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 adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Metro mayors can help Labour return to government

Labour champions in the new city regions can help their party at the national level too.

2017 will mark the inaugural elections of directly-elected metro mayors across England. In all cases, these mayor and cabinet combined authorities are situated in Labour heartlands, and as such Labour should look confidently at winning the whole slate.

Beyond the good press winning again will generate, these offices provide an avenue for Labour to showcase good governance, and imperatively, provide vocal opposition to the constraints of local government by Tory cuts.

The introduction of the Mayor of London in 2000 has provided a blueprint for how the media can provide a platform for media-friendly leadership. It has also demonstrated the ease that the office allows for attribution of successes to that individual and party – or misappropriated in context of Boris Bikes and to a lesser extent the London Olympics.

While without the same extent of the powers of the sui generis mayor of the capital, the prospect of additional metro-mayors provide an opportunity for replicating these successes while providing experience for Labour big-hitters to develop themselves in government. This opportunity hasn’t gone unnoticed, and after Sadiq Khan’s victory in London has shown that the role can grow beyond the limitations – perceived or otherwise - of the Corbyn shadow cabinet while strengthening team Labour’s credibility by actually being in power.

Shadow Health Secretary and former leadership candidate Andy Burnham’s announcement last week for Greater Manchester was the first big hitter to make his intention known. The rising star of Luciana Berger, another member of Labour’s health team, is known to be considering a run in the Liverpool City Region. Could we also see them joined by the juggernaut of Liam Byrne in the West Midlands, or next-generation Catherine McKinnell in the North East?

If we can get a pantheon of champions elected across these city regions, to what extent can this have an influence on national elections? These new metro areas represent around 11.5 million people, rising to over 20 million if you include Sadiq’s Greater London. While no doubt that is an impressive audience that our Labour pantheon are able to demonstrate leadership to, there are limitations. 80 of the 94 existing Westminster seats who are covered under the jurisdiction of the new metro-mayors are already Labour seats. While imperative to solidify our current base for any potential further electoral decline, in order to maximise the impact that this team can have on Labour’s resurgence there needs to be visibility beyond residents.

The impact of business is one example where such influence can be extended. Andy Burnham for example has outlined his case to make Greater Manchester the creative capital of the UK. According to the ONS about 150,000 people commute into Greater Manchester, which is two constituency’s worth of people that can be directly influenced by the Mayor of Greater Manchester.

Despite these calculations and similar ones that can be made in other city-regions, the real opportunity with selecting the right Labour candidates is the media impact these champion mayors can make on the national debate. This projects the influence from the relatively-safe Labour regions across the country. This is particularly important to press the blame of any tightening of belts in local fiscal policy on the national Tory government’s cuts. We need individuals who have characteristics of cabinet-level experience, inspiring leadership, high profile campaigning experience and tough talking opposition credentials to support the national party leadership put the Tory’s on the narrative back foot.

That is not to say there are not fine local council leaders and technocrats who’s experience and governance experience at vital to Labour producing local successes. But the media don’t really care who number two is, and these individuals are best serving the national agenda for the party if they support A-listers who can shine a bright spotlight on our successes and Tory mismanagement.

If Jeremy Corbyn and the party are able to topple the Conservatives come next election, then all the better that we have a diverse team playing their part both on the front bench and in the pantheon of metro-mayors. If despite our best efforts Jeremy’s leadership falls short, then we will have experienced leaders in waiting who have been able to afford some distance from the front-bench, untainted and able to take the party’s plan B forward.