Mike Dailly: Interest rates will soar with zombie mini-budget

Mike Dailly: Interest rates will soar with zombie mini-budget
Mike Dailly: Interest rates will soar with zombie mini-budget

HAS there ever been a more divisive fiscal statement than last week’s mini-budget?

Like a reverse Robin Hood from a pernicious multiverse, the new Chancellor has taken from those trying to make ends meet to give to the rich.

His budget divides the country socially. The Resolution Foundation calculate that almost 50% of tax cuts will go to the richest 5% of UK households.

His budget divides the country geographically. Those in the southeast of England will see an average gain of £1600 per annum while those in the north of England and Wales will see £500.

The stamp duty cuts in England largely prop up the bloated and dysfunctional housing market in London.

Abolishing the 45 pence tax rate for those earning more than £150,000 will cost £2bn a year and will benefit the richest 629,000 people in the UK. For someone earning £1m, that’s an immediate gain of £55,200.

The scrapping of the cap on bankers’ bonuses results in an even greater bonanza for senior financial executives.

You may well ask, who’s paying for this? We all are because this unprecedented tax giveaway isn’t funded. It’s effectively stuck on the state’s credit card. There’s no additional windfall tax on energy companies.

This is a UK asset fire sale that will add £130bn to the national 
debt in this fiscal year and almost half a trillion over the next five years.

Chancellor Kwasi Kwarteng tells us that his giant giveaway to the richest in society will generate economic growth.

Most economists believe this is folly – like the fallacy of trickle-down economics – and the money markets said as much immediately after his speech.

The impact of the Chancellor’s budget was the pound losing 3% against the dollar – £1 is now less than $1.09. UK Government bond yields increased which means the cost of borrowing for the Government is more expensive.

The elephant in the House of Commons last week was the failure of anyone to mention that our economy is tanking because of Brexit. We gave up one of the largest free trade zones in the world for the notion of a Grand Britannia that is no longer great or good.

The Big Brexit report by the London School of Economics and others (published in June) found that: “Immediately following the referendum, Brexit contributed to a rise in the cost of living and a fall in business investment. This rise in the cost of living was equivalent to a £870 increase in the cost of living per year for the average household.”

The authors found that trade barriers continued to hit agricultural and professional service exports hardest, with ongoing trade losses affecting everyone: “Our modelling finds that over the next decade, as the UK adjusts to the trade and cooperation agreement, the UK will have 1.3% lower productivity, and real wages will fall by £470 per person every year than in the absence of Brexit.”

For me, the practical danger of the Chancellor’s mini-budget – and there is worse to come I fear – is it will result in the Bank of England (BoE) hiking up interest rates to levels that will be unaffordable for most households which are already over leveraged with debt.

The base rate was hiked by half a percent last week and is now at 2.25%. That half a percent adds £23 per month to every £100,000 of a mortgage on a standard variable rate (SVR) or tracker rate. 
In the space of just over a year, tracker customers are now paying around £216 a month more, and SVR customers about £163 more. Banks will also increase overdraft and credit lending rates.

Evidence for this concern can be found in the BoE minutes to its Monetary Policy Committee (MPC), which sets the base rate.

The September minutes said: “While the [Energy Price] Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August [Monetary Policy] Report over the first two years of the forecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.”

Factor in the Chancellor’s unfunded tax give away to the rich and you have a recipe for interest rate disaster. Calls have already been made for the BoE to increase interest rates immediately – despite the next rise not being due until November.

Deutsche Bank experts called on the BoE to make an emergency rate hike this week “to regain credibility with the market”.

Bloomberg analysts predict the base rate soaring to 5.2% by next August.

I fear the new Prime Minister is on track to cause a housing crisis not seen since the 1990s with her zombie budget, while exacerbating the cost-of-living crisis for millions of people.