We’ll all pay the price for Rishi Sunak’s handouts

A £400 rebate on electricity bills. A cash handout to the poorest households. And a windfall tax on the energy companies that generate the power to keep the lights switched on to try and pay for it all. Chancellor Rishi Sunak was back to doing what he likes to do best today: handing out vast quantities of free money, while making the UK a less and less attractive place for businesses to operate. It was billed as a fix for the ‘cost of living’ crisis. Yet very soon it will become clear it was nothing of the sort. After all, you can’t tax your way out of inflation; taking the approach Sunak has opted for will only make things worse.

By the standards of the Johnson administration, the Chancellor's statement was an achievement of sorts. Sunak managed to hold out for several whole days after some scary inflation figures before caving in and unveiling a package of measures that even Gordon Brown in his pomp might have decided were too fiddly and complex.

It is an odd way to go about tackling rising prices. There are various different views on how to control inflation. You could restrict the money supply. You could hike interest rates. You could even have a prices and incomes policy as we did in the 1970s (fairly catastrophically, as it happens, but never mind). But you can search in the textbooks for as long as you like: higher government spending and higher taxes are not on the list.

Indeed, if anything, the opposite is true. If inflation, as a simple matter of mathematics, consists of too much money chasing too few goods, then there are only two ways of bringing it down again. Less money, and more goods. But rather than opt for the difficult approach, Sunak has just dished out a few more billion in free money, which is only going to increase demand. The Chancellor has also put in place another round of extra business taxes, which is only going to reduce investment, meaning in turn that the supply of goods will remain restricted. It is crazy. Ludicrously, Sunak claims to have ‘encouraged business’ with a tax rebate for ‘investment’ by the energy companies, oblivious to the simple fact that the best way to get companies to invest is to let them keep the money they make.

The harsh reality about the current bout of inflation is this: we locked down much of the global economy for a year, and printed money to pay for it. On top of that the Ukraine war has taken out a huge chunk of productive capacity as well. The result? We are poorer than we were. No matter how hard you try, you can’t cover that up with a lick of paint, or a few soundbites. Until the government is willing to address that, and start fixing it, then it won’t have even begun to tackle the crisis – it will have only made it worse.