George Kerevan: We must use the escape hatch or fall in a black hole

It is worth considering this question in a bit of detail because it determines whether or not Hunt is correct in returning the country to Thatcherite austerity for the next decade.

The default explanation for the deterioration in the public finances is (1) Covid spending, (2) inflation forcing up interest rates, and (3) the energy price bailout for consumers.

All three are deemed to be factors outside of domestic control.

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Acts of Nature and Vladimir Putin, so to speak. But this explanation is questionable.

Start with Covid. Yes, the government spent considerable sums on funding people and companies during the lockdown.

Nominally, that has pushed the size of public debt as a share of national income to nearly 100% – three times what it was at the start of the millennium.

But remember that most of the Covid increase was financed not by real borrowing but by the Bank of England printing “funny money” (aka quantitative easing).

That means we owe a lot of this debt (circa £850bn) to ourselves. But there’s a catch.

Before quantitative easing, when the government borrowed money from the markets, it was basically at a fixed rate of interest and so predictable. But with quantitative easing, the Treasury pays a variable rate on the new funny money created by the Bank of England.

Because the Bank has spent this funny money – now in the hands of banks and City institutions – the Treasury is lumbered with humongous interest rate payments.

Back in the spring, the Treasury was forecast to fork out £51bn in interest payments, for the current financial year. Since then, what with Liz Truss and all, the markets are demanding higher interest rates.

Result: the Treasury will pay circa £106bn in interest payments this year – a doubling. Now the government suddenly has to find an extra £50bn or so down the back of the national sofa.

That cash will be borrowed in the short term but ultimately it means higher taxes plus monies diverted from other areas of public spending.

There is an alternative solution: the Bank of England needs to retire the quantitative easing funny money as soon as possible, so eliminating the variable debt.

In fact, the Bank had planned to do so just before Liz Truss and Kwasi Kwarteng embarked on their suicidal economic experiment.

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Instead – after Truss caused the markets to have a mental breakdown – the Bank of England actually had to embark on yet more quantitative easing, in order to save Britain’s pension funds from going bankrupt.

Next up: inflation. Yes, the return of inflation is partly (but not exclusively) to do with rising gas prices globally.

This is the result of a combination of factors: the closing of coal and nuclear plants boosting demand for gas; rising demand for gas in Asia; and the war in Ukraine disrupting supplies.

Governments in many countries – the UK in particular – have increased borrowing and spending to subsidise higher gas bills in order to protect consumers.

But why protect consumers through the crude mechanism of paying Danegeld to the big energy monopolies?

The latter are making a fortune by exploiting gas demand. In the second quarter of this year alone, BP tripled profits to £7bn and Shell trousered £10bn.

Among the domestic suppliers, Scottish Power made a billion in profits in the first six months of the year while Centrica pocketed £1.3bn.

Even if you tax away some of these super profits, the Treasury is still having to spend insane amounts on subsidising consumers.

These subsidies are unsustainable, and we can expect Chancellor Hunt to curtail them eventually. But there’s a simple alternative: ban the price rises at source. Just make it illegal to raise gas prices.

During World War Two, mandatory price controls were used extensively in both the UK and America to cover basic necessities and materials. President Richard Nixon – hardly a bleeding-heart liberal – reintroduced price controls for a time during the early 1970s.

And in Britain, the Labour government of the 1970s imposed a prices and wage policy in order to combat inflation. Even the Tories under Edward Heath imposed price controls on nationalised industries.

The downside of price controls is that they distort the allocation of resources in the long run.

By freezing prices, you freeze returns, thus making it difficult for new entrants to business. And you end up featherbedding inefficiency. But that only happens in the long run.

We are dealing here with a consumer emergency. Freezing or managing energy prices for 12 months or two years, is not going to create massive inefficiencies.

It could conceivably chase some investment abroad, but that can be mitigated with tax incentives. Overall, a consumer price freeze is a better bet than wrecking the public finances.

Why don’t governments do these things? The answer is that they do not want to upset the City and the financial markets. And the Tories have made the markets pretty jittery in recent months.

But markets are not as all-powerful as some like to think. Overall, the markets have guessed wrongly more often than they have been correct.

It was financial market incompetence and greed that caused the banking crisis in 2008-2010. It was the pension funds playing games with derivatives they did not understand that almost sunk the UK pension funds this year. Financial markets need regulation or they act as casinos.

As an MP and a member of the Treasury Select Committee, I fought tooth and nail against George Osborne diluting a whole series of proposals for the tighter regulation of the financial sector.

Surprise, surprise: when he retired, Osborne flounced off to be a paid advisor to BlackRock, the US fund manager, at a cool £650,000 per annum.

The truth is that Tory (and Labour) politicians are an integral part of the financial nexus. The Chancellor after Osborne, Philip Hammond, went on to be an advisor to a cryptocurrency firm. Labour’s last Chancellor, Alistair Darling, retired to a position on the board of Morgan Stanley, the US investment bank.

Conclusion: former Chancellors should be barred from working for financial companies.

This week’s Budget will mean increased hardship for ordinary people. It need not be so, but the current Tory administration is determined to don a hair shirt for wholly political reasons.

Sunak and Hunt want to draw a line between themselves and the debacle of the Truss administration.

They want to go into the 2024 election with a recovered reputation for financial competence, in order to see off Labour. The rest of us can just lump it.

However, I see no respite from Keir Starmer. Labour seems bent on trying to be even more financially conservative than the Tories. Shadow chancellor Rachel Reeves (former HBOS) promises to balance the books by closing tax loopholes – a hoary old tale and meaningless unless she proposes to take on the entire City of London.

Fortunately, here in Scotland we have an escape hatch. Let’s use it or we face a decade of austerity in order to placate the City spivs.