Mark Carney: time lord?

Is the bank of England Governor messing with the very fabric of time?

Time isn’t a very interesting idea to a physicist. There is the unchangeable past and the unpredictable future. “Now” isn’t a definable concept. It’s not even fixed – you can bend it. Time is a sort of illusionary bi-product spit out as the universe goes from a state of order to one of chaos. Why politicians and central bankers would want to start messing with it is a mystery.

Mark Carney, the Governor of the Bank of England, and the Monetary Policy Committee have been lured into the time game. They expect one of their trigger points, unemployment, to drop below 7 percent in 2016 at which point they’ll have a look at what they might - or might not do. In the world of the Bank of England this constitutes "delivering a measure of certainty". The previous governor, Sir Mervyn King, just used to say "I don’t know" when faced with demands for definiteness.

With unemployment currently at 7.8 per cent three years seems a long and unambitious timescale to set yourself such a meager target. Carney says that to achieve the 7 per cent unemployment rate a million jobs will have to be created – 750,000 new ones and 250,000 to compensate for planned reductions in public jobs and that is what will take the time.  Markets disagree and have pumped up their rate increase expectation to as early as next summer. Somebody is wrong.

Perversely, if you were Chancellor of the Exchequer, George Osborne, or a Conservative Party election campaign organizer, you might be pretty happy with the idea that unemployment wasn’t going to fall any time soon. The reason is simple – over the years the multiple of house prices to earnings has risen for about 3.5 to 6.5 for England as a whole (your main electoral battle ground) and the electorate has become twice as sensitive to interest rate movements today as they were twenty years ago (see graph). Get interest rate policy wrong and it could have electoral consequences.

By mapping where house prices are highest relative to earnings it’s easy to show that above average interest rate sensitivity lies almost exclusively in Conservative-held boundaries; the East, South East and South West (see second graph).  London is the exception but suffers the double whammy of being both the most leveraged part of the country AND dominated by Labour. You’ll get no votes from Londoners for increasing interest rates too soon.

Also the higher house price-to-earnings regions are associated with areas with higher salaries which already carry the highest level of taxation. Those earning up to £50,000 a year now have total deductions (National Insurance and Income Tax) of about 20 per cent whilst if you earn between £50,000 – 100,000 this rises to 32 per cent. In the £100,000 to 200,000 bracket your annual deductions bill averages 40 per cent of gross salary. By linking housing costs (i.e. an interest only mortgage) to where you are on the income scales it can be shown that for every 0.5 per cent interest rate increase could lead an equivalent of between 2 per cent and 4 per cent increase income tax. Increasing interest rates in that sense hits traditional Conservative voters harder than potential converts from the Liberal Democrats of even Labour.

None of this should come as a surprise to people but the extent of the apparent hyper-sensitivity of the electorate to interest movements is going to be more economically and politically important at the next general election than it has ever been before. The MPC will have to be doubly sure they have a self-sustaining economic cycle, embedded in a stable global background, before increasing interest rates. It may even be why they have set their earliest revue date to beyond the next general election. In that sense Mark Carney has been right to dampen the enthusiasm the markets have shown for marginally stronger UK data recently whilst if you were Conservative Party Chairman you would be praying that not too many jobs are created too quickly especially before the General Election in 2015.  

 

        

Source: HM Land Registry

                                 

Mark Carney. Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

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Hopes of an anti-Brexit party are illusory, but Remainers have a new plan to stay in the EU

Stopping Brexit may prove an impossible task. Remainers are looking to the "Article 49 strategy": reapplying for EU membership. 

The Remain campaign lost in the country, but it won by a landslide in parliament. On 23 June 2016, more than two-thirds of MPs voted for EU membership. Ever since the referendum, the possibility that parliament could thwart withdrawal, or at least soften it, has loomed.

Theresa May called an early general election in the hope of securing a majority large enough to neutralise revanchist Remainers. When she was denied a mandate, many proclaimed that “hard Brexit” had been defeated. Yet two months after the Conservatives’ electoral humbling, it appears, as May once remarked, that “nothing has changed”. The government remains committed not merely to leaving the EU but to leaving the single market and the customs union. Even a promise to mimic the arrangements of the customs union during a transition period is consistent with May’s pre-election Lancaster House speech.

EU supporters once drew consolation from the disunity of their opponents. While Leavers have united around several defining aims, however, the Remainers are split. Those who campaigned reluctantly for EU membership, such as May and Jeremy Corbyn, have become de facto Brexiteers. Others are demanding a “soft Brexit” – defined as continued single market membership – or at least a soft transition.

Still more propose a second referendum, perhaps championed by a new centrist party (“the Democrats” is the name suggested by James Chapman, an energetic former aide to George Osborne and the Brexit Secretary, David Davis). Others predict that an economic cataclysm will force the government to rethink.

Faced with this increasingly bewildering menu of options, the average voter still chooses Brexit as their main course. Though Leave’s referendum victory was narrow (52-48), its support base has since widened. Polling has consistently shown that around two-thirds of voters believe that the UK has a duty to leave the EU, regardless of their original preference.

A majority of Remain supporters, as a recent London School of Economics study confirmed, favour greater controls over EU immigration. The opposition of a significant number of Labour and Tory MPs to “soft Brexit” largely rests on this.

Remainers usually retort – as the Chancellor, Philip Hammond, put it – “No one voted to become poorer.” Polls show that, as well as immigration control, voters want to retain the economic benefits of EU membership. The problem is not merely that some politicians wish to have their cake and eat it, but that most of the public does, too.

For Remainers, the imperative now is to avoid an economic catastrophe. This begins by preventing a “cliff-edge” Brexit, under which the UK crashes out on 29 March 2019 without a deal. Though the Leave vote did not trigger a swift recession, a reversion to World Trade Organisation trading terms almost certainly would. Although David Davis publicly maintains that a new EU trade deal could swiftly be agreed, he is said to have privately forecast a time span of five years (the 2016 EU-Canada agreement took seven). A transition period of three years – concluded in time for the 2022 general election – would leave the UK with two further years in the wilderness without a deal.

A coalition of Labour MPs who dislike free movement and those who dislike free markets has prevented the party endorsing “soft Brexit”. Yet the Remainers in the party, backed by 80 per cent of grass-roots members, are encouraged by a recent shift in the leadership’s position. Although Corbyn, a Bennite Eurosceptic, vowed that the UK would leave the single market, the shadow Brexit secretary, Keir Starmer, and the shadow chancellor, John McDonnell, have refused to rule out continued membership.

A group of Remainers from all parties met in the Labour MP Chuka Umunna’s office before recess, and they are hopeful that parliament will force the government to commit to a meaningful transition period, including single market membership. But they have no intention of dissolving tribal loyalties and uniting under one banner. A year after George Osborne first pitched the idea of a new party to Labour MPs, it has gained little traction. “All it would do is weaken Labour,” the former cabinet minister Andrew Adonis, a past Social Democratic Party member, told me. “The only way we can defeat hard Brexit is to have a strong Labour Party.”

In this febrile era, few Remainers dismiss the possibility of a second referendum. Yet most are wary of running ahead of public opinion. “It would simply be too risky,” a senior Labour MP told me, citing one definition of insanity: doing the same thing and expecting a different result.

Thoughtful Remainers, however, are discussing an alternative strategy. Rather than staging a premature referendum in 2018-19, they advocate waiting until the UK has concluded a trade deal with the EU. At this point, voters would be offered a choice between the new agreement and re-entry under Article 49 of the Lisbon Treaty. By the mid-2020s, Remainers calculate, the risks of Brexit will be clearer and the original referendum will be history. The proviso is that the EU would have to allow the UK re-entry on its existing membership terms, rather than the standard ones (ending its opt-outs from the euro and the border-free Schengen Area). Some MPs suggest agreeing a ten-year “grace period” in which Britain can achieve this deal – a formidable challenge, but not an impossible one.

First, though, the Remainers must secure a soft transition. If the UK rips itself from the EU’s institutions in 2019, there will be no life raft back to safe territory. The initial aim is one of damage limitation. But like the Leavers before them, the wise Remainers are playing a long game.

George Eaton is political editor of the New Statesman.

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear