Summary
Highlights
The closure of the Strait of Hormuz will lead to severe shortages in oil, gas, and petrochemicals, impacting energy bills, fertilizer prices, and food supplies. This is a crisis of physical supply, fundamentally different from the 2008 financial crisis or the 2020 medical crisis. The government must recognize this distinction to avoid using inappropriate tools. Unlike previous crises, stimulating demand won't work; instead, constrained supply must be managed. Inflation will be driven by resource scarcity, not excess spending.
Raising interest rates won't address physical shortages and will deepen the impending recession. The Bank of England should hold or cut interest rates. Inflation management requires direct government intervention through rationing and price controls, not monetary policy. Price controls are crucial to prevent allocation by wealth, ensuring everyone has access to essentials, learning from the success of such measures during World War II.
Resource shortages will lead to business failures and bad debts for banks, potentially stressing them to failure. Any public support for banks must come with proportionate public ownership. The possibility of bank nationalization should be considered a legitimate crisis management tool, not a last resort. The government should also extend deposit guarantee schemes and direct bank lending priorities. For businesses, discriminate rescues are necessary to support viable firms, especially in strategic industries like energy and food processing, with conditional equity support or nationalization if private ownership fails.
Rising unemployment necessitates immediate changes to the social security system. Universal Credit's five-week waiting period and conditionality must be suspended, and payment levels increased to replace lost income. The social care sector, already at a critical point, will be heavily impacted by rising costs of energy and food. Emergency funding for local authorities, support for providers, and increased carers' allowance are essential to prevent its collapse and subsequent strain on the NHS.
High household debt makes many families vulnerable. A statutory mortgage payment freeze and rent freezes with eviction moratoriums are needed to prevent widespread homelessness. Consumer debt enforcement must be suspended, and credit records protected. The government should also intervene in the buy-to-let market, acquiring properties from struggling landlords at market rates to convert them into permanent social housing, thus expanding public housing stock and protecting tenants.
Inspired by Keynes's plan for funding World War II, the UK needs tax increases to balance the economy. Windfall taxes on energy and commodity profits, and higher taxes on income and wealth, are necessary not primarily for revenue but to withdraw purchasing power from the wealthy to prevent them from outbidding those with limited resources. The government should also consider issuing crisis bonds, similar to war bonds.
The government must avoid past mistakes, such as pretending a fiscal resource shortage is temporary or leaving the response to the Bank of England. It must not let social care collapse or use fiscal responsibility as an excuse for inaction. It must not fear nationalization when strategic industries or housing require it. As a monetarily sovereign state, the UK can afford these measures. The real risk is political failure to deploy available capacity, which would be true fiscal irresponsibility. The government needs the political courage to use tools like price controls, rationing, and targeted support to manage the crisis effectively.