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Interest rate intensity

The budget that George Osbourne presented last week was not particular brave, considering the electoral cycle. Far from being the orgy of cuts that Ed "Edward" Miliband suggested, the fact is that the UK deficit will continue to rise, and the total level of indebtedness is unlikely to fall much, if at all for several years. The gap between the spending programme proposed by Labour last May and the Coalition this March is really pretty small. However this has not prevented Labour -rather foolishly- from hitching itself to a "No cuts" band wagon. The resulting juxtaposition of Ed "Edward" Miliband's speech with a serious riot by extremists was unfortunate, but sadly all too predictable. Miliband -again- demonstrated a lack of judgment that is becoming characteristic of his leadership. Labour has abandoned any sense of economic reality, if they now truly believe that there is any chance of recovering economic stability without bringing the deficit under control- yet that is what Labour are saying: the nasty coalition will take your toys away from you, but Labour will give them back, and- quite possibly- give you even more toys to play with.

Yet it is not only the politicians of the left that seem to be leaving their senses.

For many months now, the UK inflation rate has been way above target and it has been steadily rising. For many months the Bank of England has resisted the pressure to raise interest rates from their historic low level of 0.5%. The result has been that debts have effectively been reduced by inflation, while banks have been able to recapitalise themselves by borrowing at super low rates, but lending at more normal market rates. Meanwhile the government itself has been able to benefit form low borrowing rates, which have been a major factor in the ability of the government to maintain itself.

Yet this subsidy to borrowers: namely the banks and the UK government, has come at the price of penalizing savings. Savers in Sterling have been forced to take negative interest rates for several years now, and the consequence is that it is proving ever more difficult for individuals to provide capital either for a deposit for a first house or for a nest egg for retirement. In short, the low borrowing rates are destroying the ability of savers to sustain themselves. If the price of houses is the most politically sensitive economic barometer, it is clear that the policy of maintaining low interest rates is benefiting to a degree those already on the housing ladder. However the inability to save for a deposit is locking out first time buyers from the market- and the long term consequence of that could be intensely negative for real house prices, as an entire generation finds that they will have to settle for renting a home that their parents would have expected to own.

Since it is the young who will now need to fund their studies out of borrowing, and who will also need to fund their own pensions, something will have to give. We are more or less guaranteeing that the next generation will be poorer than the current one- poorer in terms of disposable income, since more money will be needed to pay for university studies and to build up pension savings; but also poorer in terms of assets, since housing in the medium term will be controlled increasingly by professional landlords rather than by owner occupiers.

All of this was probably inevitable, given the policies of the past Labour government: undermining pensions through over-taxation and then destroying public finances with unsustainable expansion and unfunded pensions. However the inability of savers to get any return for their money is only adding to the long term problem. The prospects for the next generation are bleak.

Yet the twenty-something "anarchists" of the current student generation are protesting the wrong thing! Instead of insisting on a "no cuts" agenda, they should be campaigning to reduce the fiscal burden of the state that they themselves must carry. Since the state has been forced to reduce support for both education and welfare, it is daylight madness to continue the same tax burdens. The burden for the next generation must be lifted: and the best way to do this must be to reduce the costs of the state substantially.

In any event- real anarchists believe that the state should disappear anyway don't they? Or were those rioters simply a bunch of immature trouble makers with no clear agenda except violence?


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