of providing energy are adequately covered by prices, whether the levels of profit made are appropriate or excessive when looked at in the context of investment decisions, costs, taxation and so on. He’s approaching the issue from consumers and voters’ perspectives. Are the prices going up faster than our incomes? Yes, so we must stop that from happening. It is perhaps a welcome change from his time as Secretary of State for Energy and Climate Change when he was responsible for introducing a climate change levy on energy bills which accounts for a larger part of the bills that we pay than the profit taken by the energy company…

However, appealing though this sounds, what if in fact the prices are what would be expected on the basis of costs, taxes, investment obligations? What if the levels of profit actually being made are comparable or indeed lower than the profits of other industries, rather than significantly exceeding them? So what? Perhaps, the answer could be “so what?”, but then to require the huge investment in decarbonising energy production by 2030, as he did, seems rather unjoined-up. Even if the lights won’t go out during the price freeze, how can energy companies who are expressly being required to forego an estimated £7bn of excess profit over the period to 2017 make provision for building the carbon-less generation capacity that he wants? Cancelling or cutting the budget of HS2 as Miliband’s shadow Chancellor recommended the day before wouldn’t free up enough public money to allow the government to step in to nationalise power generation.

The worry I have is that Miliband seems to have gone from wonkish theory to bold policy without missing a beat. He’s ditched the admirable part of wonkishness, that is, looking at the consequences of a policy both intended and unintended, and gone right to the other extreme of only caring about the intended consequences. That this might lead to energy prices being raised by companies now in anticipation of harder times ahead is not so much of a worry – the best thing energy companies can do now to make Miliband’s proposal come true is to raise prices. The more sensible of them would be more likely to say, why wait until 2015, we already have a fixed price product that will give you a fixed price from now until 2017. The unintended consequences in terms of incentives to invest are much more serious and difficult to resolve. A similar thing can be seen in the separate proposal to make developers who have land which they don’t develop within some undefined period lose the land – “use it or lose it”. This sounds at first like a strong way of getting developers to do the former – use the land for development. But, developers don’t leave land idle for fun – they do so because it is uneconomic for them to develop it at that moment or because they are unable to secure finance. The threat to have the land confiscated, apart from echoing Robert Mugabe, might just lead to developers writing off marginal sites and minimising their tax liabilities, or doing any number of other things with the land rather than putting in developments which they can’t justify. Where land is held for commercial development this is often done on a long-term basis (eg while working for a major supermarket chain a while back I discovered that its typical lead time for developing new stores could stretch to 20 years as it assembled plots of land and waited for the conditions to be right for opening a store in an area). The time it took for somewhere like Milton Keynes to grow shows that a use it or lose it strategy which put a short deadline on development would be unrealistic unless there was sufficient government money to step in and develop the land quickly. The target of 200,000 new homes a year by 2020 (likely to be a lot less in total 2015-2020 than the promise of one million new homes by 2020 – if not, why not a target of 200,000 new homes a year from 2015?) wouldn’t necessarily fit with the amount of land which is being sat on by developers because there’s no sign that that figure comes from any consideration of the available land or where it is compared to where the need for those homes may arise.

Another thing is that the proposal seems to have been designed as part of his answer to the question asked of voters by Ronald Reagan in 1980 – do you feel richer than you were five years ago. Certainly the answer to that question today is likely to be “no” for many people even if the ONS data shows that the disposable incomes of the bottom quarter of people has actually risen by 6.9% in the last 3 years. Miliband was criticised in previous years for caveating every criticism of government policy by saying that things might look different in 2015 so it would be foolish to pre-empt them with commitments now which would not be needed or which would not be affordable then. Unfortunately, that caution might well still apply so that it is not inconceivable that people in 2015 will feel better off than they did in 2010. If today’s cost of living is a problem, a solution which won’t come for 2 years is little comfort and any effective solution from the government before then will make it soon forgotten. The real meat behind the price freeze is a proposal to change the regulatory regime which would take time and whose details are, unlike an immediate impact on pricing, not likely to spark great public enthusiasm.

A further thought, if energy companies are charging too much already, getting them to freeze their prices doesn’t do much for anyone struggling to pay beyond telling them “it can’t get any worse”. That’s somewhat less enticing a prospect than “Britain can do better”. If Ed really was serious, why didn’t he use the opportunity given by his announcement of an end to market-led economics and the renewed use of price controls and other directive measures to be more bold? Why not pledge to cut energy prices and index them to wages and benefits? Particularly as he did talk about imposing living wage requirements on certain sectors (while awkwardly acknowledging that demonised banks did in fact pay living wages to their lower paid workers).

So, Ed has shown his “red” intent but without, ironically, being quite red enough to follow through even 2 years off from possibly becoming Prime Minister. Britain can do better? Better than Ed, I hope.


One thought on “Ed’s Red, Baby, Ed’s Red

  1. Pingback: Page not found | botzarelli

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