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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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.