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​​“If the policy isn't hurting, it isn't working” – Sunak and Hunt’s Major moment ​​

HM Treasury
By Tom Haynes
22 June 2023
Public Affairs
bank of england

Today’s interest rate rise of half a percentage point to 5 per cent represents the 13th consecutive raise by the Bank of England. This comes at a time when core inflation has risen to its highest level in 31 years as of yesterday and government spending (last month) exceeded revenue by £20 billion, with borrowing more than doubling. For Rishi Sunak, a Prime Minister who came to office with a promise to get a grip on the economy and cut inflation, the situation is looking increasingly out of his control.  

Despite all this the PM took to twitter earlier doubling down on his top three priorities; to halve inflation, grow the economy and reduce debt. He recognised that things are difficult for people but was determined to stick with the plan. Speaking on a live broadcast with employers at IKEA he was very clear that inflation makes everyone poorer, puts jobs at risk, and he is still confident that inflation can be halved.  

While there was the usual polished Rishi charm, he spelt out a bleak plan that the government must stick to, telling those in the audience that it would be anything but easy. The first thing that needs to be done is to put up interest rates because that will bring down inflation, supporting the steps taken by the Bank of England earlier today. The second thing is to ensure that the government is responsible with its spending and he gave a strong indication that tax cuts were not coming any time soon. Equally, he was very clear that there would not be any new major spending commitments as doing so would “put fuel on the fire of inflation”. Given that the first part in the plan was ticked off today, there is not much to be optimistic about when the Chancellor delivers his next financial statement later in the year.  

So, with the Prime Minister’s five priorities looking increasingly out of reach, it begs the question as to what Labour’s alternative plan looks like. Thankfully they too have five priorities, with sustained economic growth at the heart of it. On the face of it, Labour’s plan is not a million miles away from the government’s. They want to see economic growth combined with a commitment to fiscal responsibility in government spending. Shadow Chancellor, Rachel Reeves has been clear that they will have no unfunded spending commitments and has opposed Covid-style financial support packages to help people with mortgage payments, owing to the risk it poses to further inflation.  

However, where she and the Labour Party are differing is over the immediate support for mortgage payers. Reeves wants to require lenders to allow mortgage payers to switch to interest only mortgage payments as well as lengthen their repayment period. This would work to support mortgage payers with cashflow immediately, while not risking further inflationary pressures. The Chancellor is under a lot of pressure to act and is meeting with the banks tomorrow to see whether they will introduce similar measures, without making it mandatory as Labour suggests.  

The main question on everybody’s minds is whether this will make any difference. Some former interest rate setters from the Bank of England have already spoken out and think that recession is now inevitable and necessary to control inflation. We await the conclusion of the Chancellor’s talks tomorrow, but it feels very much like the PM and Chancellor are having their John Major moment. With schemes such as the Energy Bill Support Scheme, the price guarantee, and the cost-of-living payments, as well as the Covid era support packages, most people have been sheltered, to a greater or lesser extent, from the impact of the economic downturn. John Major faced very similar issues when he occupied No.11 Downing Street and was clear about the need to tackle inflation but famously said “if the policy isn't hurting, it isn't working” indicating that we are not quite out the other side yet.