An economic crisis was quietly brewing last week while the Conservative party was tearing itself to pieces over Boris Johnson’s misleading of parliament. Fears about the tough measures that might be needed to bring down inflation sent mortgage rates surging towards 6%.
Even without the disgrace of the former prime minister, this would be a government in serious political trouble staring at electoral meltdown.
Labour can hardly believe its luck. There is still a lingering fear that the Tories might somehow defy the odds, as John Major did in 1992, but in truth the real echo of three decades ago is of a Conservative party losing its reputation for economic competence. What we are seeing is a slow-motion version of Black Wednesday, and the worse things get for Rishi Sunak they better they look for Keir Starmer.
Things don’t look as if they are going to get better for Sunak any time soon. On Wednesday, the latest inflation numbers will show prices continuing to rise more quickly than wages, eroding living standards. On Thursday, the Bank of England – battling to shore up its battered credibility – will raise interest rates for a 13th successive time.
Official borrowing costs have climbed from 0.1% to 4.5% over the past 18 months but the City thinks they will need to go higher – perhaps to 5.75% – before the Bank is done. Normally, this sort of interest-rate action only takes place when Britain is booming, but that is not the case currently. The economy has been flatlining for more than a year and every increase in rates from Threadneedle Street’s monetary policy committee takes Britain a step closer to recession.
As one Labour insider noted last week, people are terrified by the rising cost of servicing mortgages. For more than a decade, the Bank kept official interest rates at historically low levels and the public got used to the idea that home loans would remain cheap. Indeed, the only way in which property prices could keep rising was if mortgage rates remained low. That prop has now been removed, and the risk of a housing market crash is increasing by the week. More than 2.4m fixed-rate mortgage deals expire between now and the end of 2024, and those forced to refinance at higher rates will be paying thousands of pounds extra each year.
No question, the squeeze on mortgage payers is real, and they are unlikely to respond with any great enthusiasm to Jeremy Hunt’s message that the pain they are suffering cannot be avoided if inflation is to be tamed. This looked like a reasonable argument last autumn following Liz Truss’s departure, because Sunak and Hunt could say they were simply clearing up the mess they had inherited. It looks a far less compelling argument today. Last week’s rise in gilt yields to levels even higher than when Truss was in Downing Street was certainly not part of the Sunak-Hunt script.
Labour is trying to draw parallels between the lack of resilience in the economy as a whole and the lack of resilience in household finances. Rachel Reeves has started to talk openly about the “age of insecurity”, and how she aims to change that by reforms of Britain’s supply side. The shadow chancellor calls this “securenomics”.
Coincidentally, The Age of Insecurity was the title of a book I co-authored with Dan Atkinson a quarter of a century ago. Although by no means a bestseller and long out of print, The Age of Insecurity’s argument – that the triumph of the free market meant piling ever more risk on ordinary people – seemingly remains valid. It warned that the laissez-faire experiment would come to grief, which it did in the global financial crisis a decade later. As we put it, the global economy had been left “chronically unstable and poised on the brink of a social and environmental chasm”.
Reeves might have more success in getting traction for her age of insecurity than we did in the late 1990s. Back then, inflation was low and living standards were rising. Labour took over an economy that was booming.
Things will be much more difficult for Starmer in the event that Labour wins the next election. The economy is weak, public services are wrecked and money will be tight. If they are smart, Starmer and Reeves will say any tough measures they have to impose are the result of the Conservatives making a total hash of things since 2010, but even so, a new Labour government will have a job on its hands managing expectations.
In part, that’s because the scale of the challenge is formidable. Clearly there are those who have thrived even as the economy has drifted sideways for the past 15 years, but insecurity is rife. The fact that more than half the people living in poverty are in working households tells its own story. As does the fact that a million working-age adults on middle incomes would be unable to meet an unexpected expense costing a month’s income. And as does the fact that in the private sector final salary pensions are now a rarity.
In part, it is because it will take time for Labour’s plan to modernise the economy’s supply side to bear fruit. Britain has serious long-term structural problems that will take years to put right.
Ultimately, though, there is a deeper issue. There is an inherent tension between classic social democracy – which is all about offering security to ordinary people – and the insecurity engendered by free-market capitalism. Highlighting that we live in an age of insecurity is easy to do when you are in opposition. The challenge begins when you are in government and have to do something about it.
