10 May 2018
Local Election Results
Interest Rates Matter.
By John Watson
“Whew”, “Could have been worse”, “Not so bad mid-term”, “Corbynism’s high point”, sighs of relief echo in the bar of every Conservative Association. Yes, it could have been worse. No it wasn’t. But before they congratulate themselves on only having lost thirty-one seats, the Tories need to remember the context. First, the figures are flattered by the collapse of UKIP , which lost 120 of the 123 councillors it amassed in 2014. Then its share was 17% of the vote and the greater part of it has now moved to the Tories. If you knocked that out, the results would look considerably worse. Then again, there is the effect of Brexit, in some areas helping the Tories but in others (Remainer-filled Richmond for example) having the opposite effect.
Now move to the overall voting pattern where The Times has estimated that if these results were projected forward to a general election, the main parties would be more or less even. That is better than Labour did in 2017, but not so much better as to suggest a pro-Corbyn surge, and, in any case, Governments are at their weakest mid-term.
Confused? Aren’t we all? Actually, the only sensible message one can draw from these results is that the political position is open and that either party, if it plays its cards right, could win the next election. In the case of Labour that means giving the public confidence that it is fit to govern. In the case of the Tories it means persuading the public that the party will meet their aspirations. It is worth thinking about what that means.
There is much common ground in British politics. Everyone agrees that public services should be adequate to support the less fortunate. Everyone agrees that those services and the raising of taxes to pay for them have to be reformed. Things have to move on. The question is how far and how fast?
The idea behind Conservatism is that you reform slowly, building on what you already have. That has three advantages. The first is that there is less chance of systems derailing badly and unexpectedly. Incremental change is less likely to lead to a car crash. The second is that it allows competing improvements, with only the best innovations surviving – a form of political Darwinism. The third, derived from the other two, is that those who have a stake in the country will not find that it has been suddenly destroyed. That is why the Conservative Party is the natural home of the prosperous, those with a way of life which they would not wish to see wrecked by the process of reform.
It is no coincidence then that at the time when wealth has become concentrated in the older generation, it is their juniors who are most inclined to vote Labour. At the moment, many young people feel disenfranchised, so the expectation that the Conservative Party will enable them to preserve their prosperity means little to them. If the party wishes to thrive, its main object must be to grow the proportion of young people who are in a position which they regard as worth protecting.
To what then do young people aspire? They want jobs, of course, but it goes beyond that. They want jobs which are well paid, so that they can enjoy a good living standard. Then they want either to own their homes or to have a good prospect of doing so. They also want financial security, in particular the prospect of a reasonably comfortable retirement.
In relation to each of these areas, all eyes should be on the Bank of England today because the low interest rates which prevailed since 2008 are a very large part of the problem. Suppose that interest rates begin to go up and ultimately plateau at traditional levels – say somewhere around 5%. That would be expensive for those on floating rate mortgages, but for retirement funding it would be very good news indeed. At the moment those with pension pots watch with horror as low rates of return make sensible pension provision impossible. A higher yield would take a lot of the pressure off and mean that people could look forward to the future with far more confidence.
That would have a knock-on effect on the housing market. Currently many people trying to build up their savings hold buy-to-let property because that is the only way they can see of generating a decent return. If higher returns were available elsewhere, the pressure to do this would ease, making more housing available for purchase by occupiers. That is not, of course, a substitute for building badly-needed new housing, but it would certainly help.
Rising interest rates could also help with remuneration levels. We are frequently told how bad the UK’s productivity figures are, something which is balanced by historically high levels of employment. Coming out of 2008 this was an acceptable trade off, but it has been going on too long. The sweating of labour needs to be replaced by investment in new plant and technology, and that means that UK businesses need to have prospects which justify new investment. As interest rates rise, a number of marginal businesses will disappear and, if the economists are right, that should allow healthier businesses to emerge in their place. Healthier businesses mean a better paid work force, and employees with a greater stake in the country.
In deciding whether to put interest rates up, the Bank’s Monetary Committee looks at the prospects for inflation and takes into account the difference which any change will make to growth projections, but as we review their decision we need to keep in mind the damage that the long period at low rates is doing to the economic fabric and how it is frustrating the aspirations of the young. For the Tories this is now a central issue.
If not today, when?