At the end of March, as the Treasury published the budget, the Office for Budget Responsibility (OBR) issued its economic forecast. It made for grim reading. On growth, the OBR predicted economic expansion of 3.8% this year (healthy in normal times, less so in the aftermath of Covid) and 1.8% in 2023. On disposable incomes it was even worse, with living standards set to fall more than any single year since 1956 and the average person losing around £552 a year as price rises outstrip wage increases.
Yet even these predictions, bad as they were, now look optimistic. Last week the Bank of England (BoE) claimed inflation could reach 10% this year, with 2023 likely to see no economic growth at all. Even the possibility of a recession, previously unthinkable given that in 2020 the UK experienced a record contraction in peacetime, wasn’t ruled out. This isn’t boom and bust – it’s just bust.
But while the OBR is often erroneous and prey to political influence, it appears the Centre for Economics and Business Research (CEBR) showed greater foresight. Like the BoE, it predicted no growth for 2023 but, more worryingly, expects the average person will lose around £1,000 in purchasing power this year – twice as bad as the OBR’s claims.
Consequently, living standards by 2024 will lag far behind those in 2019. This wouldn’t be so bad if Britain hadn’t already endured a lost decade after 2008, with wages and productivity barely shifting in the ten years after the global financial crisis. Yet this is precisely what appears to be happening. One lost decade is fast becoming two.
Now throw into this mess a series of interest rate rises. On the same day the BoE predicted the highest levels of inflation since the 1970s, it increased the base rate of interest (interest rates determine the cost of borrowing money) to 1% – the highest since 2009. While still low by historic standards, we know what this will do: put mortgage payments up, stopping money being spent elsewhere in the economy. Renters won’t be insulated from this, as landlords will simply pass on the higher costs to their tenants – one reason why rents are now 15% higher than in 2020.
Britain’s mortgage market is uniquely exposed to short term changes in interest rates, more so than the US or Europe. What’s more, increasing rates in response to rising inflation seems strange when the inflation is itself being ‘imported’ and is the result of supply side factors such as the rising cost of energy, food and raw materials. More inflation will mean more interest rate rises – which will suck yet more demand out of the economy and make mortgage repayments and rents rise further still. Privately, chancellor Rishi Sunak is alleged to have told colleagues he expects interest rates to rise by 2.5%.
If this comes to pass, it will hit Middle Britain for six. Hargreaves Lansdown, an investment platform, recently predicted that interest rates of just 1.5% would add £134 a month to the payments of someone remortgaging at the end of a two-year fixed term deal. According to a survey of 2,000 adults, more than a third would struggle to afford those extra costs. This is around half the increase the chancellor is expecting.
For now, the two major parties are offering different shades of inaction on the cost of living crisis. Labour proposes a one-off cut to VAT on energy bills and other targeted measures which could reduce bills by up to £600 a year for the poorest. Meanwhile, the government plans to give millions of households as much as £350. But when people are set to become thousands of pounds worse off, these are meagre palliatives. The Tories are banking £50bn from rising VAT tax receipts (one upside of inflation), with the plan presumably to hold back attention-grabbing tax cuts until before the next general election. In normal times, this might prove an effective strategy, but soon – likely within months – the idea of delaying support in the name of electoral expediency will incense millions.
‘Two lost decades’ might sound like a curious chapter from a little-read book about post-1990s Japan, but for much of the planet it is steadily becoming reality. Rather than an intriguing abstraction, it means tens of millions of people in this country will lead different lives to what they might have reasonably expected, from living with their parents, to failing to start a family or being unable to pursue the career or life they want. All this in the name of ‘serious, grown up politics’, the parameters of which are determined by several thousand people in London in their gentlemen’s clubs, TV studios and the Houses of Parliament.
It’s now being openly admitted that high inflation could last for “years rather than months”. The hegemony of our economic model – privatisation, outsourcing, the market always knows best – didn’t prevail because Britain’s working class was persuaded of the wisdom of unrestrained capitalism. Rather, it did so because of rising house prices and low inflation. Both are now set to disappear, not in a moment of calamity – like the Dotcom crash or even the 2008 financial crisis – but in a gradual shift, steadily eroding the fundamentals of a world many thought would never change.
The longer the government upholds the fiction that it can’t interfere in markets – with price caps, wage rises and forms of public ownership – the greater the ensuing volatility. In the wake of the financial crisis we had Brexit, Trump, Sanders, Corbyn and Bolsonaro. As this decade unfolds, and with it a return to stagflation, we should expect responses that are far more profound, organised and effective. The left and the labour movement would do well to think radically, not hold on to the centre’s sacred cows.
Aaron Bastani is a Novara Media contributing editor and co-founder.