When rates finally rise, things are set to get nasty

Nothing turns a dry economic story into a turbo-charged political one quite like fear of losing the

A good recession followed by a bad recovery. Trite lines like this are often wide of the mark, but this one bears some truth. The fallout of the economic downturn over the last few years -- though harsh -- was less gruesome than first feared in terms of overall unemployment, bankruptcies and repossessions. The risk is that far more misery than might have been expected lies ahead.

Everyone knows that sooner or later (and it will probably be later) interest rates will have to go up, and when they do it's going to hurt a lot of people who are already sore from the effort of keeping up with a rising cost of living. After stagnant wages, reduced working hours, cuts to tax-credits, higher inflation and escalating energy prices, the next chapter of Britain's living standards squeeze is set to be climbing interest rates.

The immediate threat of a rate rise has receded due to pitiful growth figures over the last two quarters, which leading forecasters say are set to continue (in case you were distracted by other news, the NIESR have predicted growth of 0.1 per cent in the second quarter of 2011), and, thankfully, a slight dip in inflation. But make no mistake -- unless the economy goes into freefall, in 2012 we can expect to see steadily climbing interest rates.

We don't have a clear sense yet of what the impact will be. One reason for this, rather surprisingly, is that we don't really know exactly how many people are already struggling in some way with their mortgage. There are, of course, statistics about levels of home repossessions -- and they have remained very low. In part, this is because this recession, far more than previous ones, has been characterised by people avoiding the horror of losing their home by striking some sort of agreement (known as "forbearance") with their bank, which allows them to reschedule their repayments, often by shifting from a "repayment" to an "interest only" mortgage for a period. Forbearance has been helpful to many people. But it buys time; it doesn't solving the underlying problem.

What is becoming clear is that the number of households covered by forbearance is very large -- and this is now starting to spook our economic authorities. The FSA highlighted this earlier in the spring, and the Bank of England has just chosen to do so in its recent Financial Stability Report.

The first line of support to households who get pushed over the edge is often those who provide debt advice. So it is telling that the Consumer Credit Counselling Service, a charity that helps those in financial distress, has issued a stark new report on financial fragility in Britain. It estimates that over 750,000 mortgages are in some form of forbearance, and when this is added to the number of mortgages in arrears, the authors get a grand total of 1.2 million mortgages under pressure -- that's more than one in ten of all outstanding mortgages. If correct, this is scary. It points to a potentially far bigger problem for households in the years ahead then you would think simply by looking at the Council of Mortgage Lenders projections for repossessions.

This warning shot from CCCS also helps to focus attention on a little appreciated but wider problem: the rising burden of debt repayment for low-to-middle income families, which has grown over recent years, reaching the levels of the early 1990s when interest rates were dramatically higher (see the chart). How can that be right, you might ask, given interest rates have been on the floor for some time?

gavin kelly graph

Source: Source: Growth without gain?, Resolution Foundation, May 2011

Part of the answer is the larger mortgages that people took out over the last decade due to rising house prices, and the easy availability of 100 per cent mortgages (for instance almost one in three first time buyers on a low-to-middle income in the years running up to the financial crisis used one). It also reflects the fact that lower interest rates often didn't get passed on to borrowers - particularly lower income ones. And let's not forget that household incomes have actually been falling recently, making it harder to service debts. So perhaps we shouldn't be too shocked by alarming Shelter research which finds that over two million people used credit cards to pay their mortgage or rent in 2010 -- an increase of almost 50 per cent in a year.

Given this backdrop, if the cost of debt repayment shoots up alongside higher interest rates, at the same time as living standards continue to be squeezed -- as is expected throughout 2012, with inflation continuing to outpace wages, and government cuts to tax-credits and benefits ratcheting up -- then we can expect the consequences to be dire. Debt advice charities are already starting to think about the need to scale up their operation to meet higher demand. Indeed, it is the severity of the this risk to household budgets (and to the banks that have lent to them) that will be one of the key factors restraining the Bank of England, who will otherwise be itching to return interest rates to a more normal level as soon as is feasible.

At the moment, all this is under the radar. Issues like forbearance struggle to make it onto the money pages of the papers. That's sure to change. Nothing turns a dry economic story into a turbo-charged political one quite like fear of losing the family home. This could get nasty.

Gavin Kelly is chief executive of the Resolution Foundation.

Gavin Kelly is a former Downing Street adviser to Gordon Brown and Tony Blair. He tweets @GavinJKelly1.

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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle