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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Lord Sainsbury pulls funding from Progress and other political causes

The longstanding Labour donor will no longer fund party political causes. 

Centrist Labour MPs face a funding gap for their ideas after the longstanding Labour donor Lord Sainsbury announced he will stop financing party political causes.

Sainsbury, who served as a New Labour minister and also donated to the Liberal Democrats, is instead concentrating on charitable causes. 

Lord Sainsbury funded the centrist organisation Progress, dubbed the “original Blairite pressure group”, which was founded in mid Nineties and provided the intellectual underpinnings of New Labour.

The former supermarket boss is understood to still fund Policy Network, an international thinktank headed by New Labour veteran Peter Mandelson.

He has also funded the Remain campaign group Britain Stronger in Europe. The latter reinvented itself as Open Britain after the Leave vote, and has campaigned for a softer Brexit. Its supporters include former Lib Dem leader Nick Clegg and Labour's Chuka Umunna, and it now relies on grassroots funding.

Sainsbury said he wished to “hand the baton on to a new generation of donors” who supported progressive politics. 

Progress director Richard Angell said: “Progress is extremely grateful to Lord Sainsbury for the funding he has provided for over two decades. We always knew it would not last forever.”

The organisation has raised a third of its funding target from other donors, but is now appealing for financial support from Labour supporters. Its aims include “stopping a hard-left take over” of the Labour party and “renewing the ideas of the centre-left”. 

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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