Good morning from New Economy Brief.
The mortgage crisis has dominated the UK news cycle for the last week, but the relationship between inflation, interest rates, and mortgages is not always well understood.
In this week’s newsletter we look at the impact of rising rates on mortgages, the political fallout, the solutions being proposed by the main parties and some progressive alternatives, before considering what this all means for the debate about how to tackle inflation.
Mortgage misery. Last week’s decision by the Bank of England to hike interest rates by 50bps to 5%, the highest since the 2008 financial crash, has sparked a wave of panic in Westminster over what Money Saving Expert Martin Lewis has dubbed the ‘mortgage time-bomb’. It isn’t hard to see why. Mortgage holders who are on tracker products or whose fixed terms are coming to an end face significant increases of hundreds of pounds a month to their interest payments. These increases will intensify the cost of living crisis for millions, and put many families at risk of defaulting on their mortgage.
Political fallout. The immediate political fallout has been three-fold. First, Labour have seized on the opportunity to brand the crisis as a ‘Tory mortgage penalty’, sensitive to the fact that middle-aged families with mortgages are exactly the demographic of people that the party hopes to win back from the Conservatives at the next general election. YouGov’s Patrick English has mapped the mortgage crisis and found a significant overlap with the most marginal constituencies in the country, while in the Times, Emma Duncan argues that this could spell the end for Conservative hopes in Barratt Britain (a demographic of northern homeowners largely thought to be responsible for Conservative victories in the ‘Red Wall’). Also sensitive to this fact are Conservative backbenchers in marginal seats who have been calling on the government to do something, anything, to alleviate the pain their constituents are feeling. And remember, the structure of the mortgage market means that the vast majority of homeowners have not yet felt the effects of monetary tightening on the mortgage payments yet, meaning that as millions of fixed rate deals expire between now and a likely general election next year, the political pain of this crisis is only going to intensify.
Help for homeowners? Caught between the voters and the pledge on inflation, Chancellor Jeremy Hunt has attempted to walk a difficult line between being seen to respond to the crisis whilst not undermining the government’s central argument on inflation. The result is a ‘mortgage charter’ voluntarily agreed with some of the UK’s main mortgage lenders. The deal involves lenders offering various forms of temporary relief such as short-term switches to interest-only repayments, as well as a longer period between missed payments and forcible home repossession.
Alternative strategies for controlling inflation. Ultimately, the mortgage-timebomb is caused by a combination of high levels of housing debt, and a policy choice of trying to control inflation primarily through interest rate rises. The result is a very big squeeze on one particular cohort of homeowners, which may prove to be politically unsustainable (and economically ineffective). This also illustrates what UCL IIPP economist Josh Ryan-Collins calls ‘the paradox of contemporary monetary policy’: the tension between the Bank of England’s mandate to maintain both price stability and financial stability. As many commentators are starting to note, monetary tightening is far from the only tool for tackling inflation, and excessive reliance on it leads to political problems because the distribution of the pain is felt so unevenly. So what are the alternatives?
Climate Change Committee progress report. “The UK has lost its clear global leadership position on climate action” and lacks “urgency” in tackling climate change, according to the Climate Change Committee's latest report to Parliament, released this morning. The report urges immediate action and suggests that the Government’s “over-reliance on specific technological solutions” should be balanced with the development of “demand-side and land use policies”.
Child poverty and austerity. The average height of five-year-olds in the UK has decreased since the mid 2010s and it is “highly plausible” that this trend is linked to deteriorating social conditions for British children, argues director of the UCL Institute of Health Equity Michael Marmot. Marmot argues that as well as child poverty, which is associated with child nutrition and growth, another cause of children getting smaller might be the fact that the UK spends less than its counterparts on its children. The average OECD country spends $6,000 per child per year. This rises to $12,000 in Norway and Sweden, $9,000 in France and falls to $4,000 in the UK.
Publicly owned energy. The UK is “trailing internationally in the shift to a low-carbon economy” and should introduce a publicly owned energy company in order to develop “homegrown green industry”, according to a new report by economist Nick Butler published by King’s College London’s Policy Institute. It highlights that not one of the world’s 20 largest wind turbine manufacturers is based in the UK and that other than Rolls Royce’s small modular reactors, there is no clear existing or potential British leader in any significant strand of the low-carbon economy.
A Royal College of Care Workers? A care workers’ professional body would help to deliver Labour’s proposal for a National Care Service and provide care workers “with the career opportunities and support they deserve”, argues Matthew Ball writing for the Social Market Foundation. Ball highlights that there are around 165,000 vacancies in the adult social care sector.
Borrowing to invest. Economist Simon Wren-Lewis argues that the Labour Party has made a rod for its own back by watering down its £28 billion climate spending pledge. Wren-Lewis says that Labour would have been able to defend high spending pledges by explaining that borrowing to invest is good fiscal policy. However, now that they have somewhat rowed back on such an investment pledge, it will be harder to defend fiscal choices in the future.
Penalising the poor. 40% of all HMRC late filing penalties from 2018 to 2022 were charged to people who earned too little to pay tax, according to research by Tax Policy Associates (TPA). In the last tax year, 92,000 people in the lowest-paid 10% of the population were fined by HMRC for late tax returns compared to just 39,000 of those in the highest-paid 10%.
Housing benefit freeze. New research by the Institute for Fiscal Studies finds that since the freeze on housing benefits in April 2020 and due to “skyrocketing” rents, the proportion of new private rental properties on Zoopla which can be covered by housing benefit has plummeted from 23% to 5%, the lowest level on record. The research also found that properties affordable to those on housing benefit had 19% higher heating and hot water costs than the average.