{"pageContent":{"uid":"bltc6e122bc46e3b958","type":"miscellaneous-page","title":"Sign up to the Economics newsletter.","description":"The Spectator offers you the best emails to suit every interest.","icon_alt":"Sign up to the Economics newsletter.","url":"/the-economics-newsletter","content_sections":[{"text_body":"

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The Tories took a serious beating in Thursday’s by-elections. Whilst Boris Johnson and his government refuse to take responsibility for the big issue of the day – inflation – and fail to convey any meaningful central purpose to their government (‘levelling up’ being clearly nothing more than an empty soundbite) they will continue to face huge electoral defeats. It really is as simple as that.

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When I say the government needs to take responsibility for inflation the immediate question is: ‘So how would you get it down?’ But that is the wrong place to begin. The first thing the government needs to do is to take political and policy responsibility for inflation. At present, whenever he talks about inflation Boris Johnson looks to blame someone else. It’s all the fault of Putin, or of rapacious capitalists forcing up prices, or greedy unions demanding too high wage rises, or deluded Tory backbench MPs calling for tax cuts. The first step – by far the most fundamental – is for the government to accept and declare that the rate of inflation is something it can control and that it will take responsibility for controlling.

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Obviously it’s politically tempting to declare that bad things are all someone else’s fault. But that won’t wash with Tory voters who imbibed with their mother’s milk the idea that the great Tory triumph of the 1980s was getting inflation down. It just reinforces a political message that Johnson’s government always wants to claim that everything is always someone else’s fault.

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It also presents a disturbing message to voters that they are helpless in the face of the forces that steer their lives. This government was all about ‘taking back control’ of the policy choices that affect us. How did the government ever come to believe that didn’t apply to inflation?

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Furthermore, the idea that inflation is some randomly induced phenomenon leaves workers and businesses all at sea in pay negotiations. Workers naturally want their wages to rise to protect them from future inflation. But by how much do they need to rise to achieve that? The government gives the impression inflation is not under its control. It has no credible target for inflation for the next couple of years. Notionally the inflation target is 2 per cent. Literally no one believes that the government wants the Bank of England to get inflation to 2 per cent in 2022. That 2 per cent number is some kind of mañana target. But if inflation is going to come down to 2 per cent in four years’ time, what is it to be in the meantime? Workers and businesses have to work out what wages to ask for and grant now, not at some vague future date.

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The government needs to accept responsibility for inflation and tell us what its objectives are for inflation now. What inflation rate does it hope to achieve over the next 12 months? And over the year after that? That is what businesses and workers and investors and household budget-planners need to know.

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Under our current system the government tells the Bank of England the inflation target it should seek to achieve. The Bank isn’t supposed to pick its own objective. But at present the government isn’t setting the Bank any target it genuinely wants the Bank to achieve. That central aspect of monetary policy is broken.

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Mid-1970s inflation and late-1970s inflation were both heavily affected by oil price rises, as was inflation in 2008. There is nothing new about the current situation. It’s not even vaguely true that policy could not affect inflation now. For example, more rapid interest rate rises would strengthen the pound (or at least see it fall by less). A stronger pound would mean lower import prices – including in particular lower prices for importing energy.

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Looking slightly further ahead, tighter monetary policy would mean some prices falling to offset rises in prices elsewhere, so the average price level change (i.e. inflation) would be lower. There’s no mystery as to how that could be achieved.

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That doesn’t mean that’s necessarily a good idea. Maybe a credible inflation target would make the Bank tighten policy slower, cutting inflation by less than it would otherwise do. But let’s actually have this argument. At present there is no responsibility taken for inflation, so we can’t even argue it should be cut more slowly.

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Rises in the cost of living are economically damaging and politically disastrous for governments. But rises seen (or in this case presented by the government) as out of control are even worse. If the government wants to recover politically it needs to take back control of inflation – soon.

","pull_quote":"At present, whenever he talks about inflation Boris Johnson looks to blame someone else","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"blt17da9de16ed75212","type":"author","title":"Andrew Lilico","url":"/writer/andrew-lilico","caricature_alt":"Andrew Lilico","hard_paywall":false},"topic":[{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false},{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"no_index":false,"no_archive":false,"no_follow":false},"image_style":"contain","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":false,"suppress_inline_house_slot":false,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blt7657308901772a85","type":"article","title":"Of course we can afford to cut taxes","card_title_with_kicker":"","kicker":"Economics","standfirst":"What the debt doom-mongers get wrong","url":"/article/of-course-we-can-afford-to-cut-taxes","wpid":"","date":"2022-06-23T15:10:35.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt36601f89a856e98c/62b48907a4bbf60d9add84f5/mervyn-king_(5).jpeg","hero_video":"","hero_image_alt":"Of course we can afford to cut taxes","byline":"What the debt doom-mongers get wrong","text_body":"

The latest data on the UK’s public finances have provided more ammunition for those arguing that the government cannot afford to cut taxes. However, the economic reality is far more nuanced – especially when it comes to interest payments.

The bad news is that the government borrowed another £14 billion in May, £3.7 billion more than forecast by the Office for Budget Responsibility (OBR). This reflected both lower-than-expected tax receipts, despite the increase in National Insurance contributions, and higher spending, including £7.6 billion in debt interest costs.

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This means that the government has already borrowed £35.9 billion in the first two months of the new fiscal year, or £6.4 billion more than forecast. To rub it in, these figures will get worse before they get better. In particular, debt interest costs will almost certainly top £20 billion in June alone, because the inflation uplift on index-linked government bonds (gilts) will be based on the jump in the Retail Price Index (RPI) between March and April.

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This OBR was already forecasting that debt interest payments will cost the government over £87 billion in the current financial year (2022-23). A figure nearer £100 billion is now plausible. This has led a number of well-placed commentators to rally to the support of the Treasury. For example, Robert Peston was quick to compare that potential £100 billion to government spending on education and to endorse the Chancellor’s line that ‘rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets’.

But that's not quite right. For a start, it is wrong to compare the £87 billion (or £100 billion) bill for debt interest to annual spending on, say, defence, justice or education. The RPI uplift applies to the principal value of index-linked gilts and will only be paid out when these bonds are redeemed – over an average of more than 18 years. This is not the same as the budgets for departmental spending in a single year. The fact that these higher debt interest payments will be spread over many years also undermines the argument that this means the government cannot afford to cut taxes now. Looking instead at actual cash flow, higher inflation will still provide a windfall to the Treasury as rising nominal incomes and higher prices feed through into higher tax receipts.

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Indeed, despite the bad news on new borrowing, the latest public debt to GDP ratio of 95.8 per cent in May was actually 0.1 per cent below the latest forecast. This is presumably because the denominator, which is nominal GDP, was higher than expected. In other words, higher inflation still reduces the real burden of government debt.

Rising inflation and debt interest costs, therefore, pose a much smaller challenge to the public finances than they do to family budgets. In particular, the government’s income rises automatically when inflation increases, because the tax base is larger, while it is much better able to spread the cost of interest payments over time.

To be clear, it would also be incorrect to argue that we can forget about the additional debt interest costs, just because they will not actually materialise for many years. Nonetheless, payments in the future are usually valued differently than payments now. In this case, assuming at least some real growth in the economy, the burden of paying £100 billion in dribs and drabs over many years, even if uprated in line with inflation, should be less than the burden of paying £100 billion in one chunk now.

What’s more, the RPI uplift will have relatively little impact on the government’s cash requirement (known in the jargon as ‘CGNCR ex’) in 2022-23. This is the amount that actually has to be raised from the markets to cover the gap between cash inflows and outflows. Put another way, there will still be plenty of cash to spend on other areas, without having to issue loads more new gilts.

In short, will the government really be spending as much as £100 billion on debt interest this year? In purely accounting terms, and on an accruals basis, yes, and that is all some people might care about. But in my view, this figure gives a misleading picture of the economic, financial and policy implications of the jump in debt interest costs. It is therefore still right to view each proposal for tax cuts – or indeed spending increases – on its own merits. These benefits could actually include reducing inflation, both directly and indirectly, or at least doing more to ease its impact on households and businesses. But the Treasury’s dodgy arguments about the impact of inflation on the public finances are not helpful to anybody.

","pull_quote":"","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"bltfd25cf6494bf10e7","type":"author","title":"Julian Jessop","url":"/writer/julian-jessop","bio":"Julian Jessop is an independent economist and fellow at the Institute of Economic Affairs","caricature_alt":"Julian Jessop","twitter_handle":"@julianhjessop","meta_description":"","related_authors":[],"hard_paywall":false},"topic":[{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"meta_description":"What do the debt doom-mongers get wrong about the Treasury's ability to service the national debt?","no_index":false,"no_archive":false,"no_follow":false},"image_style":"contain","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blt0bcdb4656d219bd7","type":"article","title":"Biden's racial 'equity' plan is bound to backfire","card_title_with_kicker":"","kicker":"Flawed","standfirst":"Distorting the market in service to progressivist race ideology ends up hurting everybody","url":"/article/biden-s-racial-equity-plan-is-bound-to-backfire","wpid":"","date":"2022-06-23T12:11:59.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltf87f6f5ee248dffb/62b4713ec12cec2574e79c3e/GettyImages-1240732637.jpg","hero_video":"","hero_caption":"(Credit: Getty images)","hero_image_alt":"Biden's racial 'equity' plan is bound to backfire","byline":"Distorting the market in service to progressivist race ideology ends up hurting everybody","text_body":"

‘America is a nation that can be defined in a single word,’ said the proud Commander-in-Chief Joe Biden, standing outside the White House earlier this year. ‘Alsdfnalcaofjlksfa.’

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“America is a nation that can be defined in a single word. Asfutmsifwffutsh.”pic.twitter.com/4QTkDfTIvQ
— James Melville (@JamesMelville) June 22, 2022

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We shouldn’t laugh. The poor man has a speech impediment. Still, that ‘Alsdfnalcaofjlksfa’ word will strike many Americans as an amusingly apt description of their country in 2022. It sums up Joe Biden’s whole administration: nonsense pretending to be clear leadership.

America is, as everyone knows, in an inflationary crisis. The cost of petrol has reached such highs that Biden has called on Congress to suspend gas (petrol) tax for three months. That will do nothing to address the energy supply shortage that is driving up the price of everything, but at least it hints at a willingness within the administration to tackle a big problem.

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On other fronts, however, Biden and America’s ruling party, the Democrats, seem astonishingly distracted from the bigger concerns of voters. Last week, the Democratic majority in the House of Representatives passed a measure that adds ‘racial equity’ to the Federal Reserve’s core obligations. The bill would require the central bank’s Federal Open Market Committee to ‘exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.’

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A noble goal, but ought that really be the business of the Federal Reserve? The Fed’s traditional role is to try to stabilise prices and enhance employment. It is now struggling to find a way to bring down inflation without crashing the whole global economy.

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Shouldn’t that be its exclusive concern? Nope. For Biden Democrats, racial ‘equity’ – a nebulous concept that essentially means coercively redistributing wealth towards racial minorities – trumps all. On his first day in office, Biden signed an executive order to make racial equity a top priority for every single branch of the federal government. His administration has doggedly stuck to the pledge, even as everything else falls apart.

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Just two weeks ago, the Biden Admin ordered Fannie Mae and Freddie Mac, the government-backed mortgage underwriters, to develop a housing 'equity' plan. This involves handing out money for down payments according to race, lowering interest rates for buyers with bad credit scores, and even handing out free money to black homeowners for home repairs or to substitute for ‘disruptions to income.’

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One problem with equity as a governing concept is that it involves not just helping black people but often sidelining struggling whites. For instance, last year, the Biden administration attempted to prioritise Covid relief for women and non-whites, though judges in Texas and Tennessee found the policy violated the principle of equal treatment under the law.

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Another problem is that these noble endeavours often end up making life harder for the minorities they are meant to support. Vice president Kamala Harris in March this year unveiled a plan to force ‘home appraisers’ to increase their valuations of black-owned properties.

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Exhibiting a relationship with reality that is at best detached, Harris said this equity measure would improve ‘intergenerational wealth’ among minorities. Would it also not mean that black people end up poorer because they would be paying more in property taxes on their higher-valued homes? Nobody seemed to care. Equity is about gestures not results.

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As part of its multi-trillion-dollar Build Back Better infrastructure agenda, the Biden administration has also suggested destroying interstate highways, not because the roads are bad infrastructure but because they were built by a racist society in the 1960s.

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At the state level, equity drives can be equally bizarre. In California, to take just one example, regulators just approved $23 million (£19 million) in ‘social equity’ loans to help non-whites open more marijuana dispensaries – a move that some black people might rightly regard as racial stereotyping.

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The specific justification of loose monetary policy being a tool of 'equity' has always been at best shaky. Yes, higher employment is more 'equitable'. But rapid inflation hurts people whose savings are mostly cash and people who rent instead of own. So the biggest victims of inflation tend to be the lower-middle class, which is disproportionately black and Hispanic – the very people the Biden administration supposedly wants to help. It should be obvious that the best way to lift them up is to help the whole country by tackling inflation at source rather than trying to meddle to ensure the ‘right’ groups win out.

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Distorting the market in service to progressivist race ideology always ends up hurting everybody. It’s not just Democrats that fail to appreciate this point. A big initiative of George W. Bush’s first term was Increasing Minority Homeownership, which tried to find shortcuts for achieving 5.5 million additional minority homeowners.

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The scheme backfired. By January 2013, 31 per cent of Hispanic homebuyers from 2004-2007 were in default, along with 28 per cent of black homebuyers from the same period (whites and Asians were about 12 and 15 per cent).

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This issue fed into the larger housing crisis which, in turn, triggered the 2008 financial crash. Naturally, in the wake of that collapse, the politicians who pressured banks to loosen lending standards accused them of 'predatory lending' against vulnerable communities.

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Rather than learn from earlier failures, the Biden administration seems determined to introduce ever more flawed policies into the system in the name of addressing racial disparity. What with crime rates rocketing, an illegal immigration crisis at the southern border, and inflation out of control, Americans of all races increasingly feel as if their country is coming undone. The government’s focus on barmy ‘equity’ measures does little to reassure them. Why can’t Team Biden see that? The answer is Alsdfnalcaofjlksfa.

","pull_quote":"Distorting the market in service to progressivist race ideology always ends up hurting everybody","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"blte17a67d20ee05064","type":"author","title":"Freddy Gray","url":"/writer/freddy-gray","bio":"Freddy Gray is deputy editor of The Spectator","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blta337a23017756e91/5e3b02690022f52efa9eb242/Freddy_G.png","caricature_alt":"Freddy Gray","twitter_handle":"@Freddygray31","meta_description":"Freddy Gray is deputy editor of The Spectator. He was formerly literary editor of The American Conservative.","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt579bbaf57fc3757f","type":"topic","title":"World","description":"","categorisation":"Coffee House","url":"/category/international","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt4631347266f09874/6183f0e296cc43179ebd13e4/International-icon_200x200.jpg","hub":false,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt4631347266f09874/6183f0e296cc43179ebd13e4/International-icon_200x200.jpg"}},{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"meta_title":"Joe Biden's racial 'equity' plan is bound to backfire","meta_description":"The US president's attempt to coercively redistribute wealth towards racial minorities in the United States won't work","no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":false,"suppress_inline_house_slot":false,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blt8f58afbd3afbf31b","type":"article","title":"Is Boris able to stand up to Sunak?","card_title_with_kicker":"","kicker":"","standfirst":"Economic woes are making Tory MPs jittery","url":"/article/is-johnson-able-to-stand-up-to-sunak-","wpid":"","date":"2022-06-23T09:41:31.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltd8443f958400f5f6/62b43c96fe024227e9e2cac4/GettyImages-1235308258.jpg","hero_video":"","hero_caption":"(Getty)","hero_image_alt":"Is Boris able to stand up to Sunak?","byline":"Economic woes are making Tory MPs jittery","text_body":"

The latest inflation figures have sent Tory MPs into a tizz again, unsurprisingly. There are a number of things that they're upset about: the first is the ongoing refrain that their party should be cutting taxes, not imposing the highest tax burdens in living memory. Another is that Universal Credit is largely 'an unfinished project', in the words of one Red Wall backbencher who sees the impact of the malfunctioning benefit on his constituents. What both of these complaints have in common is that MPs feel the Treasury is deliberately pursuing the wrong policy: arguing that now isn't the time to cut taxes and choosing to spend money on grants for low earners rather than targeting the help through what is supposed to be a very responsive benefit.

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When I spoke to former Conservative leader Iain Duncan Smith about the first point, he was concerned not just about the tax burden but also about the way in which Boris Johnson seems to be losing the argument with Rishi Sunak on a regular basis. Few Tory MPs voted for Johnson to be their leader on the basis of his grasp of economics – but they did expect him to do what he did so successfully when mayor and cover his weaknesses by turning to expert advisers. IDS thinks the Prime Minister is failing to do that in Downing Street. He said:

What they need to be doing at the very least is cutting business taxes, and try to get the basic rate of income tax down. They can afford all of this, the government is wrong when they say they can't afford it, or that it will feed inflation. We face a stark choice: to ensure economic growth or risk recession. The Conservative party is united in the need to reduce the heavy burden of tax. The Chancellor, as a politician, must understand the damage that going into a recession will do for our prospects. No. 10 is outgunned by the Treasury and the PM should have an independent economics guru: Thatcher had hers, Alan Walters, who told her to get the economy moving again rather than tighten it. Boris needs someone like this too so he can stand up to the Treasury orthodoxy.

When Johnson was in City Hall, he had Gerard Lyons as his chief economist – and indeed he has brought Lyons back in on occasion to try to out-argue Sunak when it comes to offering help with the cost of living in his spring statement. But the Treasury has more recently managed to shut down most talk of tax cuts – hence this complaint from IDS and others.

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The Treasury as an institution has also never really been signed up to Universal Credit. When IDS was introducing it, he had a personality clash with Chancellor George Osborne, who reportedly didn't think him bright enough to be able to master the complexity of this reform. But there were also the standard Treasury gripes about shelling out even more money on benefits than before with the promise – rarely believed in this part of Whitehall – that the upfront cost would save money in the future. In the end, Osborne took the money out of UC anyway.

Six work and pensions secretaries later, Therese Coffey is still very committed to UC and has had her own clashes with Sunak over it. But backbenchers representing particularly deprived constituencies have two complaints: one is that it is taking forever to move legacy benefits over; and secondly that the government should introduce automatic uprating of the benefit to make it more responsive. One Red Wall MP says: 'It's an unfinished project. Lots of people are agitating to get it done, but HMT just aren't interested.' That's not a view shared by those in the Work and Pensions department, who argue UC is now working pretty well and point out that the Budget announcement cutting the taper rate from 63 per cent to 55 per cent has made a big difference. On the uprating of benefits, Work and Pensions Secretary Therese Coffey – herself not immune to clashes with the Treasury – has a statutory review in the autumn.

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As Kate explained yesterday, the cost-of-living crisis is going to get worse over the coming months, which means the pressure from backbenchers on tax and benefits is going to get stronger. Will Johnson listen to their advice and try to stand up to his Chancellor, who is after all politically wounded as well after the past few months? Perhaps it suits him not to– after all, it's always nice to have someone else to blame.

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P.S. Iain Duncan Smith’s words first appeared in my Evening Blend email, which is a free round-up and analysis of the day’s political events, plus a diary on what to expect next. For more exclusive stories and insider insight from the best-read politics email in Britain, sign up here.

","pull_quote":"","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"blt090cc9cb015a4b07","type":"author","title":"Isabel Hardman","url":"/writer/isabel-hardman","bio":"Isabel Hardman is assistant editor of The Spectator and author of Why We Get the Wrong Politicians. She also presents Radio 4’s Week in Westminster.","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt0a95371de7661082/5e3b02695678d02b5882057a/Isabel_H.png","caricature_alt":"Isabel Hardman","twitter_handle":"@IsabelHardman","meta_description":"Isabel Hardman is assistant editor of The Spectator. She also presents Radio 4’s Week in Westminster and is author of Why We Get The Wrong Politicians.","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"bltabc85f6833da83c0","type":"article","title":"Where's Boris's plan to stop the economic chaos?","card_title_with_kicker":"","kicker":"Politics","standfirst":"","url":"/article/where-s-the-plan-to-stop-the-economic-chaos-","wpid":"","date":"2022-06-23T09:36:48.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltece4b84df77cac44/62b43469965b481632d8048f/boris-johnson-partygate.png","hero_video":"","hero_image_alt":"Where's Boris's plan to stop the economic chaos?","byline":"","text_body":"

Interest payments on the national debt rose 70 per cent last month to £7.6 billion (compared with a year earlier) – largely because of the impact of inflation on income paid to holders of index-linked gilts, which are inflation-protected government bonds. More worryingly, this was 49 per cent more than the official forecast made in March by the Office for Budget Responsibility (OBR).

It suggests the OBR’s forecast that the government will have to pay £87.2 billion in interest payments (a colossal sum) may be too low, especially since the ONS is not factoring in the most recent inflation figures in its calculations of the monthly bill. Little wonder Rishi Sunak says 'rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets'.

He’s not crying wolf. To put that in some kind of context, government spending on education is circa £100 billion. It is not inconceivable the debt interest bill for the government will end up being of the same magnitude.

And as the rail strike and likely future strikes by teachers and other public service workers show, the pressure on the government to spend more to protect employees’ incomes will be relentless for months.

But every time the government borrows to fund additional pay rises – or to fund tax cuts demanded today by the CBI business lobby group – the interest bill rises.

Political expediency and economic reality are about to collide in the most painful way for Boris Johnson and his government. It is not hyperbole to say this feels like an emergency. The pressure on Johnson to acknowledge the magnitude of this economic and financial shock and set out a plan – rather than whacking moles on a daily basis, to use a Johnsonian metaphor – will only intensify.

","pull_quote":"Every time the government borrows to fund additional pay rises, the interest bill rises","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"blt633d87aff3a1e4d3","type":"author","title":"Robert Peston","url":"/writer/robert-peston","bio":"Robert Peston is Political Editor of ITV News and host of the weekly political discussion show Peston. His articles originally appeared on his ITV News blog.","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltf28ace21620107a9/5e5d1502c3e6067dbb18ef88/peston.png","caricature_alt":"Robert Peston","twitter_handle":"@Peston","meta_description":"Robert Peston is a British journalist, presenter, and founder of the education charity Speakers for Schools. He is the Political Editor of ITV News and host of the weekly political discussion show Peston.","related_authors":[],"hard_paywall":false},"topic":[{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false},{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":["economics","inflation","boris","boris johnson","money"],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":false,"suppress_inline_house_slot":false,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"bltedef70669b7ce9db","type":"article","title":"Boris Johnson’s inflation contradiction","card_title_with_kicker":"","kicker":"","standfirst":"","url":"/article/boris-johnson-s-inflation-contradiction","wpid":"","date":"2022-06-22T13:10:11.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt491fc596fe748ffd/62b3147be2ab5f0377503a00/mervyn-king_(6).jpeg","hero_video":"","hero_image_alt":"Boris Johnson’s inflation contradiction","byline":"If higher wages mean higher prices, why isn’t that true for benefits and pensions?","text_body":"

As Boris Johnson tries to limit pay rises to bring down inflation, ministers have no explanation for why planned rises in the state pension and benefits would be less inflationary than increasing teachers’ and nurses’ pay. The government is attempting to limit public sector pay to 3 per cent, while allowing pensions and benefits to rise to around 10 per cent.

This is not to argue against protecting the poorest through the standard indexation of pensions and benefits. But it is to say that Mr Johnson’s pay policy is confusing. And he cannot pretend there is no pay policy. Even refusing to engage directly in pay talks with rail workers – despite owning the network and funding services – is a policy.

Johnson’s mantra is that incomes have to be suppressed to bring down inflation. So the question he needs to answer is why he thinks some income rises are toxic and inflationary and others are benign and acceptable. This isn’t just an economic question.

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For his party, it is also the difference between political life and death. A swing Tory voter who, for example, earns just above the eligibility threshold for universal credit, and will therefore see their living standards savaged, will think twice before rewarding Mr Johnson at the ballot box. There are two other points.

First, the government is the biggest and most powerful employer in the country. The overriding consideration – in Mr Johnson’s own words – is that inflation must be crushed by bearing down on pay rises. But why is it fair that public servants should take the strain in bearing down on inflation when pay rises in the economy as a whole are currently averaging 6.8 per cent (according to official figures)? Apart from anything else, the public sector employs just 17 per cent of all workers in the UK, so squeezing their pay alone won’t eliminate core inflation.

Second, trade unions are much less powerful than they were in the 1970s and even less powerful than they were a few years ago – in 2016 David Cameron made it much harder for teachers, nurses, rail workers and other important public service workers to go on strike. On Mr Cameron’s orders, the threshold for a successful strike vote was changed such that at least half of eligible union members had to vote and four-fifths of that 50% had to be in favour of the vote. This was thought to be a high bar, given normal apathy among union members. It was an attempt by a Tory PM to make sure that no strike could be called except when there was a legitimate grievance.

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The thresholds were beaten by a country mile in the RMT strike ballot. Yet the rhetoric of Mr Johnson and his ministers is that rail workers can’t possibly have a fair claim and they are simply holding the country to ransom. This may be effective short-term politics, though opinion polls show voters are fairly evenly divided on whether they support or oppose the strikers. But the risk for the government is that he is encouraging workers to become more militant, not less – because if workers are denigrated as vandals even when they vote in overwhelming numbers to strike, what is in it for them to be more constructive in negotiations and less aggressive?

\n\n\n","pull_quote":"Johnson’s mantra is that incomes have to be suppressed to bring down inflation","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"blt633d87aff3a1e4d3","type":"author","title":"Robert Peston","url":"/writer/robert-peston","bio":"Robert Peston is Political Editor of ITV News and host of the weekly political discussion show Peston. His articles originally appeared on his ITV News blog.","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltf28ace21620107a9/5e5d1502c3e6067dbb18ef88/peston.png","caricature_alt":"Robert Peston","twitter_handle":"@Peston","meta_description":"Robert Peston is a British journalist, presenter, and founder of the education charity Speakers for Schools. He is the Political Editor of ITV News and host of the weekly political discussion show Peston.","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":["inflation"],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"no_index":false,"no_archive":false,"no_follow":false},"image_style":"contain","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blt441b5492595bab4d","type":"article","title":"The Tories are picking inflation winners and losers","card_title_with_kicker":"","kicker":"","standfirst":"Boosting pensions, while holding back wages, reveals who the Conservatives really care about","url":"/article/the-tories-are-picking-inflation-winners-and-losers","wpid":"","date":"2022-06-22T11:00:52.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt7534c351ae8dc804/62b30ae900a04504aeea5492/Boris-Beggar_SE_FORF1_(1).png","hero_video":"","hero_image_alt":"The Tories are picking inflation winners and losers","byline":"Boosting pensions, while holding back wages, reveals who the Conservatives really care about","text_body":"

Inflation rose to 9.1 per cent on the year in May, taking the UK’s consumer price index to a 40-year-high. Optimists are noting the slowdown in pace, rising by 0.1 per cent between April and May. But I suspect we are in the eye of the storm. This price spiral is nowhere close to over, not least because the next energy price cap review is currently estimated to lift bills by an additional £1,000.

The Bank of England’s latest forecast predicts inflation will peak at around 11 per cent, but it must be said that the Bank has consistently underestimated the inflation rate, playing catch-up with its forecasts, as well as its rates policy. Today’s figures will further convince the Bank that its snail's pace interest rate hikes to combat inflation are still the right way to go, making it increasingly likely that the next meeting of the monetary policy committee will see rates go up again by a relatively meagre 0.25 per cent.

But while we’re used to central bankers rightfully taking the hit for failing to gauge inflation properly, focus is starting to shift to the government, as overtly political decisions are creating winners and losers in this inflation crisis. Yesterday it was announced that the ‘triple lock’ on state pensions will return next year, which means the value of the state pension is about to skyrocket. Under the policy, the value of the state pension rises by the rate of inflation, wage growth or 2.5 per cent, whichever is highest. There’s no doubt which variable will take the cake. The decision is based on September's CPI forecasts, which could be when inflation is nearing a double-digit peak. This means as working people’s salary rises fall behind the pace of inflation, pensioners will storm ahead with an estimated 10 per cent rise to their state pension, a huge boost to their purchasing power in this high-price economy.

The triple lock was suspended during Covid, on the grounds that hiking the state pension using skyrocketing inflation figures was an unfair measure, especially what younger generations had just gone through – in many cases losing their jobs, and in nearly all cases missing out on major life events, in a bid to protect older, more vulnerable people from the pandemic. Now, the lock is being reinstated, despite the only meaningful change to circumstances being that inflation is significantly higher, set to further widen the gap between pensioners and workers.

Inflation tends to help the assetocracy, which owns their home and sees the value of their assets go up over time. In the UK, the chronic under-supply of homes meant that throughout post-crash years these people tended to be older, or the beneficiaries of parents and grandparents with deposits to spare. By protecting (in full) the value of the state pension too, the government is positioning itself as the defender of the gerontocracy against the younger generations, who have more or less been told there’s very little the government can do to help curb inflation.

And it’s getting tricky to defend. This morning the deputy prime minister Dominic Raab suggested it was reasonable to hike the state pensions by 10 per cent while simultaneously telling workers not to ask for a pay rise, as this was consistent with the idea of ‘protecting the most vulnerable’. Low-wage workers who are struggling to pay the bills are likely to take issue with this narrow definition of ‘vulnerable’. But more broadly, reinstating the triple lock is estimated to cost north of £20 billion, almost quadruple what the new National Insurance tax is estimated to bring in.

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Suspending the triple lock last year offered the perfect opportunity to scrap the policy altogether. Instead, it’s being ushered back in at a time when workers are being squeezed with a tax burden hovering at a 70-year-high. It will do nothing to reassure most folk that No. 10’s inflation policies are designed to best protect them from rising prices. Instead, it will solidify further the belief that public policy, on the most important of issues, is crafted with voter blocs in mind.

","pull_quote":"","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"bltf2f6fff9e98a52a5","type":"author","title":"Kate Andrews","url":"/writer/kate-andrews","bio":"Kate Andrews is economics editor of The Spectator","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1ea6bcaf32591b40/6256be4527c70b38a0848a9a/kandrews_(1).png","caricature_alt":"Kate Andrews","twitter_handle":"@KateAndrs","meta_description":"Kate Andrews is The Spectator’s economics correspondent.","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":["boris johnson","pensions","pay","strikes"],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"no_index":false,"no_archive":false,"no_follow":false},"image_style":"contain","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blte58ce216da304eae","type":"article","title":"Is Britain heading into a wage-price spiral?","card_title_with_kicker":"","kicker":"","standfirst":"It’s why the government is reluctant to meet pay demands","url":"/article/is-britain-heading-for-a-wage-price-spiral-","wpid":"","date":"2022-06-21T07:00:03.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt7fb78a141152d278/62b190e586cd2d0f735e1cd8/5813583-1.png","hero_video":"","hero_image_alt":"Is Britain heading into a wage-price spiral?","byline":"It’s why the government is reluctant to meet pay demands","text_body":"

Are wages about to spiral out of control? Boris Johnson certainly thinks there’s a risk. Last week he warned that the economy was ‘steering into the wind’ and that the UK could be entering a 1970s-style malaise.

With inflation shooting up to 9 per cent – and expected to go higher still – rail workers are embarking on the first of three days of industrial action today, demanding a minimum pay rise of 7 per cent. Network Rail has offered just 2 per cent, with the potential for an extra 1 per cent on top if they can meet productivity targets later this year. Barristers too have voted for a walkout, and teachers and doctors are threatening to join the strikes. Speak to people in Westminster and there is a prevailing sense that there is only one way to stop runaway inflation: keeping wages down.

The wage-price theory is simple enough: higher costs mean workers demand higher pay, higher pay then pushes prices further upwards, and a vicious circle ensues. The theory is predicated on a couple of factors, one being a tight labour market, which allows workers greater leverage in negotiating more pay. With unemployment currently at 3.7 per cent and job vacancies at a record high of 1.3 million, that condition has certainly been met. Another is that wage growth exceeds productivity growth – otherwise, businesses would be able to absorb the rising cost of labour without having to pass on price rises to their consumers. Again, that condition has been met: growth is so stagnant that there are now even fears of a recession. The final condition is that workers and employers expect inflation to stay high. If it were transitory, businesses might feel able to weather the storm without having to push up prices, potentially making them uncompetitive.

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The Bank of England certainly thinks inflation is transitory. According to the Bank, inflation should be back to 2 per cent by June 2024, predicated on the assumption that energy prices fall back down to normal levels soon. It’s a huge gamble (the Bank has called it wrong before) and relies on western allies such as Saudi Arabia agreeing to play ball when it comes to pumping more oil (hence why Biden is visiting the Gulf state next month).

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One criticism of the spiral theory, put forward by economists such as Grace Blakeley, is that because UK inflation is largely imported – caused by that spike in energy prices and post-Covid disruptions to shipping – the spiral won’t get going in the first place. But you have to think about it from the position of businesses: their costs are going up, for whatever reason, and if workers add to those costs by demanding higher pay then their only option is to raise the price they set for their goods. It doesn’t really matter why, for example, raw materials are getting more expensive, the problem is that costs are going up full stop.

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Such arguments also fail to account for a major culprit that has stoked inflation at home: money printing. As Mervyn King, the former governor of the Bank of England, has said, ‘The problem was that central banks… put a lot of money into the system.’ Post-2008 quantitative easing went to balancing government books; pandemic printing has been funnelled into the wider economy through furlough, loans, support packages and the rest.

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And then there's the sheer amount of printing that took place: the UK printed nearly £500 billion during the pandemic, nearly twice what it had printed between 2008 and 2020. Meanwhile, consumers weren’t spending nearly as much during the lockdowns (as many as 85 per cent of UK adults reduced their spending when the country shut down). In the US, demand was boosted even further with a series of stimulus cheques sent out to every American. The result, when we finally did reopen, was an overheated global economy.

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This is perhaps why the UK government hasn’t got involved in the rail workers pay dispute. They know that Network Rail is unable to meet the wage demands – subsidies tripled to £12 billion during the pandemic to make up for the huge fall in revenue – and the government doesn't want those demands to be met anyway. The result is pain, both in people’s pockets and in disruption to services. The gamble is that it will save more pain in the longer term.

","pull_quote":"","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"bltea06213c76cca2ef","type":"author","title":"Gus Carter","url":"/writer/gus-carter","bio":"Gus Carter is The Spectator’s online comment editor.","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt4e4b7781286ef595/6182a2b60e8f4c0c7e6b1558/gus-carter-512x512.png","caricature_alt":"Gus Carter","twitter_handle":"@GusCarter","meta_description":"","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":["inflation","wages"],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"meta_description":"Rail workers have gone on strike, teachers and other public sector workers are planning a walkout. But is the government right to restrict pay rises?","no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blta3712675a881c524","type":"article","title":"France could plunge the eurozone into its next crisis","card_title_with_kicker":"","kicker":"Trouble ahead","standfirst":"The country finds itself in the same perilous place it was in after the first world war","url":"/article/france-could-plunge-the-eurozone-into-its-next-crisis","wpid":"","date":"2022-06-17T06:00:10.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltbefdb32413cb37fa/62ac186f5b1bd2257b15b736/GettyImages-1178653885.jpg","hero_video":"","hero_caption":"Emmanuel Macron and Christine Lagarde (Credit: Getty images)","hero_image_alt":"France could plunge the eurozone into its next crisis","byline":"The country is dancing on a debt volcano","text_body":"

In the French presidential elections, and now in the legislatives that will close on Sunday evening, the one issue kept under the carpet is finance. Neither the centrist Macronista grouping ‘Ensemble!’, nor the far-left Corbynista-like Nupes coalition of Jean-Luc Mélenchon has updated the electorate on how their manifestos are to be funded. And yet over the last month French finances have deteriorated dramatically. Neither programme has the slightest chance of being implemented without plunging French finances, and thus the eurozone generally, into a new sovereign debt crisis. France is dancing on a debt volcano.

The unabashedly ideological Nupes programme calls for nationalisation of the banking and energy sectors, motorways, strategic industries, raising the minimum wage to €1,500 (£1,500) a month, increasing paid holidays from five to six weeks, cutting the working week for certain sectors from 35 to 32 hours and reducing the pension age from 62 to 60. Not to mention the European Central Bank nullifying all member states’ debt. To be fair, Nupes has itself costed its programme at an astronomical €250 billion (£210 billion) annually, though more independent organisations such as the respected Institut Montaigne puts the figure closer to €332 billion (£280 billion) annually.

Nupes claims that its programme will be financed by taxes on the rich and renewed consumer spending resulting from shifting wealth from rich to poor. But costings were done when French inflation was at 2 per cent and the interest on French debt close to zero per cent. French inflation in May was 5.2 per cent and debt financing at 2.2 per cent, both rising fast. Add to that a French national debt to GDP ratio of 115 per cent which, in absolute, rather than percentage, terms is the highest in the EU; when public and private debt are combined, it reaches a staggering 361 per cent (UK 289 per cent, Germany 205 per cent) making France for the first time the greatest debtor in the world.

It is all but certain that Mélenchon’s coalition will not win an outright majority on Sunday. However, the latest polling gives Nupes between 150 and 190 seats, with Macron’s coalition probably denied an outright majority (289) on 255 to 295; marking a fall from his present 346 seats. That will make governing particularly difficult. Add to that the French parliamentary rule that the largest opposition party automatically chairs the highly influential and interventionist finance committee and the financial picture is worse than sombre.

But what of Macron’s programme, if he gets a chance to implement it? Macron continues to claim that his second presidential mandate will see more company and personal tax cuts paid for by reforming the French social benefit system and raising the pension age from 62 to 65. His financial calculation done months ago rests firmly on continued economic growth. But in the last quarter the French economy shrunk by 0.3 per cent and growth prospects are poor. What's more, seat projections for the new assembly put the Rassemblement National – opposed, like Nupes, to pension and social reform – on 20-45 seats, meaning Macron is unlikely to have the parliamentary muscle to reform anything. Meanwhile servicing French debt is predicted to cost huge sums that will not only stymie tax reductions but likely require tax increases (a VAT hike has already been leaked as a possibility).

Both the French presidential and legislative elections have been lacklustre affairs, with Emmanuel Macron continuing to maintain his habitual Jupiterian and scornful posture. To the extent that there has been any serious political debate, all sides have studiously avoided the explosive issue of France’s perilous finances and how to fix them. Fear of depressing French voters further with the reality that after Covid, and potential stagflation, greater pain is to come, is motivated by fear of where historically that leads the French.

After Brexit, France aspired to regain the position she occupied before the first world war as Europe’s banker, with Paris once more at the heart of European finance. That dream came to nought. Now the scenario is more that of France after the first world war: mired in debt, stalemated in policy and with the broader modern prospect of seriously contributing to a new eurozone debt crisis. In the past, France devalued to extricate herself from financial plight, most notably after president Mitterrand’s socialist reforms of 1981 to 1983. Without that option, France could end up passing on the burden to a far more indebted eurozone than in 2012/13, once again fragmented by widening spreads on Italian, Spanish, Greek and Portuguese government bonds. The euro would never survive.

","pull_quote":"France finds itself in the same perilous place it was in after the First World War","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"bltaa6595ddc78b96ac","type":"author","title":"John Keiger","url":"/writer/john-keiger","bio":"John Keiger is a former Research Director in the Department of Politics and International Relations, Cambridge University and the biographer of Raymond Poincaré, France’s President before, during and after the First World War","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltceda822daf4d42a4/5ecce7f553e7da19a32ab2eb/John-Keiger-512x512.png","caricature_alt":"John Keiger","twitter_handle":"","meta_description":"","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt579bbaf57fc3757f","type":"topic","title":"World","description":"","categorisation":"Coffee House","url":"/category/international","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt4631347266f09874/6183f0e296cc43179ebd13e4/International-icon_200x200.jpg","hub":false,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt4631347266f09874/6183f0e296cc43179ebd13e4/International-icon_200x200.jpg"}}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"meta_description":"France finds itself in the same perilous place it was in after the First World War: mired in debt and stalemated in policy","no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":false,"suppress_inline_house_slot":false,"suppress_most_popular":false,"exclusive":false,"card_title":""},{"uid":"blte7c183431da53ca7","type":"article","title":"Asking for a pay rise won't crash Britain's economy","card_title_with_kicker":"","kicker":"Inflation","standfirst":"","url":"/article/asking-for-a-pay-rise-won-t-crash-britain-s-economy","wpid":"","date":"2022-06-16T13:27:29.000Z","hero_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltd63fd306636c3d0e/62ab384ca212eb05ee680393/GettyImages-1240460292.jpg","hero_video":"","hero_caption":"Andrew Bailey, Governor of the Bank of England (Credit: Getty images)","hero_image_alt":"Asking for a pay rise won't crash Britain's economy","byline":"","text_body":"

The Bank of England has just raised interest rates for the fifth time in the row, warning that inflation is expected to pass 11 per cent by the end of this year. If it had escaped your notice, everything is getting more expensive, and the government is powerless to help. The extent of the Bank’s assistance has been to tell you not to ask for a payrise. Boris Johnson, meanwhile, seems furious that taxes are so high, and will be having stern words with whoever raised them. Even Freddo bars aren't exempt from the cost of living crisis, shooting up to a frankly outrageous 30p each.

Inflation is essentially a problem of too much money chasing too few goods. Markets don’t like unmet demand, or unused supply. If people are lining up to buy goods that are selling out, prices rise until supply and demand match. This is exactly what’s happening now, with an unusual twist: rather than overheated demand, goods are selling out because production is low. If supply contracts while aggregate demand is high, prices rise until both are balanced.

This puts the government in a difficult position. Supply is down because of global events it has little control over. The first is the Covid-19 pandemic, which has fouled up global supply chains from factories to shipping. As households return to normal and begin to spend, demand has risen. Production and logistics haven’t been able to keep up. Last winter’s scenes of ships queuing off the coast of America waiting to offload goods at bottlenecked ports were an obvious sign that something was badly wrong, and shipping isn’t expected to return to normal any time soon. Away from the freight side, lockdowns in China are playing havoc with production schedules, and labour absence across the West remains an issue. These effects meant inflation was already up to 4.6 per cent by November last year.

The second shock to the system came in Ukraine with Russia’s invasion. Between the conflict and sanctions, prices for oil, gas, and raw materials have shot up. Even though Britain imports relatively little energy from Russia directly, it still feels the pinch: it’s now competing with much higher demand for the suppliers it buys from. It’s no surprise that energy prices are a major contributor to today’s inflation. In the Eurozone, energy prices have shot up 39 per cent year on year.

The response to these shocks explain partly why inflation differs so much across countries. Even in the Eurozone where countries share a single currency, inflation can be as low as 5.8 per cent in France to 20.1 per cent in Estonia; the extent of dependence on Russian energy and ease of switching supply is a major driver. If you’re lucky enough to be Switzerland, where gas and oil only make up one per cent of your electricity supply, then energy prices basically haven’t risen at all. Combine that with your own currency and central bank, and inflation sits at just 2.4 per cent. There are, of course, other domestic factors that make a difference. Brexit may turn out to have long term benefits, but right now it’s driving prices up as we reorient our economy away from Europe and adjust to the new barriers to trade.

So that’s the bad news. Inflation is high because supply is down, and supply is down because of factors we can’t control. With that said, here’s a little encouragement: you can safely ask for all the pay rises you want. It’s not going to crash the economy. What Boris and the Bank say they’re worried about is a so-called 'wage-price spiral', where demands for higher wages push up production costs, which feed into rising prices and start the whole cycle over again.

This shouldn’t worry you. Britain’s labour market is highly flexible, and wages are rarely the result of unionised bargaining. This means we don’t have the sort of institutional set-up which gives employees the power to demand wage rises which can push costs up in this way. If wages are rising, it’s because the labour market is running hot. Artificially holding wages down won’t do anything to help with this; when labour is cheap relative to prices, firms keep hiring until demand slacks off or wages rise. The end effect would be to send wages racing the moment wage restraint ends.

This points at one last factor to blame for inflation: the Bank of England. In November, while forecasting rising inflation, the Monetary Policy Committee voted to keep interest rates low, with the market expecting them to hit one per cent by the end of 2022. They’re already at 1.25 per cent. The MPC can’t be blamed for failing to predict Putin’s invasion, or for expecting the supply chain inflation to be a temporary blip. But it is unfortunate that years of low interest rates combined with an increasing emphasis from politicians on growth and employment appear to have undermined confidence in the Bank’s credibility when it comes to tackling inflation.

If people expected steep interest rate increases to keep prices under control, then the very fact of this expectation would help to hold inflation down as companies and households built it into their decisions. Instead, the Bank will have to go the long way around and increase rates higher. This means more economic pain on the horizon.

","pull_quote":"This points at one factor to blame for inflation: the Bank of England","associated_image_caption":"","associated_image_alt":"","addendum":"","addendum_anonymous_only":"","author":{"uid":"bltab7928130395c3fd","type":"author","title":"Sam Ashworth-Hayes","url":"/writer/sam-ashworth-hayes","bio":"Sam Ashworth-Hayes is a former director of studies at the Henry Jackson Society.","caricature":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltde61509f722d3dbc/625e8ded29e3e256ca258295/sam-ashworth-hayes-512x512.png","caricature_alt":"Sam Ashworth-Hayes","twitter_handle":"","meta_description":"","related_authors":[],"hard_paywall":false},"topic":[{"uid":"blt2942416014c7a915","type":"topic","title":"Economy","description":"","categorisation":"Money","url":"/category/economics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png","hub":true,"seo":{"meta_description":"","meta_image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt1bbfcde5961405f1/60744a34dbc23374786cea03/money.png"}},{"uid":"blt83396aa3ea78cdcb","type":"topic","title":"Money","description":"","categorisation":"Money","url":"/category/money","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/bltb816fbc9cae1d847/605b9e209074c10f292fda11/money.png","hub":true},{"uid":"bltebf2e7812f81f2b3","type":"topic","title":"Politics","description":"Read about the latest UK political news, views and analysis.","categorisation":"Coffee House","url":"/category/politics","image":"https://images.contentstack.io/v3/assets/bltf04078f3cf7a9c30/blt42654d76e4628965/6033a2b9ba193a16289017ea/Politics-icon_200x200.jpg","hub":false}],"related_content":[],"cartoon":{"type":"cartoon","caption":"","text_body":"","has_magazine":false,"magazine_subsection":"More cartoons"},"books_arts":[],"magazine_content_production_only":{"magazine_":false},"tags":[],"audio_read":{},"hard_paywall":false,"has_magazine":false,"magazine_page":null,"comments_enabled":true,"seo":{"meta_description":"The Bank of England's governor has urged Brits not to ask for a pay rise. But doing so won't make inflation any worse","no_index":false,"no_archive":false,"no_follow":false},"image_style":"cover","house_slots":{"house_slot_anonymous_users":[],"house_slot_registered_users":[],"house_slot_subscribers":[]},"never_paywall":false,"suppress_inline_ad":true,"suppress_inline_house_slot":true,"suppress_most_popular":false,"exclusive":false,"card_title":""}]}],"high_priority_content_sections":[{"custom_styles":""}],"image_banner":{"link":{"title":"","href":""}}},"loading":false,"loadFailed":false,"loadFinished":true}

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