In this section
Suggest using the financial power of the state to rebuild the country, and someone yells “inflation!” like they’ve won the bingo. Weimar. Zimbabwe. A wheelbarrow of banknotes.
It is worth being precise about what inflation actually is, because the explanation gives the answer.
Inflation occurs when spending outruns the ability to supply. In a specific good, that means demand exceeding what can be delivered, like when the Straits of Hormuz are too dangerous to sail. In aggregate, it means total spending in an economy exceeding what that economy can produce. Bid for bricklayers, steel and timber that are already in short supply, and you will push prices up. That is real, and it is the honest form of the objection.
The answer is to build the capacity to fulfil the demand before and alongside buying the goods.
Instead of the stop-start spending that leaves a contractor unsure whether to hire staff or buy machinery, the state gives a twenty-year pipeline. A firm that knows the country will be retrofitting homes and building council houses for two decades trains the apprentices now, and builds the supply chains now, a year before the first order lands. Chapter 19 sets out how funding is released only when that capacity exists.
Hyperinflation is a different beast altogether. It requires political collapse, a collapse in physical production, or debts denominated in a currency the country cannot issue. None of those describes Britain.
British government debt is denominated in sterling. A gilt is defined by the Debt Management Office as a liability of the UK Government in sterling — not usually, not mostly, but by definition.1
“Britain does not owe anyone money it cannot issue. That is what separates us from the countries usually cited in these arguments, and it is why the Weimar comparison fails before it starts.”
We cannot be forced to default on a debt we can always meet, and we cannot be forced into anyone else’s programme to avompsid it.2
So what does a sovereign currency not protect you from?
The exchange rate. Britain does not buy gas in pounds. It buys gas in dollars, and to do that it must first sell pounds. The rate it gets is set on a market, by whoever happens to be trading that day. When fewer people want pounds, every import priced in dollars or euros – gas, food, steel, semiconductors, heat pumps – costs more before a single price has changed abroad.
An imported price can therefore rise two ways. The thing gets dearer, or our money buys less of it. In 2022 both happened at once.3
Which exposes the problem with the Bank’s single tool. Raising interest rates can be a method to attract money into sterling and hold the rate up. Higher purchasing power in sterling keeps imports cheaper, but makes exports more expensive. But whenever that lever is pulled it hurts the third of households with a mortgage. Defending the currency and defending your citizens are not the same job, and one tool cannot do both.
Every country is exposed to something. The only questions are what, and how fast it reaches your front door.
Britain’s current exposure is to a market that can reprice a mortgage in seventy-two hours. That is not a hypothetical. It is Chapter 2, and it happened, and it pushed 320,000 people into poverty.
Compare that to a currency shock. After the June 2016 referendum sterling fell 7% in a month and was 20% down on its effective rate by that October. As a result, consumer prices rose by between 1% and 2.9%, depending on whose figures you use.4 The ONS found that the non-imported items in the reference basket barely changed in price. And ten months later, the Bank’s own assessment was that most of the effect still had not reached the shops.
Currency shifts affect households partially, and slow. A gilt shock is total, and it arrives within days.
So neither the status quo nor this report’s plan allows unfettered borrowing. But ours is a better trade, you can see its effects coming, and its exposure is time limited.
“Consider what we actually buy. Gas is a bill that never stops. A wind turbine is bought once and owned for thirty years. The programme replaces a permanent commodity import for a temporary capital one.”
The sequencing helps. Retrofit runs first, and it is the least import-intensive part of the programme. Most of its cost is labour that cannot be offshored, and it starts cutting gas demand while the heavier equipment is still arriving. Britain already makes 60–70% of the wood panel it uses, with room to make more against a twenty-year order book. The raw timber comes overwhelmingly from Sweden, Finland, Latvia and Ireland. Stable, contracted, close, and not priced in dollars.
Norway supplied 69% of UK gas imports in 2025, mostly by pipeline. Domestic production and Norwegian pipeline gas together provided around 79% of UK supply. Globally traded LNG was 14%, Qatari imports were about 1%.5 The point is that despite the bulk of Britain’s gas not coming through the Straits of Hormuz or via a Russian gas pipeline, the global market sets the price of every unit, including the gas from the North Sea and the pipeline from Norway. It is precisely the mechanism Chapter 22 describes in the electricity market, one layer further back. The remedy is renewables: we don’t need to import wind or sunshine.
To do that we need to build supply chains. There will be imports, too, especially in machine tools. Some global supply chains are stretched – transformer lead times can be several years, worldwide. That is a physical constraint before it is a currency one. And it is an argument for building capacity with the guardrail, not an argument to being dependent on volatile gas prices.
In summary, too many imports, and things get expensive. The answer is not to wish the constraint away. It is to need less of what has to be bought in someone else’s money.
Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.
- The distinction is not academic, and Greece is the most instructive case because it is the one that superficially resembles Britain: a developed European economy borrowing in a currency it called its own. Greece had not borrowed in dollars. It had borrowed in euros, having delegated the power to issue that currency to the European Central Bank. The consequence was that when investors lost confidence, Greece had no lender of last resort — the ECB was explicitly prohibited from acting as one — and its euro-denominated debt therefore behaved, in the standard analysis of the eurozone crisis, as foreign currency debt would in any other sudden-stop crisis. The trap closed at both ends: because the debt was denominated in euros, leaving the eurozone and adopting a devalued national currency would have increased the debt’s value in domestic terms rather than reducing it. Devaluation, the ordinary means by which a country restores competitiveness after a shock, was unavailable both inside the euro and on the way out of it. The Argentine case shows the same mechanism in its more familiar form. Around 90% of Argentine public debt was dollar-denominated for most of the period leading to the 2001 default. When the peso was devalued, the debt-to-GDP ratio rose from around 55–62% before the crisis to between 150% and 164% afterwards; the ratios vary between sources depending on gross or net measure and valuation date, so a range is given rather than a point estimate. The debt had not grown. The currency it was measured in had. Nothing Argentina could decide domestically altered what it owed. Turkey is a variant worth noting because it is the more sophisticated form of the objection: the 2018 crisis was driven substantially by private foreign-currency borrowing — external debt of $466.7 billion at end-Q1 2018 against reserves of $114.5 billion — the consequences of which the state ultimately carried. A country can be sound on its own books and still be exposed through everyone else’s. Britain’s position differs from all three. The government’s marketable debt is sterling-denominated, and the Bank of England is the issuer of sterling. The relevant contrast is not the name printed on the currency but who is able to issue it. Sources: Tooze, Crashed; Baldwin et al., “The Eurozone crisis: A consensus view of the causes”, CEPR; Congressional Research Service, Greece’s Debt Crisis: Overview, Policy Responses, and Implications; Kiguel, “Argentina’s 2001 Economic and Financial Crisis”, Brookings; Congressional Research Service, Argentina’s Sovereign Debt Restructuring. See also the note to Chapter 18 on Article 123 of the Treaty on the Functioning of the European Union, the provision that denied Greece a lender of last resort, and from which the United Kingdom holds an explicit exemption. ↩︎
- On 1976, which is usually raised at this point. Before it is deployed as an argument, four things about it should be established rather than assumed. First, sterling was emerging from a fixed exchange rate system: the Bretton Woods parity, devalued in 1967 and abandoned in 1972. The exchange rate was a policy commitment to be defended, not a price that moves.
Second, the IMF assistance was denominated in Special Drawing Rights and drawn in foreign currency, because the problem was a shortage of foreign exchange with which to meet foreign currency obligations. The Letter of Intent of 15 December 1976 requested the right to purchase from the Fund the currencies of other members in exchange for sterling, up to SDR 3,360 million — then about $3.9 billion, and the largest arrangement the Fund had made for any member country. That is the same category of problem as Argentina’s. It is not the same as the position of a country that owes money in a currency it issues itself.
Third, Britain then held substantial foreign currency liabilities that it does not hold now. The Anglo-American Loan of 1946, denominated in US and Canadian dollars, was not finally repaid until December 2006. Under the Exchange Cover Scheme introduced in 1969 and its successors, the Treasury encouraged public bodies — primarily local authorities — to borrow abroad in Deutschmarks, Swiss francs, US dollars and other currencies, with central government carrying the exchange risk. The Bank of England records that the final repayment of Exchange Cover Scheme debt was made on 30 October 2007. Sterling balances held by overseas official holders formed a further class of obligation, addressed through the Basle arrangements, which were restored alongside the standby specifically to reduce the use of sterling as a reserve currency.
Fourth, the 1976 conditions were negotiated against that specific structure of external liability, and cannot be detached from it. The conclusion usually drawn from 1976 is that Britain must never test the patience of external creditors. The more accurate conclusion is that owing money in a currency you cannot issue is a bad idea, and that ending that dependency is worth doing. Both are lessons this report agrees with. Britain in 1976 was not brought to the IMF by ambition. It was brought there by obligations denominated in other people’s money — some of them incurred by war, some of them arranged by the Treasury itself.
The programme set out in this report creates no such obligations. It finances domestically, in sterling, and reduces over twenty years the volume of what Britain must buy in currencies it cannot issue. Anyone invoking 1976 against it should first establish what a fixed-rate economy carrying dollar-denominated war loans and a state-sponsored programme of foreign currency municipal borrowing has in common with a floating currency and sterling-denominated debt.
Sources: Bank of England, “Further details about UK central government and other public sector foreign currency debt data”, which records Exchange Cover Scheme borrowing under the 1969 and subsequent schemes as principally local government borrowing in foreign currency, with final repayment on 30 October 2007; HM Treasury statements on the final repayment of the Anglo-American Loan, December 2006; IMF records of the 1976 standby arrangement, including the Letter of Intent of 15 December 1976. See also the preceding note on Greece and Argentina. ↩︎ - Wholesale gas prices rose steeply through 2022 following the invasion of Ukraine, and sterling fell against the dollar over the same period, from around $1.35 at the start of the year to a record low of about $1.03 on 26 September. The pound cost of imported energy therefore rose by more than the dollar price alone. On the simplification in the text: UK wholesale gas is quoted at the National Balancing Point in pence per therm, not in dollars. The dollar exposure is real but indirect — Britain’s marginal supply is imported LNG, bid for on a global market against buyers paying in dollars, so the sterling price tracks the dollar benchmark whatever the contract currency. Oil, and refined products including diesel, are dollar-priced directly. ↩︎
- Sterling fell approximately 7% in the month following the June 2016 referendum, and its effective exchange rate was around 20% below its pre-referendum level by October 2016 (ONS, “Exchange rate pass through and transmission to consumer prices following the 2015 to 2016 depreciation of sterling”, Economic Review, July 2019). CPI inflation rose from 0.4% in June 2016 to 3.0% in September 2017. Attribution of that rise to the depreciation is contested and the estimates are given here in full rather than selecting one. Breinlich, Leromain, Novy and Sampson (CEP/LSE) initially estimated the depreciation raised consumer prices by 1.7% in the first year, revising this to 2.9% with later data, equivalent to around £870 a year for the average household. The Federal Reserve Bank of San Francisco attributed close to two-thirds of the UK inflation spike to the exchange rate move. Lower-end estimates put the effect of the initial 10% depreciation at around one percentage point of CPI. The point made in the text does not depend on which figure is correct. On timing: in an April 2017 speech, ten months after the referendum, the Bank of England’s assessment was that most of the depreciation had not yet been reflected in consumer prices and that full pass-through would take longer. On distribution: the ONS found that half the subsequent CPI increase was driven by the components of the basket with more than 25% import intensity. ↩︎
- DESNZ, Digest of UK Energy Statistics 2026, Chapter 4. Norway accounted for 69% of total UK gas imports in 2025, down from 76% in 2024, equivalent to 40% of gross supply, with Norway supplying 98% of pipeline imports. NESO’s 2025 review records UK and Norwegian fields together supplying 79% of gas, LNG 14% and storage withdrawal 7%. Qatar accounted for approximately 1% of UK gas supply in 2025. The distinction drawn in the text is between volume exposure and price exposure: because gas is traded on an internationally linked market, the marginal LNG cargo influences the price paid for domestically produced and pipeline-imported gas alike. NESO figures are operational rather than audited statistics. ↩︎