On Thursday, the Bank of England raised the base interest rate by half a percentage point, adding to the woes of any consumer who has debt in the United Kingdom.
While a raise was anticipated, the doubling of the expected hike came as something of a surprise to Downing Street — and certainly to anyone who is coming off a fixed-rate mortgage and trying to renew their house funding.
The timing of the rise was impeccable, not because it comes as Britons are wondering just how they are going to make their overstretched paycheques find some more elasticity, but because the hike coincided with a poll that says that just 18 per cent of Britons who supported Brexit and thought it was a good idea the leave the European Union.
Am I cynical? Yes, of course, such a trait is always finely tuned in someone who reports on the affairs of politics and economics, history, geography and society. But even the most ardent Brexiteers can’t help but wonder just what the heck has happened to the UK since they decided to leave the third-largest global economy on their doorstep.
Sure, coronavirus and shutting down national economies had a detrimental effect on economies globally — but they have bounced back. Britain, leaving the EU just before we were all locked down, suffered another 8 per cent hit on their gross domestic product.
UK’s Economic Woes Deepen
And then that small matter of the conflict in Ukraine was the next hit. And while prices soared and governments across Europe came up with measures to try and protect those struggling with the choice between heating and eating, the UK was in a far weaker position to be able to help those facing much higher household bills.
If you think I’m being overly hard on Britain, consider then one further piece of economic news that broke there this week. For the first time since 1961, Britain owes more than 100 per cent of its annual GDP.
According to the Office for National Statistics, the UK owes £2.6 trillion — a figure that represents 100.1 per cent. In layman’s terms, for every £1 in circulation in the UK economy, another £1.01 is owed to lenders.
This is no mere statistic. The importance of this means that the government of Rishi Sunak has very little wriggle room to try and help mortgage holders who are coming off fixed low-rates mortgage terms and are renewing at levels that, one average, are £300 more per month.
This is where Europe's Electric Revolution is happeningThat means that over the next few months, there are going to be a lot of disgruntled people struggling to keep a roof over their heads, put food on the table at a time when inflation in the UK remains stubbornly high, and who will be heading into the winter facing high energy costs.
I would be disingenuous if I did not note
that 61 per cent of Brits believe that the
effects of Brexit will get better. But that
was before the interest rate hike was announced
Inflation in the UK stands at 8.7 per cent, just as it was the previous month.
In other EU countries, it’s far lower. France is below 6 per cent, Germany at 5. Why? Well, the key difference is that France and Germany are within the EU. And being outside the EU had added a hefty premium to food prices in the UK. Analysts estimate that any given food item in the EU costs 20 per cent more in the UK.
Perfect economic storm brewing
Consider if you will that traditionally, the Conservatives have always had the reputation with voters of being, well, conservative when it came to the economy, The party was considered to be best in handling finances and letting the free market grow without regulatory processes of big state spending and interventions — none of that nation-owning railways or waters or things that Labour and lefties like to do with other peoples’ money.
That was then. Now? And particularly since Liz Truss — remember here? — got her hands on the economy, it’s all gone up the creek.
But despite the best efforts of Sunak and Chancellor Jeremy Hunt, inflation remains rampant, the negative effects of Brexit are all too real for everyone to see and feel, and the government’s fiscal policy is simply down the toilet.
That economic storm coming on the horizon coincides perfectly with a general election in the UK that has to be called before January 2025.
UK Prime Minister Rishi Sunak
With debt so high, Sunak risks being perceived as reckless, offering tax cuts on borrowed moneyNormally, any government would try to time tax cuts to the period just before the election is called in a cynical attempt to buy votes on the back of the economic bounce those tax could would create.
Struggles with Inflation and Debt Burden
Now, thanks to Brexit, thanks to soaring inflation, thanks to rising inflation, the Sunak government simply doesn’t have the wriggle room to create those tax cuts.
What’s more the government is in something of damned if you do, damned if you don’t conundrum.
Offer tax cuts, and people will ask why couldn’t the money have been used to end the countless public sector strikes that have crippled the country. Or gone to give some sort of aid to people facing much higher mortgage rates. On that note, the opposition Labour party says it would instruct banks to offer interest-only payments and extend the term of mortgages to help borrowers through this sticky period.
But with debt so high, Sunak risks being perceived as reckless, almost in the ilk of Truss, offering tax cuts on borrowed money, worsening the UK’s overall financial position.
Back to that Brexit poll. I would be disingenuous if I did not note that 61 per cent of Brits believe that the effects of Brexit will get better. But that was before the interest rate hike was announced. I would happily wager that come the next poll, that figure would hardly break 50 per cent. How long before less than 10 per cent of Brits think Brexit was a good idea?
Mick O'Reilly is Foreign Correspondent at Gulf News. Source: Gulf News