In late March, as the Treasury released the budget, the Office for Budget Responsibility (OBR) released its economic forecast. It was a dark read. On growth, the OBR predicted economic expansion of 3.8% this year (healthy in normal times, less in the aftermath of Covid) and 1.8% in 2023. On disposable income, it was even worse, with living standards set to fall more than anything in a single year since 1956 and the average person losing around £552 a year as price rises outpace wage increases.
Yet even those predictions, bad as they are, now seem optimistic. Last week, the Bank of England (BoE) claimed that inflation could reach 10% this year, with 2023 likely to see no economic growth. Even the possibility of a recession, previously unthinkable given that in 2020 the UK experienced a record peacetime contraction, has not been ruled out. It’s not a boom and bust, it’s just a bust.
But while the OBR is often misguided and plagued by political influence, it seems the Center for Economics and Business Research (CEBR) has shown more foresight. Like the BoE, it forecast no growth for 2023 but, more worryingly, expects the average person to lose around £1,000 in purchasing power this year – twice as bad as the OBR claims.
Therefore, the standard of living by 2024 will be far behind that of 2019. It wouldn’t be so bad if Britain hadn’t already endured a lost decade after 2008, with wages and productivity barely changing. in the ten years since the global financial crisis. Yet that is precisely what seems to be happening. A lost decade quickly becomes two.
Now throw in that mess a series of interest rate hikes. On the same day the BoE predicted the highest levels of inflation since the 1970s, it raised the base interest rate (interest rates determine the cost of borrowing) to 1% – the most high since 2009. While still low by historical standards, we know what this will do: increase mortgage payments, prevent money from being spent elsewhere in the economy. Tenants won’t be immune to this, as landlords will simply pass on the higher costs to their tenants – one of the reasons why rents are now 15% higher than in 2020.
The UK mortgage market is uniquely exposed to short-term changes in interest rates, more than in the United States or Europe. Moreover, rising rates in response to rising inflation seems odd when inflation is itself “imported” and the result of supply-side factors such as rising energy costs, food and raw materials. More inflation will mean more interest rate hikes – which will suck even more demand out of the economy and drive mortgage payments and rents even higher. Privately, Chancellor Rishi Sunak reportedly told colleagues that he expects interest rates to rise by 2.5%.
If that happens, it will hit central Britain for six years. Hargreaves Lansdown, an investment platform, recently predicted that interest rates of just 1.5% would add £134 per month to payments from someone repaying at the end of a two-year fixed-term contract. According a survey of 2,000 adults, more than a third would find it difficult to afford these additional costs. This is about half of the increase planned by the Chancellor.
For now, the two major parties are offering different shades of inaction in the face of the cost of living crisis. Labor is proposing a one-off VAT cut on energy bills and other targeted measures that could cut bills by up to £600 a year for the poorest. In the meantime, the government plans to give millions of households up to £350. But when people are on the verge of losing thousands of pounds, these are meager palliatives. Tories cash in on £50billion from increased VAT tax revenue (a benefit of inflation), with plan likely to hold back on eye-catching tax cuts until next general election . In normal times, this could prove an effective strategy, but soon – probably within months – the idea of delaying support in the name of electoral expediency will incense millions.
“Two Lost Decades” may seem like a curious chapter in a little-read book about post-1990s Japan, but for much of the planet, it’s gradually becoming reality. Rather than an intriguing abstraction, it means that tens of millions of people in this country will lead different lives than they could have reasonably expected, whether it’s living with their parents, not founding a family or not being able to pursue the career or life they want. All this in the name of “serious and mature politics”, the parameters of which are determined by many thousands of people in London in their gentlemen’s clubs, their television studios and the Houses of Parliament.
It is now openly admitted that high inflation could last “years rather than months”. The hegemony of our economic model – privatization, outsourcing, the market always knows best – did not prevail because the British working class believed in the wisdom of unbridled capitalism. On the contrary, it did so due to rising property prices and low inflation. Both are now on the verge of extinction, not in a moment of calamity – like the Dotcom crash or even the 2008 financial crisis – but in gradual change, steadily eroding the fundamentals of a world many thought would never to change.
The longer the government maintains the fiction that it cannot intervene in markets – with price caps, wage increases and forms of public ownership – the greater the resulting volatility. In the wake of the financial crisis, we had Brexit, Trump, Sanders, Corbyn and Bolsonaro. As this decade unfolds, and with it a return to stagflation, we should expect much deeper, organized and effective responses. The left and the labor movement would do well to think radically, not cling to the sacred cows of the centre.
Aaron Bastani is editor and co-founder of Novara Media.