Boris Johnson is economically illiterate
The joke is over. The stand-up comedian that is our Prime Minister Boris Johnson suspended reality for an entertaining 20 minutes on Wednesday before providing more evidence that he is economically illiterate. Whether Johnson simply does not understand the extent of the cost of living squeeze, or whether he really believes that things will magically improve by bullying employers into paying more, is almost irrelevant.
That squeeze, the culmination of years of complacency regarding energy supplies this winter, promises a violent increase in the cost of domestic gas. We can expect ministerial claims that this is an international lack of fuel as the world economy opens up after the pandemic. But Britain’s energy shortage has been years in the making, thanks to the war on coal, the pressure on oil companies to stop developing reserves, the lack of gas storage, and the naive belief that the wind will always blow to keep the windmills turning.
Since the only way to ease the shortfall in the supply of gas is to pump more from Russia, we are now faced with the unedifying prospect of being dependent on mild weather and the goodwill of Vladimir Putin to keep us warm through the winter. He is unlikely to agree out of the kindness of his heart. As he is blamed, however, it is worth remembering that Russia is already fulfilling all its contractual obligations.
As for the UK, if recent policy is any guide, the response will be a fresh round of subsidies to soften the blow, with the real cost disguised as another increase in the deficit, to add to all the other free lunches that pass for Johnsonian policy. So far, Johnson has got away with it, but it is crucially dependent on cheap borrowing, and there are early signs that this era is coming to an end.
The yield on 10-year government stocks has risen to its highest in two and a half years. At 1.07 per cent, it is still ridiculously low, but a one per cent rise in the cost of new borrowing adds over £700m to next year’s interest bill. At the Bank of England’s forecast of inflation, the buyers of these gilts are losing three per cent of their capital a year, while the markets are implying six per cent inflation, powered by the gas price cap. It would be impossible not to raise interest rates if that came about, and history shows that once they start to rise, they can go a very long way.
This week also saw more evidence of inflation running away already. The Halifax house price index has risen by 7.4 per cent in the last 12 months, helped by the desire for more domestic space in the pandemic along with the increased savings to pay for it.
It is a stark reminder of the gulf between home-owners and the rest. Each rise takes home ownership further away from those without access to capital, and highlights the hopeless task of saving to buy. This is surely the biggest social divide in Britain today, and each rise attracts more money into domestic property, pushing up prices further. This is reinforced by the fiction that it is important to be able to pass on the family home to the offspring (who will sell it as soon as you die). We are not so much a nation of home-owners as a nation of property hoarders.
The solution is obvious, and painful. Higher interest rates will help savers and bring an end to near-zero mortgage rates. They might also shake faith in the belief that house prices can only go one way, and start a much-needed bear market in domestic property. Of course in his conference speech Rishi Sunak tried to reassure the markets that it is immoral for governments to stack up debt on future generations, while he is doing just that. It’s an illustration of the old adage: listen to what Johnson is saying, and bet on the opposite happening.