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

Photo: Getty
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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