The left are currently tying themselves into knots over the emergence of Jeremy Corbyn’s new party. The Guardian writer Owen Jones says he will support it. Others see the split in the vote on the left as likely to make a future Reform UK government more likely.
I would not comment on Jones’s view. But the other argument seems hard to fault. Though we are still four years away from an election and anything could happen, Reform is apparently ahead in the polls. Any reduction in the Labour vote must by definition make them more likely to form the next Government rather than less.
Two potential Cabinet members, Nigel Farage in Clacton obviously, and his deputy Richard Tice in Boston and Skegness, are either on our patch or not far off it. Will Rupert Lowe in Great Yarmouth mend his fences with Farage and make up a third? I wouldn’t bet against it.
Yet few seem to have sat down and worked out what a Reform administration would look like, and its implications for the effectiveness of government, the housing market, pensions and the economy as a whole. All that follows is of necessity speculative because Reform’s declared intentions are unformed and unclear, but let’s try.
Purging the professionals
The first move, it is a fair bet, is a Doge-style purge of government departments, because this is what Reform has already attempted in local authorities where it has taken control. The argument we hear is that civil servants are all woke lefties who do little work anyway so we can live with fewer of them.
Given the current Reform MPs have zero experience in national office, this has every likelihood of misfiring. Civil servants are there, Nigel, to allow ministers to implement policy. Expect a degree of impotence across government departments as the first consequence of a Reform administration.
Attempting to ship all migrants to Rwanda/Albania/Xanadu requires detailed and difficult negotiations with those countries. Who do you think carries out those talks, Nigel? It isn’t the ministers.
The second, probably parallel, development will be severe downward pressure on the value of the pound. Investors hate any uncertainty, and the apparent emergence of an impotent Government will only add to this. Inward investment into the UK, including purchase of government debt, will largely cease.
The economic consequences are catastrophic. A collapsing pound puts pressure on inflation, only partly because imported goods cost more, and on interest rates. The Bank of England’s job is to raise the base rate to attempt to counter rising inflation. Except…
The Bank was made independent in 1997 to prevent politicians trying to influence voters by manipulating rates, such as cutting them to spark an economic boom just ahead of an election.
However Tice has indicated Reform might do just that. This is dangerous territory. Already spooked markets would react even worse to any suggestion that the UK economy was being manipulated for political reasons. (This is pretty much what happened, by the way, after the Truss/Kwarteng Budget.)
Crisis by design
So here is the scenario. Inflation is running at 15 to 20% – it has been there before in living memory and was heading there after that Truss/Kwarteng debacle.
Meanwhile Reform is pulling the levers at the Bank to keep rates at, for the sake of argument, a comfortable 3%. Why should the banks lend money, on mortgages, for example? The housing market would collapse, because no one could move house. Soaring inflation devalues the worth of existing housing stock, while new building would pretty much cease, because why put up homes if no one can buy them?
All this is speculative. The next effect, on pensions, is less so. There are, you will know, two types of pension: final salary – or defined benefit – and defined contribution. Final salary pensions are index-linked and go up in line with inflation – except that a sustained bout of high inflation is probably unaffordable to those funds administering them. They either fail to raise payments, making pensioners poorer in real terms, or risk going bust.
Defined contribution pensions, now more common, allow someone retiring to take on board a “pension pot”, a fixed sum of money, and invest it accordingly to pay for their old age. Soaring inflation diminishes the value of those pension pots and makes those pensioners poorer as well.
So that’s pensions sorted.
Broken Britain, again
How about the economy as a whole? Well, while higher inflation makes exporting goods easier, imported food and other goods are much dearer. This, as well as that pressure on pensions, means a cost-of-living crisis way worse than the one we have just suffered through.
We will all have to grit our teeth and buy food, though more will certainly go hungry. UK-focused business providing non-essential goods, though, will lose out. Pubs and restaurants will suffer as people cut back, as will those supplying them, along with retailers selling, for example, clothes and electrical goods.
And the housing market has dried up. All those estate agents and solicitors hit, plus those retailers supplying goods to new home buyers – moving house is a significant trigger to consumer spending.
The ripples will flow through the jobs market, as those affected firms lay off staff. Those all start to draw benefits, and go onto the public payroll – or will Reform just say there are no more benefits? The gravy train has come off the rails, suckers. Find work or starve.
Speculation or foresight?
All of the above is, as I say, pure speculation, though upward pressure on inflation looks a given. But one last consequence is much more likely, and it is truly cataclysmic. A quarter of all government debt in the form of gilts is index-linked. A huge jump in inflation puts immense pressure on the public finances because the interest on that debt soars.
It is probably unaffordable, so a Reform Government may be forced to renege on that promise to raise the rates paid to existing lenders to match the inflation rate. The consequence? No one will buy government debt for the appreciable future. All governments, from Reform to a future Prime Minister Corbyn, are reliant on gilt issuance to keep the country functioning.
Except that there will not be much of a country left to function, if what I suggest comes about. I could add further downsides, such as the drying up of overseas investment in the UK and a lower tax income and further job losses. But that’s enough horror for now.
All speculative, as I say, and one of the very few times when I fervently hope I am talking complete rubbish.
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