Why Major's call for 5% interest rates is economic madness

A significant rise in rates by 2017 would leave more than a million households spending more than half of their income on debt repayment.

While it's John Major's comments on social mobility that have made headlines today (read my critique of them here), his remarks on interest rates are equally striking. After years of loose monetary policy, with the base rate held at a record low of 0.5% since March 2009, Major called for rates to return sooner rather than later to "normal levels, say three to five per cent" to create a society that treats "the saver as fairly as it treats the debtor".

It's advice as bad as one would expect from the man who presided over rates of 15% in the early 1990s. As research by the Resolution Foundation shows, even under an optimistic scenario of strong and sustained earnings growth, a rise in the base rate to 3.9% by 2017 would leave 1.08 million families in "debt peril", defined as spending more than half of their income on debt repayment. Under a negative scenario of weak and uneven earnings growth, the number at risk would rise to 1.25 million. A more modest rise in rates to 2.9% would leave between 880,000 (positive scenario) and 1.04 million (negative scenario) in debt peril.

No one believes in low rates as a point of principle (and Major is right to highlight how savers, most notably the elderly, have suffered) but after the longest sustained fall in living standards since 1870, the only sensible option remains to keep monetary policy loose. As Matthew Whittaker, senior economist at the Resolution Foundation, has noted: "Even if interest rates stay in line with expectations, we are likely to see a rise in the number of families struggling with heavy levels of repayment over the coming years. But if the squeeze on household incomes continues, Britain could be left in a fragile position, with even moderate additional increases in interest rates leading to a major surge in families with dangerous debt levels – especially among worse-off households."

The coalition's decision to rely so heavily on cuts to public spending and benefits, rather than progressive tax rises, to reduce the deficit means that low-income families are even less well-placed to cope with a rise in rates. The OBR forecasts that average household debt will rise to £58,000 in 2010 to £77,309 by 2015, or from 160% of total income to 175%.

While fixated with reducing government borrowing, Cameron and Osborne appear intensely relaxed about ever-greater levels of household indebtedness. If Major wants someone to blame for the punishingly low rates endured by savers, he should turn his ire on the austerians in Downing Street.

John Major called for interest rates to return to "normal levels, say three to five per cent". Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Jeremy Corbyn has transformed Labour from resisting social movements to supporting them

The opposition's new leadership has brought about a historic shift in its relationship with social movements.

“Another world is possible,” declared John McDonnell last month in his first major speech as Labour’s new shadow chancellor. These four words show how Labour’s leadership views its relationship with activists and campaigners outside the Westminster system. The slogan is the motto of the World Social Forum, an annual alternative to the ultra-elite World Economic Forum, formed by social movements across the world to struggle against, and build alternatives to, neoliberalism.

How times change. In a speech given at the George Bush Senior Presidential Library in Texas, United States, in April 2002, Labour leader and British Prime Minister Tony Blair offered his support to the administrators of the global economy, not those demonstrating against them.

He said: “It's time we took on the anti-globalisation protestors who seek to disrupt the meetings international leaders have on these issues. What the poor world needs is not less globalisation but more. Their injustice is not globalisation but being excluded from it. Free enterprise is not their enemy; but their friend.”

In 2002, Labour’s leadership wanted to take on social movements. Now, it intends to engage with and support them. “The new kind of politics” of Labour’s new leader, Jeremy Corbyn, is about more than focusing on issues over personalities and (anti-) presentational changes.

It is also “a new politics which is based on returning the Labour party to its roots. And the roots of the Labour party was as a social movement, representing the vast majority of working people in this country,” as McDonnell, Corbyn’s closest political ally, explains to the New Statesman.

Campaigners outside of the Labour party are excited. John Hilary, executive director of War on Want, a campaigning anti-poverty NGO, tells the New Statesman, “there’s a really positive impulse to the Corbyn/McDonnell leadership reaching out” to social movements. For Hilary, the immediate policy changes on TTIP – the EU-US investor rights, regulation harmonisation and non-tariff barriers deal negotiated behind closed doors – and a Financial Transaction Tax have already sent “a message to a disenfranchised part of the electorate that Labour is back”.

But, for the campaigners outside of the Labour party, this moment is not without risks. Political parties have a long record of crushing the autonomy of social movements.

“It’s important they aren’t incorporated or have to work on the terms of the political system. It’s a matter of a respectful relationship,” explains Hilary Wainwright, a political activist and founder and co-editor of Red Pepper magazine. Wainwright argues for “close engagement [between Labour and outside campaigners] that isn’t a bossy dominating one. One that seeks to collaborate, not govern”.

McDonnell agrees. “The most important thing,” he says, “is that all of the campaigns and social movements that are campaigning at the moment and those that will campaign in the future, need to maintain their autonomy from government and political parties. We respect that . . . Otherwise, we’ll undermine their vitality and their independence.”

To remain “strong, independent and radical” is “the most helpful” campaigners can be to Labour’s leadership, according to Hilary. Labour’s leadership “don’t look to us to make the sort of political compromises that they might have to do in order to hold a much broader spectrum of people together. What we can do best is hold that line as we believe it be right and support the Labour leadership in taking a line as close as possible to that”, he says.

The task for social movements and campaigners outside of the party is “to show how there will be popular support for radical and principled positions”, according to Hilary.

To win in 2020, Labour will “bring together a coalition of social movements that have changed the political climate in this country and, as a result of that, changed the electoral potential of the Labour Party as well”, says McDonnell. For Labour’s shadow chancellor, the people's views on issues are complex and fluid rather than static, making the job of politicians to bump up as close to them as possible.

Movements can help shift political common sense in Labour’s direction. Just as UK Uncut placed the issue of tax avoidance and tax justice firmly on the political map, so too can other campaigners shift the political terrain.

This movement-focused perspective may, in part, explain why the Corbyn campaign chose to transform itself last week into the Momentum movement, a grassroots network open to those without Labour membership cards. This approach stands in contrast to Blair’s leadership campaign that evolved into Progress, a New Labour pressure group and think tank made up of party members.

In order to allow movements the space to change the terms of the debate and for Labour to develop policy in conjunction with them, the party needs “to engage with movements on their own terms”, according to Wainwright. This means “the party leadership need to find out where people are struggling and where people are campaigning and specifically work with them”, she continues.

McDonnell says it will. He says Labour “want to work alongside them, give them a parliamentary voice, give them a voice in government but, more importantly, assist them in the work that they do within the wide community, both in meetings, demonstrations and on picket lines”.

This position is not one you would expect from McDonnell’s five more recent predecessors: Chris Leslie, Ed Balls, Alan Johnson, Alistair Darling, Gordon Brown. So, “this may seem like a unique moment if you’re looking just within the British context. But, if you look outside Britain it’s actually much more in touch with movements in many places in the world”, says Hilary.

He adds: “Political parties are going to have to have much more honest engagements between parliamentary politics and the social movement hinterland. For us, it just means that in a wonderful way, Britain is catching up with the rest of the world.”

McDonnell too sees this shift in how Labour engages with movements as “a historic change that modernises the Labour party”.

But, perhaps for Labour, this is a recurrence rather than a transformation. The party grew out of Britain’s biggest social movement: the unions. Labour’s new leadership’s openness to campaigners “modernises it by taking it back to being a social movement again”, says McDonnell.