The Governor of the Bank of England, Mark Carney. Photo: Getty
Show Hide image

To avoid squeezed households struggling, we must beware of premature interest rate rises

Households may struggle unnecessarily from premature interest rate rises if we continue to rely on the current key indicator of income growth.

Thursday’s interest rate announcement from the Monetary Policy Committee is unlikely to generate many headlines. “Bank does nothing for 65th month straight” is hardly a circulation-booster, even during silly season. But we can expect plenty of speculation alongside the announcement that the consensus among MPC members on holding rates will have been broken for the first time since the summer of 2011.

We won’t know for certain until the minutes are published in a couple of weeks, but it is surely only a matter of time before such divisions become apparent. At some point rates must rise, but getting the timing and pace of change right will be an extremely difficult task. Differences of opinion are natural. After all, on the one hand the UK economy is expected to be the pace-setter among advanced economies over the course of 2014; yet on the other, average wages continue to fall in real terms.

Making the right call is made both more difficult and more important by the continued presence of a debt overhang built up during the pre-crisis years. This legacy means that, even with rates at an all-time low, almost one-in-five mortgagors say they’re struggling to meet their repayments. Small initial movements in the base rate might not have a material effect on these households, but if the trajectory is such that borrowing costs normalise before incomes do, then the potential for repayment difficulties is significant.

The MPC is of course alive to this danger: Mark Carney has stated that rates won’t rise until “jobs, incomes and spending [are] growing at sustainable rates”. Yet, in relation to the key indicator of income growth, the committee is let down by the statistics it relies on.

Our best measures of what is happening to household incomes are derived from large-scale government studies. Both the Family Resources Survey and the Living Costs and Food Survey provide directly-reported information and allow us to understand patterns across the income distribution – an important distinction given that problem debt is particularly concentrated among those with low and modest incomes. Yet these surveys are annual and take time to report, thereby lacking the timeliness required to inform the MPC’s real-time decision making.

Unfortunately, the timely measure that the Bank instead relies on – Real Household Disposable Income – is not fit for purpose. It doesn’t just measure household income, but universities, charities and trade unions too. And it is deflated using a national accounts measure that has little to do with the actual spending patterns of households. As a result, the chart shows that RHDI per capita has consistently overstated income growth over the past 15 years or so: rising more sharply than the survey data in the pre-crisis years and falling less starkly in the subsequent period.

The cumulative difference in income growth between 1998 and 2013 as measured by the FRS median and the RHDI per capita is almost 9 percentage points. That’s equivalent to around £1,700. In debt terms, that’s the same as the extra annual repayment cost on a £150,000 mortgage following a 1.7 percentage point increase in the interest rate.

(Click on the graph to enlarge)

The difficult path that the MPC must steer means that such differences matter. That’s why, alongside a range of recommendations for how we can better prepare for the interest rate rise when it comes, we’ve called on the Bank to work with the ONS to fix its malfunctioning dashboard.

Debates within the MPC in the coming months will be a welcome sign that at least some aspects of the economy are improving. But those discussions must be informed by data that provides the best sense possible of what is really happening in our economy. Pushing too hard on interest rates as a result of misleading data risks generating headlines of the wrong sort.

Matthew Whittaker is chief economist at the Resolution Foundation

Matthew Whittaker is senior economist at the Resolution Foundation

Getty
Show Hide image

In the 1980s, I went to a rally where Labour Party speakers shared the stage with men in balaclavas

The links between the Labour left and Irish republicanism are worth investigating.

A spat between Jeremy Corbyn’s henchfolk and Conor McGinn, the MP for St Helens North, caught my ear the other evening. McGinn was a guest on BBC Radio 4’s Westminster Hour, and he obligingly revisited the brouhaha for the listeners at home. Apparently, following an interview in May, in which McGinn called for Corbyn to “reach out beyond his comfort zone”, he was first threatened obliquely with the sack, then asked for a retraction (which he refused to give) and finally learned – from someone in the whips’ office – that his party leader was considering phoning up McGinn’s father to whip the errant whipper-in into line. On the programme, McGinn said: “The modus operandi that he [Corbyn] and the people around him were trying to do [sic], involving my family, was to isolate and ostracise me from them and from the community I am very proud to come from – which is an Irish nationalist community in south Armagh.”

Needless to say, the Labour leader’s office has continued to deny any such thing, but while we may nurture some suspicions about his behaviour, McGinn was also indulging in a little airbrushing when he described south Armagh as an “Irish ­nationalist community”. In the most recent elections, Newry and Armagh returned three Sinn Fein members to the Northern Ireland Assembly (as against one Social Democratic and Labour Party member) and one Sinn Fein MP to Westminster. When I last looked, Sinn Fein was still a republican, rather than a nationalist, party – something that McGinn should only be too well aware of, as the paternal hand that was putatively to have been lain on him belongs to Pat McGinn, the former Sinn Fein mayor of Newry and Armagh.

According to the Irish News, a “close friend” of the McGinns poured this cold water on the mini-conflagration: “Anybody who knows the McGinn family knows that Pat is very proud of Conor and that they remain very close.” The friend went on to opine: “He [Pat McGinn] found the whole notion of Corbyn phoning him totally ridiculous – as if Pat is going to criticise his son to save Jeremy Corbyn’s face. They would laugh about it were it not so sinister.”

“Sinister” does seem the mot juste. McGinn, Jr grew up in Bessbrook during the Troubles. I visited the village in the early 1990s on assignment. The skies were full of the chattering of British army Chinooks, and there were fake road signs in the hedgerows bearing pictograms of rifles and captioned: “Sniper at work”. South Armagh had been known for years as “bandit country”. There were army watchtowers standing sentinel in the dinky, green fields and checkpoints everywhere, manned by some of the thousands of the troops who had been deployed to fight what was, in effect, a low-level counter-insurgency war. Nationalist community, my foot.

What lies beneath the Corbyn-McGinn spat is the queered problematics of the ­relationship between the far left wing of the Labour Party and physical-force Irish republicanism. I also recall, during the hunger strikes of the early 1980s, going to a “Smash the H-Blocks” rally in Kilburn, north London, at which Labour Party speakers shared the stage with representatives from Sinn Fein, some of whom wore balaclavas and dark glasses to evade the telephoto lenses of the Met’s anti-terrorist squad.

The shape-shifting relationship between the “political wing” of the IRA and the men with sniper rifles in the south Armagh bocage was always of the essence of the conflict, allowing both sides a convenient fiction around which to posture publicly and privately negotiate. In choosing to appear on platforms with people who might or might not be terrorists, Labour leftists also sprinkled a little of their stardust on themselves: the “stardust” being the implication that they, too, under the right circumstances, might be capable of violence in pursuit of their political ends.

On the far right of British politics, Her Majesty’s Government and its apparatus are referred to derisively as “state”. There were various attempts in the 1970s and 1980s by far-right groupuscules to link up with the Ulster Freedom Fighters and other loyalist paramilitary organisations in their battle against “state”. All foundered on the obvious incompetence of the fascists. The situation on the far left was different. The socialist credentials of Sinn Fein/IRA were too threadbare for genuine expressions of solidarity, but there was a sort of tacit confidence-and-supply arrangement between these factions. The Labour far left provided the republicans with the confidence that, should an appropriately radical government be elected to Westminster, “state” would withdraw from Northern Ireland. What the republicans did for the mainland militants was to cloak them in their penumbra of darkness: without needing to call down on themselves the armed might of “state”, they could imply that they were willing to take it on, should the opportunity arise.

I don’t for a second believe that Corbyn was summoning up these ghosts of the insurrectionary dead when he either did or did not threaten to phone McGinn, Sr. But his supporters need to ask themselves what they’re getting into. Their leader, if he was to have remained true to the positions that he has espoused over many years, should have refused to sit as privy counsellor upon assuming his party office, and refused all the other mummery associated with the monarchical “state”. That he didn’t do so was surely a strategic decision. Such a position would make him utterly unelectable.

The snipers may not be at work in south Armagh just now – but there are rifles out there that could yet be dug up. I wouldn’t be surprised if some in Sinn Fein knew where they are, but one thing’s for certain: Corbyn hasn’t got a clue, bloody or otherwise. 

Will Self is an author and journalist. His books include Umbrella, Shark, The Book of Dave and The Butt. He writes the Madness of Crowds and Real Meals columns for the New Statesman.

This article first appeared in the 25 August 2016 issue of the New Statesman, Cameron: the legacy of a loser