Monday, 15 February 2010

Inflating away Wylfa B

The admirable Dylan Jones-Evans has posted a very interesting piece on the effects of high inflation on the recovery. He notes that Citibank is predicting that inflation rates could hover around 4% throughout the year - in contrast to the Bank of England's forecast of just 1%. Based on the BoE's recent performances the Druid knows which forecast is more likely to be correct.

Dylan Jones-Evans points out that rampant inflation will have the following adverse effect on public finances:

  • higher inflation leads to higher consumer prices which can adversely effect the recovery meaning less tax income;
  • higher inflation will also lead to higher pay demands from Public Sector workers whose pay settlements are linked to inflation;
  • furthermore higher inflation means pressure to increase pensions, social security, etc.

Such pressures could be disastrous for any government which wants needs to cut back public spending in order to reduce the massive public debt which this Labour government has been racking up.

And lets not forget that we have no alternative but to start paying back the debt. There was a letter in the Sunday Times yesterday signed by the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, a former permanent secretary to the Treasury and cabinet secretary, four former members of the Bank of England’s monetary policy committee (MPC), a Labour peer, the former chief economists of the Bank of England, HSBC and the Greater London Authority, the head of the economics department at the London School of Economics (LSE) and the presidents of both the Royal Economic Society and the European Economic Association. In it, these leading economists say:

"IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.
In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.
In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report."

How will this effect Anglesey?

Put simply: as inflation increases, the chances of Wylfa B going ahead decreases:

  • higher inflation will make the estimated £90bn cost to the public purse of disposing of the UK's existing nuclear waste even more expensive;
  • higher inflation will push up construction costs of a potential Wylfa B, making it less cost effective over its lifetime;
  • If Wylfa B becomes less cost effective there is less financial incentive for RWE npower/E.on UK to build without calling for a public subsidy;
  • Both the Labour and Conservative party have publicly pledged no public subsidies for new nuclear reactors - and indeed may not have any money to do so as they have to pay back the vast debt already run up and counter the spending pressures described by Dylan Jones-Evans above.

So at the very point when a decision has to be made whether to build Wylfa B or not the UK's economy is in the worst possible state: suffering from a double whammy of vast public debt and rising inflation - a combination which could easily kill off Wylfa B and Anglesey's economic future with it.

Of course, if the Labour government had commissioned Wylfa B ten years ago when it should have, we wouldn't have these problems.


Anonymous said...

A very interesting article.

The Druid of Anglesey said...

Thank you. I like your site also - as a fellow Anglesey blogger, I've added you to Druid Blogroll!