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.

Getty
Show Hide image

School funding: the £3bn problem creeping up on Theresa May

Parents are starting to notice the consequence of schools funding changes. And they're not happy. 

As speculation grew last Tuesday morning that Theresa May would imminently call a snap general election, Kevin Courtney, the general secretary of the National Union of Teachers, was furiously re-writing the speech he was due to deliver at the union’s conference at noon.

The resulting changes included a pledge to put school funding “at the centre” of the union’s campaigning in the run-up to 8 June. Alongside a call to arms for teachers, he also wrote a message for parents.

“I am talking to the activists in this hall, but I have a wider audience in mind,” Courtney told teachers in Cardiff.

He was, he said, also addressing the “hundreds of thousands of teachers who aren’t here and the millions of parents and children currently engaged in our schools and colleges” and who were ready to mobilise against funding cuts. 

Tapping up angry parents as a campaign resource is nothing new. But the growing disquiet among the wider public as the school funding crisis reaches breaking point means the parents’ voices are now a particularly powerful tool. One the government could do without in the run-up to polling day.

The figures are stark – the Institute for Fiscal Studies says real-terms spending is set to fall by 6.5 per cent by 2020 – that’s the steepest cut in school funds since the 1990s.

Schools must find savings of £3bn by 2019-20, according to the National Audit Office. That’s the average salary of around 100,000 teachers.

The schoolcuts.org.uk website - put together by the unions using government data – shows that 99 per cent of schools will have per-pupil funding cut, and there are concerns the final version of the government’s upcoming new formula for handing out cash to schools will hit those in cities even harder than first thought.

But it is the plight of individual schools that is really getting through to parents. School leaders are increasingly having to ask them for donations, while the curriculum on offer to their children narrows, with creative subjects often the first to go because they do not count towards the government’s accountability measures.

Support services are being cut too. - Stuart McLaughlin, from Bower Park Academy, told the education select committee that he faced having to axe support staff roles, including those of the school’s counsellor and first aid officer. These are things that parents notice.

The impact of the government’s decision not to protect school funding in the face of rising costs from salary increases, pension and national insurance rises and other pressures such as the apprenticeship levy is now very visible on the ground, and parents are increasingly worried.

To an organisation like the NUT, the maths is simple. Its 300,000+ members can shout pretty loudly, but millions of parents can shout louder. With the unions facing a battle on two fronts – grammar schools and funding – they are going to need all the help they can get.

This is why groups like Fair Funding for All Schools are increasingly important. While the complaints of teachers and union members are often – wrongly – dismissed as scaremongering, parents make up a huge chunk of the electorate, and were already starting to organise before an election was even announced.

Jo Yurky, a mum of two from Haringey and founder of Fair Funding for All Schools, told the NUT conference last week that she was confused when she heard the head of her local secondary talk about needing to increase class sizes. She thought funding was protected, and had believed the government when it said it was spending a record amount on schools.

“Teachers and head teachers are trusted by parents – we leave our children in their care each day,” Yurky told teachers.

“They are speaking out publicly about their concerns out of desperation, because they are so worried about the financial situation in our schools. When headteachers speak, parents listen.”

Education funding is also a key campaign issue for Labour. Jeremy Corbyn has accused Theresa May’s government of breaking the 2015 manifesto commitment to protect the money following pupils into schools.

John McDonnell, the shadow chancellor, pledged last week to restore the role of the Local Education Authority and “fully-fund” schools, although the party will now have to explain in detail what this means in its upcoming manifesto (and where the money will come from).

However, this isn’t a partisan issue. Tory MPs Michael Fabricant, Tom Tugendhat, Maria Caulfield and James Duddridge are among those to have spoken out in parliament about cuts faced by schools in their constituencies under the proposed new school funding formula.

The government wasn’t due to publish its final funding plans until the summer anyway, but has rejected calls for it to bring the announcement forward to better inform voters, blaming pre-election purdah rules.

It is admirable to move cash around the system so it is more equitable for people in different places, but without injecting extra cash, ministers are simply moving inadequate levels of funding around, and children will lose out in the end.

It is no longer acceptable to parents, teachers, school leaders and children for the government to peddle its line that there is record funding going into schools. There are also record numbers of pupils in the system, so you’d hope that this would be the case.

Urgent action is needed to properly equip schools for the additional cost pressures they face, and if this doesn’t happen soon, Theresa May is going to see a lot more than just a few union activists attempting to block her road back to Downing Street.

 

0800 7318496