2022 in review – the economics of chaos

Raconteur reflects on a tumultuous 12 months for the UK economy, featuring exorbitant energy bills, a cost-of-living crisis and a car-crash budget
2022 In Review 9

In October, UK inflation reached a 41-year high of 11.1%. Shortly after, the country’s fourth different chancellor under its third different prime minister in the space of just four months, confirmed a recession.

It has been a bruising year. The Office for Budget Responsibility has predicted that the UK economy will shrink by 2% over the course of the downturn, which it expects to last into 2024.

Soaring energy bills 

Chief among the economic difficulties of 2022 has been the rising cost of energy. As countries began to recover from the coronavirus pandemic, the demand for oil and gas started to rise again and could not be met thanks to a shortage in supply.

In August, the UK’s energy regulator Ofgem reset the default tariff rate that most people pay, with the average household’s energy bill increasing from a price cap of around £164 to £296 a month, working out at £3,549 a year. The problem has been mirrored by business premises facing exorbitant costs to stay open.

And all of this has been made even worse by Russia’s invasion of Ukraine. Russia is one of the world’s leading producers of oil and gas and, facing widespread economic sanctions from other countries, has curtailed its own exports in response.

The UK government has intervened with a range of subsidies and rebates but how sustainable these are is a cause for concern. Ofgem’s most recent price cap announcement, in November, saw the cost of energy rise to 67p per unit of electricity and 17p for gas. 

Without the government’s support the average household would be paying approximately £4,279 a year for its energy under the new measures. The current package of relief, which lasts until April 2023, will ensure that average households only pay £2,500 annually. Beyond April, though, in the midst of a recession, it remains to be seen what the government can or is willing to do.

The cost-of-living crisis

Energy is just one flashpoint of a wider cost-of-living crisis. The past year has observed huge hikes in food prices, mortgage interest rates, rent, transport, and, frankly, every business’s products in response to the current climate. Yet people’s salaries have, in the main, stagnated. 

Less disposable income has, as one might expect, scaled back consumer behaviour. According to the Office for National Statistics, 57% of UK adults were actively spending less on non-essential items or social trips in 2022. The ONS also found that 51% were actively trying to use less gas and electricity in their homes and 42% were cutting back on non-essential journeys in their vehicle. 

More than a third (35%) of UK adults this year have actively bought less food and almost a quarter (23%) have dipped into their savings to cover month-to-month costs. 

The mini-budget

The second prime minister and third chancellor of 2022, Liz Truss and Kwasi Kwarteng, arguably oversaw the year’s most damaging fiscal statement. 

September’s so-called mini-budget was an ideologically driven but ultimately uncosted programme of tax cuts. It was touted as a dash for growth but the relief focused on corporations and the super wealthy and was unlikely to ever trickle down when the cost of everything is so high. 

Trussonomics was not so much a free market as it was a freefall. The pound tanked to a record-low against the US dollar in October. Truss sacked Kwarteng just over two weeks after the mini-budget was announced and resigned herself two weeks later. 

The third prime minister of the year, Rishi Sunak, and the fourth chancellor, Jeremy Hunt, have since gone about reversing most of the economic policies that the mini-budget set out.

The road to recovery

The UK needs the strong and stable leadership it was promised. The merry-go-round of senior government officials must stop. Policies should be long-term and holistic, rather than sugar-rush populism. 

In his Autumn Statement, Hunt announced the windfall tax on energy companies would increase from 25% to 35% from January 2023, but this could certainly stand to be more ambitious. So too could the rate of corporation tax which, even factoring in the planned rise to 25% from April next year, is still lower than the G7 average (32.3%).

The benefits of Brexit, meanwhile, remain to be seen. The sooner a softer divorce from the European Union can be negotiated, the better. The weak pound is contributing to a higher cost of imports and the UK is struggling to fill shortages in key employment areas such as hospitality. 

The private sector also has a role to play in stimulating growth. People’s salaries need to be reviewed with empathy and perspective. Companies would do well to understand that pay rises are an investment in retention worth making and can offset the risks attached to a recruitment scramble.

The main lesson of 2022 should be that people matter more than profits. This isn’t to say that profit is a dirty word or that aspiration should be discouraged. But it is to recognise that without people, profits cannot happen. And the past 12 months should serve as a fresh injection of impetus to look after them.