While the Tories inflict hardship on millions, profits roll in. Geoff Tily reports that Jeremy Hunt’s ‘pain’ is not the answer while outlining an alternative
“Of course, there is pain when there are difficult decisions”, was how on 3 August Jeremy Hunt endorsed the Bank of England’s 14th consecutive rate rise. Yet another Tory chancellor promises to repair the economy by making workers poorer and the wealthy richer. Treasury support is inadequate for those who need protection and too generous to those who don’t. The bitter experience of the past 13 years shows that this approach will not work, and it is likely that ‘pain’ means ‘fixing’ inflation with recession.
Pain for who?
On the day the rate rise was announced TV news coverage focused first on those with mortgages. Channel 4 featured a family crushed by the thought of finding an additional £4,000 a year. The BBC reported someone confronting repossession, his monthly payments having soared to £4,501 from £1,264.
But renters are hit even harder. ONS figures show a terrifying three in ten mortgage holders struggling to pay, but this rising to four in ten for renters.
Beyond housing costs, we know the great majority of workers are paying, enduring the longest pay crisis for two centuries.
So, Hunt’s pain is very real. But not for everyone: some gain from high inflation and others from high interest rates. The BBC coverage included a pensioner saying rising interest rates were ”manna from heaven”. But the real winners are the wealthy. In their last two reports the Bank of England have emphasised the steeply higher (9%) pay growth in finance and business compared to other industries. Hardly a surprise of course – these are the only workers with pay above the 2008 level. This is also the second consecutive year of record bonuses in the City. CEO pay was up a staggering 16% last year. Energy and banking businesses are rewarding themselves and shareholders with record profits boosted by high returns gained from higher prices and higher interest rates. More widely the idea of “greedflation” is supported by OECD analysis showing for the great majority of advanced economies (including the UK) that the profit contribution to inflation has been greater than the labour contribution. Those households that enjoy income from interest have seen a windfall probably of more than £50 bn since rates started rising.
And it’s not over yet. Interest rates in the UK are now expected to go significantly higher and be held up longer than in Europe or the US, as the Bank of England analysis (below) shows. On top of growth and real pay failures, the UK is paying a heavy price for 13 years of economic mismanagement.
Why pain doesn’t work
Hunt’s pain is illogical. The chancellor claims to be protecting workers from higher costs (from energy prices and prices in general) with even higher costs (from interest payments) and the threat of recession.
Worse, he has sought to blame workers for driving prices higher and has been actively seeking to hold down public sector pay as well as wanting spending in the economy contained.
But far from driving prices, wages are simply trying to keep up with the effects of shocks from international energy and commodity markets. Higher prices on international commodity markets coupled with inadequate government support has meant workers trying to take matters into their own hands. The Governor of the Bank said he “understood why people are taking this view on wage negotiations because of where inflation is”.
To the extent that spending (or demand) is a factor at all, it is only the spending of the wealthy that can be inflationary. As TUC General Secretary Paul Nowak reminds us Porsche sales were up by a third, the Daily Telegraph reports Rolex watch sales “jumping”.
Nonetheless interest rate rises mean less money for workers, and more money for the wealthy and those whose income is from savings and those who own houses outright. The economist J.K. Galbraith observed many years ago how capitalism incentivises the rich with more and the poor with less. The same is true of Jeremy Hunt’s remedy for inflation.
Higher rates discourage the wealthy from spending by making saving more attractive. They stop workers from spending by making them poorer. And indeed we see big shifts of money from deposit accounts into timed saving accounts, but tragically we also see greatly increased reliance on consumer credit as some workers are pushed to the brink.
This is chronically unjust, as well as being an inefficient if not wholly defective way of defeating inflation.
In the meantime, rate rises mean higher costs for firms (and the Bank report “three quarters of the stock of corporate bank debt has a variable interest rate”) and at the same time they face collapsed spending from cash-strapped households. Channel 4 interviewed an entrepreneur who warned “businesses go bankrupt very gradually, then all at once”. Unsurprisingly, the Bank have now downgraded their GDP forecast to a near standstill. They maintain recession will be avoided, but even this will cost an increase of 1/3 million in unemployment. In fact unemployment is already sharply up by 170,000 over 2023. The Financial Times is concerned with “stocks pulling back after optimism over a soft landing is punctured”.
Making the pain stop
We urgently need a new approach. The government is persisting with pressing down on demand to fix a problem of supply. The Chancellor should protect not punish workers and prioritise measures which reduce inflation while protecting incomes and growth. This could include making the energy cap work more effectively so that the economy benefits more quickly and fully from price reductions on international markets, ensuring those who have recently seen such huge windfall gains– not least banks and energy companies – pay more, and a wealth tax. Countries that have taken a much more interventionist approach, like Belgium – with automatic mechanisms for wages to adjust in line with inflation– and Spain – taxing profits and capping prices – have been rewarded with stronger growth and lower inflation than the UK.
On a longer view the solution should be obvious. Rebalancing the economy towards work and away from wealth will succeed where punishing work and rewarding wealth has failed. Policies including stronger unions, fair pay agreements, fixing the safety net, strengthened investment in public services and public infrastructure, public ownership of green energy, improved corporate governance and fairer taxes not only mean a fairer economy, they mean a better economy.