How should autumn shortages affect long-term government policy?

Shortages dominate the economic discussion, and are surely the priority for politicians and officials, too. Most of the time, economic events happen far from the direct apprehension of the voter, in a dry world of data releases. But market dysfunction is currently unfolding directly before the eyes of the public, in the form of queues, empty shelves and folding energy companies.

Usually the demands of a transitory crisis are handled separately to the processes that shape settled government policy. Policy professionals have no particular advantage in guessing the course of a crisis like this one. Given the complexity of supply chains you hardly need a free-market outlook to shy away from the temptation to intervene, in case the problem is made worse.

However, the division between tactical firefighting and long-term policy development is not always so neat. Immediate turmoil often reflects historical decisions that need to be revisited, such as the one to allow too thinly-capitalised energy companies to enter the market.^[1] Crisis management can have consequences that set back significant political goals. Trying to tough it out, in an effort to encourage companies to prepare better in future, might induce such turmoil that it hits public confidence. Gas shortages might be blamed on too-sudden a rush away from fossil fuels, for example, and embolden a nascent anti-green movement on the right.^[2] 

Therefore, while it is fighting fires and being urged to “get a grip”, the government must also reflect honestly on how crisis events and responses interact with its longer-term policy agenda.^[3]

The government should not ignore the Brexit impact on supply chain problems

There are a few analytical lenses to apply to the current problems while going about this.

First, there is a judgment to make about how much what looks like a series of unfortunate incidents and bottlenecks are just manifestations of a general, passing macroeconomic phenomenon: the UK economy’s recovery bumping up against its capacity to grow fast. This is a global event. Given changes in the economy during and out of the pandemic – crudely, a shift from in-person services to physical and digital goods, now reversing – some bottlenecks and disruptions were bound to occur.^[4] This is a key judgement for the Bank of England to make in regulating the pace of the economy ^[5], but it also determines whether and where the government should be intervening to try to make bottlenecks better. It should focus mainly on issues that are deemed likely to last or are sector-specific.^[6]

Related to this, the government must think about how much current problems stem from aftershocks of the Covid-19 crisis, such as the sharp apparent reduction in the effective domestic labour force ^[7], or changes in how people travel towards more use of cars. Should either of these prove long lasting, the government needs to adapt its policies in response, to encourage older people back into work, say, or to adjust its environmental and infrastructure plans for new travel patterns. 

The third lens to apply is the most politically awkward. The government cannot dismiss the question of Brexit and its impact on supply chain problems. While it is reasonable to draw attention to the global nature of the crisis, it is inconceivable that the rupture from the EU has had no effect. Ignoring this may lead the government to underutilizing the tools that it has at hand.

There are lessons – and plans – to be taken from Operation Yellowhammer

One of the odd benefits of the drawn-out Brexit process is the considerable experience gained in Whitehall towards the possible disruptions following the UK’s departure from the EU. The databases and contacts built up when planning “Operation Yellowhammer” ^[8] are still embedded in the civil service, and proved valuable during the onset of the Covid pandemic. The current crisis is different from a No Deal Brexit - there are not queues at the border, for example - but shares features in common with it, such as a loss of access to certain EU workers and impaired logistics.

From my conversations with business representatives, little of this Brexit-handling expertise is being deployed in finding cooperative solutions that might ease the crisis. Instead, there is a growing blame game and a brewing argument about business use of immigrant labour.^[9]

Another under-utilised tool is the more sensitive use of the Shortage Occupation List– which has become a much more important matter since the end of free movement following exit from the EU. There has been growing frustration in the logistics industry that the government is not deploying this tool more proactively to alleviate the problem of insufficient numbers of drivers. It is also resisting calls to issue more visas for foreign butchers and head off a crisis in the pork meat industry. ^[10] The government’s repeated insistence that industry should simply hire more domestic workers suggests an unwillingness to deploy the control it enjoys, despite this being such a key theme of Brexit – an unwillingness that bemuses Brexit-supporting businessmen too.^[11]

Any shift in the UK economic model will take time and can involve disruption

It has become increasingly common to hear that this refusal stems from a conscious policy to wean the economy off “cheap foreign labour”, with the ultimate goal of tighter labour markets and higher wages. Over the weekend before Conservative Party Conference there were numerous pronouncements that tried to portray an upside to fracturing supply chains, in providing opportunities for others to enter the market.^[12] Without going into the merit of such a policy here, it is disingenuous for the government to advocate a policy that raises costs and cuts supply, but only acknowledges the effect on possible beneficiaries. Consumers pay more when wages and other costs rise, and lose out from reduced access – the sorts of shortages being suffered today.  

Moreover, even if what we are seeing is a conscious shift in the UK’s economic model, there needs to be a proper recognition that such shifts take time, can involve serious short-term disruptions – it takes months to train an HGV driver, over a year to train a butcher – and produce losers as well as winners. Markets do not clear instantly, something the government recognised when it was trying to put in place arrangements to mitigate a No Deal Brexit.^[13]

Whether consciously chosen or accidental, a refusal to acknowledge the Brexit-related causes of our current problems impedes the efforts to ameliorate them. Ultimately, if the disruptions persist, this will undermine support for the kind of economic shift the government claims to want.

1. Gas supply issues expose risks to government’s competition policy | The Institute for Government
2. https://www.economist.com/britain/an-anti-green-backlash-could-reshape-british-politics/21804957   
   https://www.ft.com/content/f9535e7d-8a44-4cd6-bc08-9b255a4d9883 “Gas crisis shows why we must stop demonising fossil fuels”, Merryn Somerset Webb
3. Financial Times, “Memo to Boris Johnson: prenez un grip”, https://www.ft.com/content/95bb5c85-1778-4e1e-bb13-c063f069aeba
4. It is interesting to note that President Joe Biden warned of this in May https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/05/27/remarks-by-president-biden-on-the-economy-2/   “Now, as our economy recovers, there’s going to be some bumps in the road; we know that — of course there will be.  You can’t reboot a global economy like flipping on a light switch.  There’s going to be ups and downs in jobs and economic reports.  There’s going to be supply chain issues, price distortions on the way back to a stable and steady growth.”
5. There is an excellent recent speech by Governor Andrew Bailey about the path of supply capacityhttps://www.bankofengland.co.uk/speech/2021/september/andrew-bailey-guest-speaker-at-the-society-of-professional-economists-annual-dinner-2021
6. An good discussion of four structural  forces that will outlast the current turmoil is provided by Rupert Harrison, https://www.standard.co.uk/comment/four-trends-fuel-labour-energy-shortages-brexit-hgv-drivers-b958117.html “Four trends that will cause a cost of living crisis”, Evening Standard 30th September
7. This Prospect article by Tony Wilson is a helpful discussion https://www.prospectmagazine.co.uk/economics-and-finance/end-of-furlough-would-bring-mass-unemployment-the-reality-is-very-different-vacancies
8. https://www.instituteforgovernment.org.uk/sites/default/files/publications/no-deal-business-bailout.pdf
9. See https://www.ft.com/content/5f4db022-465b-4380-9f79-6f8db5c8eaba Financial Times, “Boris Johnson steps up battle with business over UK supply chain crisis”, 5 October 2021
10. https://www.thetimes.co.uk/article/visas-for-foreign-butchers-as-industry-warns-of-christmas-shortages-6rl72gd2p
11. See comments from Simon Wolfson in  https://www.ft.com/content/7c8bf648-dd0a-4558-9544-f77bde4798b2?sharetype=blocked , “Labour shortages must not be seen as simple case of business vs Brexit”, 4 October 2021
12. Chris Loder MP commented that it was a “great opportunity” if supermarket supply chains were to break is probably the baldest statement of this new approach
13. Even if this Institute for Government report argued that in many cases, support was ill conceived or unaffordable https://www.instituteforgovernment.org.uk/sites/default/files/publications/no-deal-business-bailout.pdf