I usually thank my lucky stars for paying me to keep up with economic and political developments. It is a massive privilege. But it’s also impossible right now. Another week of ups and downs in the gilt market is spilling over into the real world: Interest rates on some fixed-rate mortgages are hitting highs not seen in more than a decade (see COTW).
Meanwhile, the Birmingham-based U-turns, over-turns, and hit claims have been hard to follow, and that’s before you realize that, while Macron is our best friend againanyone who doesn’t love huge unfunded tax cuts is the new enemy number 1. Personally, I think the sweet spot is to be a proud member of the anti-spaffing money you have not up the wall coalition, while also being a going for groupie growth (here it is our take about what growth, growth, growth requires).
This week’s reading touches on some of this, including where tax cut conservatives might want to focus. Have a great weekend, whatever coalition you’re in.
hard tax. Removing the top tax rate of 45 pence was all about ensuring that the wealthy had an incentive to make wise effort. Now that it’s not happening anymore our prayers obviously go out to the top 5 percent who lost 60 percent of their tax cuts with the U-turn; now they only get 40 times the bottom fifth tax cut. But who faces the higher marginal tax rates, which conservative tax reformers might want to focus on? Not top earners, like quick blog of the Dan Neidle shows. While facing marginal tax rates of 47 per cent, some with lower incomes (although certainly not low) lose far more of each extra pound earned. The elimination of child benefit for people earning between £50,000 and £60,000, and the personal allowance for those earning between £100,000 and £125,000, means marginal tax rates above 60 per cent. And that’s before we get to student loans, or even very high effective tax rates for those who receive benefits. Do you care about incentives? So worry less about the top.
It is not normal. Last week we largely hid from readings about the developing market chaos, including the Bank of England’s emergency intervention. But it’s worth taking the time to read the first one. detailed discussion of what happened, provided in a letter from Lieutenant Governor Jon Cunliffe to the chairman of the Treasury Select Committee. Along with the mechanics of why some pension funds ran into trouble, he also lays out in black and white why what has happened in the UK over the last two weeks is so far from normal. If you do nothing else, look at the first chart which shows that the increase in long-term interest rates in the UK over the last month is much larger than that seen in the US or the euro area. The high volatility is also worth noting: Last Wednesday, the range of 30-year gilts returns seen in one day was as wide as that seen in 23 of the last 27 YEARS. Homework now? To make British economic policy seem much more normal.
coal costs. Coal is back in fashion as Europe tries to cope with far less of the hydrocarbon we have largely replaced it with: gas. But in the longer term, Europe – and everyone else – must phase out coal and its workforce to meet our net-zero emissions targets. Weather our own work shows that concerns about net zero leading to widespread job losses are greatly exaggerated in the UK context, our story provides warnings about the challenges facing some other countries. recent research uses the dramatic collapse of UK coal mining in the 1980s to warn policy makers to focus on the dangers of the displacement of more than five million coal miners, more than half of them in China . In the UK, miners’ wages fell by 40 per cent immediately after losing their jobs, and their earnings were still significantly low fifteen years later. Anyone who wants a smooth transition to net zero should expect China to do a better job of shutting down its coal industry than we do.
Looking at salaries. The IMF is due to update its forecasts for the world economy with the new World Economic Outlook shortly, but you don’t have to wait for it to be released to know there will be downgrades everywhere. More interesting is a chapter have published in advanceabstract) about what history has to tell us about the risks of spiraling wages and prices. It examines 20 situations in advanced economies over the past 50 years that had characteristics similar to those of today: rising inflation, rising nominal wage growth, falling real wages, and tight labor markets. The good news? Most did not lead to wage and price spirals. The bad news? There was a lot of variation, including actual spirals. But, in general, the authors are optimistic, we should avoid that fate. Why? Because central banks are raising rates all over the world to make sure that it does. Which brings us to…
chart of the week
The cost of living pain in 2022 has been from rapidly rising prices, especially for energy and food. The 2023 edition will bring something else to center stage: housing costs. Rents are rising rapidly and rising interest rates will translate into higher monthly mortgage payments. The government can take heart from the fact that rising mortgage bills won’t be felt as widely as in the past: three decades of falling home ownership by young people means only 28 per cent of households have a mortgage (versus 43 percent in the 1990s). And they might get even more heartened when told that among conservative voters only one in three has a mortgage. That’s what having older, wealthier voters does for you: 50 percent of those who voted Conservative in 2019 owned their home without a mortgage, nearly double the national average.
But the government shouldn’t completely relax just because voters from other parties are being hit harder across the UK. Why? Because the new ‘Red Wall’ political battlefield is defined in part by lower home prices and more mortgaged homeowners: About two in five households are in the process of buying their own home. The politics and economics of rising interest rates will be huge for years to come.