Multiple media outlets in the UK every day report that the Cost-of-Living Crisis is taking an unprecedented turn each day, closer and closer reminding of the 2007-8 financial crisis. Meanwhile, the major banks, including Barclays, Lloyds, HSBC, NatWest and Santander are reporting record-high annual profits this year. So, what is actually happening, who should be responsible and what are the experts suggesting as solutions?
The Bank of England has reported that the UK is currently experiencing higher inflation rates than the US and Europe. As a result, the bank has decided to increase interest rates to reduce inflation.
This is a common practice in capitalist economies: when interest rates are raised, the consumers’ demand is supposed to start falling (i.e., the consumers will be borrowing and spending less) and that way the inflation rates would shrink. That is according to the basic microeconomic theory.
However, there is concern that, although spending has decreased in the past few months, the situation slows down the growth of the UK economy and there is a possibility of recession in the future. Moreover, the policy might significantly increase monthly repayments for millions of people in the coming years.
The government has not introduced specific measures that could help deal with the problem. Currently, it has introduced measures to offer temporary help to those severely struggling with their debts but no systematic solution yet.
So, what are the experts saying and what could be potential solutions to the crisis? There are many opinions and many angles that this could be considered from, and here are some of them:
Martin Lewis, the founder of the MoneySavingExpert website, argues that the policy of interest rates increase is only targeting an individual group of people – the mortgage lenders and household renters – and is therefore ineffective because, instead of focusing on changing the systematic issue with national inflation and bank profits, the government affects lives of individuals who are already struggling to pay their basic “disposable income” (i.e., people’s salaries that then get spent on groceries and bills, etc).
He explains that, because of the way mortgage eligibility works, the current Bank of England policy intends to force the lenders to cut back on all their spending to be able to “just about” afford the new monthly repayments in line with the rising interest rates.
Therefore, it makes it very difficult to provide advice to individuals on the topic. He shares that this is causing “deep frustration” for him, especially considering that he “already raised that issue last year”.
Josh Ryan-Collins, an Associate Professor of Economics and Finance at University College London, also assesses the potential impacts of high-interest rates together with the lack of financial support for individual households that are repaying mortgages.
He considers the issue from the perspective of fiscal policy: he argues that one of the solutions to this would be for the government to support “social landlords” (landlords who provide lower-cost rented housing) in buying the homes of mortgaged homeowners which could be converted into a socially rented sector.
That would mean that the social tenants would be paying rent to the government without being burdened by high interest rates, while the government, in turn, would receive the flow of rental income and could expand the supply of affordable housing.
He adds that the crisis shows that the UK needs to reconsider its general mortgage policy by potentially shifting from short-term fixed-rate mortgages to longer-term, fixed-rate mortgages of 20-25 years, similar to the US, Canada and Europe.
To do this and to prevent the risks of a rise in house prices from such a policy, Ryan-Collins states that the government has to reduce the investment demand for housing from those nationals who already own properties.
This, he says, could be “easily done” via property tax reform, “with higher taxes on buy-to-let income and second homes.”
John McDonnell, Labour MP for Hayes and Harlington and a former shadow chancellor, provides solutions from the perspective of what the banks themselves could do.
In a perfect world, the banks could “voluntarily shoulder some of the burdens of the rise in interest rates” and cover the costs from their profits, this way easing the situation were the stakeholders.
However, McDonnell says, it would require the government to step in and introduce an excess profits tax on the sector. This would mean that, if the banks paid, say, a windfall tax of 15%, the government could fund a mortgage interest relief scheme “of £5.5bn for 2022 and likely significantly higher in 2023”.
In any case, the government has to act now in order to “provide a breathing space needed to enable a comprehensive housing policy programme to be brought forward under Labour”.
Speaking of the Labour Party, politically, economists are critically assessing the party’s future role in the crisis which, under most of the predictions today, is very likely to win the next election.
Mick McAteer, co-director of the Financial Inclusion Centre, and Harry Lambert, editor at the New Statesman, warn of the risks of “financialisation”, i.e., political prioritisation of the finance industry in the UK which primarily benefits “the City” [London’s financial centre], and government’s deregulation of the economy.
They argue that the fiscal policy that is practised by the Conservative Party in the spirit of neoclassical economics theory, is already being taken over by Labour, who pledge the policies that would strengthen the financial sector.
McAteer explains this by providing an example of Labour’s green plan: the party stated that it would invest £28bn a year through private finance which is “by definition … more costly” and “would push up the total cost of the green transition”, which would be reflected in the households’ rising bills.
Lambert confirms that this situation could be solved by an alternative fiscal policy: if the government taxed the financial sector instead of the individual households, just like was argued by McDonnell above, it would be able to fund its green plan or allow Rachel Reeves, the shadow chancellor, to reduce income tax by up to 4p, significantly reducing the pressure on the households during the cost-of-living crisis.
Nevertheless, as the news is showing today, Reeves ruled out wealth tax as an option.
Meanwhile, the Office for National Statistics recently revealed that 42% of adults paying rent or a mortgage in the UK are finding it “very” or “somewhat difficult” to afford these payments.
UK private rental prices increased 5.3% in the year to July 2023 on average, with 5.2% in England, 6.5% in Wales and 5.7% in Scotland. The Office reports that these are “the highest annual changes in rental prices since records began” (January 2006 for England, January 2010 for Wales and January 2012 for Scotland).
Today, there are more and more stories appearing in the media about families, forced out of their homes due to rises in interest rates and therefore rental costs.
The new study by the Observer, the Guardian’s sister paper, has also found that there is a large discrepancy in rent increases between poorer and richer areas of Britain. For example, 10% of the most deprived areas have seen a rise of 52% in rental costs, while the 10% most affluent areas saw a rise of 29%.
The Child Poverty rates across the UK currently stand at more than 40% in areas like Newcastle upon Tyne, Birmingham and Manchester.
While there are many options that are offered by economists to the current and future governments, ultimately the decisions on fiscal policy and mortgage crisis will lie on the national objectives. Whether those objectives are going to prioritise the British people or the financial sector, is the burden that has to be faced by both the Tories and the Labour.
The next Mortgage Lenders and Administrators Return (MLAR) statistics will be published by the Bank of England on 12th September 2023. The report will show the immediate effects of the recent monetary policy – specifically the effects of the rise in interest rates on the rates of borrowing and mortgage returns.
