Problem is not regulation but charges heaped on business

A few weeks ago, as farm costs began to climb in response to the war in Iran, I suggested farmers and supermarkets would face pressure from politicians not to pass on these rises through higher food prices. This week that pressure came – and the way it was done confirmed that politics is a murky game, where self-interest prevails over economic logic. The suggestion was that the price of basics, such as bread, milk and eggs, should be capped. In return the government suggested it would allow some easing of regulations on supermarkets. This ignores the reality that their problem is not regulation but the charges heaped on business as a result of government decisions. Top of that list is the big increase in employers’ national insurance contributions, followed by successive increases in the national minimum wage. However the real issue is that trying to prevent food price increases is akin to King Canute’s fabled attempts to show his lack of power by failing to turn back the tide. The increase in farm costs is an equally great reality and this has to be passed on via higher food prices. Farmers are not in a position to absorb these cost increases, and big and profitable as supermarkets are they too are not in a position to absorb these costs and so cap the price of what the government deems basic food products. This is where the politics of this get very murky. The government must have known the answer from retailers and farmers would be that any price cap was unaffordable and impossible, regardless of any bribes on reduced regulation. This however leaves farmers and retailers looking the bad guys with consumers, which is probably exactly what politicians wanted from their statement that they would not legislate for a cap. At the same time they have made any price increases a bigger issue, with criticism likely to be directed more towards suppliers than the fact that the government does not have the finances or borrowing capacity to take direct action on energy and food costs. The decision not to impose an increase in fuel duty is nonetheless welcome, if at five pence a litre irrelevant in the context of the continuing failure of the United States to resolve a war it started with no plan how to end it. The cut in duty on red diesel is more meaningful and in the equation of the duty element relatively generous at a third of the duty. However cost is still an issue as the basic fuel price is still being driven by events in the Middle East, regardless of the reduction in excise duty. In reality until Iran and the US find the road to a deal that gets shipping flowing again governments worldwide can only tinker with the problem. This is linked to how deep their financial pockets are – and in the case of the UK those pockets are shallow. The government has also agreed to allow some imports of diesel and jet fuel that originated in Russia, as opposed to coming directly from there. This dents the tough stance on sanctions against Russia over the war in Ukraine. But in reality – and regardless of the manufactured criticism from the Conservatives – the government was left with no option, as the US/Iran stand off shows no signs of easing any time soon. This was a judgement call and unlike many others around energy and green taxes it is one the government got right to head off a potential fuel crisis. Behind all this cost push price pressure the cost of fertiliser remains the big concern and a major driver of higher food costs, not least for the so-called basics that all rely on fertiliser. The European Commission is becoming alarmed both over the availability and price of fertiliser. It has stepped in with a further easing of state aid rules to allow it and member states to offer some support for farmers. Its fear is a loss in productivity and food security if farmers opt to use higher food prices to offset lower yields from reduced fertiliser use. However Brussels is rightly facing criticism for maintaining green carbon levies against fertiliser imports. A dogmatic green stance on carbon and action over availability and food security are ultimately contradictory policies. Like a backdoor easing of sanctions on Russia this highlights the reality that sometimes it is important to do what is needed, rather than what is politically correct.