Some chancellors are sacked. Some are forced to resign. Some exchange the green benches of the House of Commons for the red benches of the Lords. But not in living memory has a chancellor lost his seat at a general election.
If opinion polls are accurate, Jeremy Hunt will break that tradition, with the Liberal Democrats on course to take his newly created Godalming and Ash seat in Surrey. The last time the Conservatives were on the wrong end of a landslide Kenneth Clarke, then chancellor, held his Nottinghamshire seat reasonably comfortably. Hunt has a real fight on his hands.
The state of the economy is not helping the chancellor’s survival chances. Growth figures, out later this week, are likely to show activity was flat in February and on course to expand, marginally, in the first three months of 2024. That will be enough for the UK to emerge from its shallow recession in the second half of last year but it is unlikely many voters will notice.
The Bank of England is not helping Hunt either. Most members of Threadneedle Street’s nine-strong monetary policy committee want to see more evidence that inflation has been decisively won before cutting interest rates, a needlessly cautious approach that is hampering the economy’s ability to bounce back after two years of flatlining.
When the Bank announced the last of its 14 interest-rate increases in August last year, taking official borrowing costs to 5.25%, the annual inflation rate stood at 6.7%. That meant real interest rates – interest rates adjusted for inflation – were slightly negative.
Since then the fall in inflation has meant real interest rates have turned positive and the Bank’s policy stance has become ever-more restrictive. Inflation currently stands at 3.4% and is expected to fall to about 3% when the March figures are released later this month, and to about 2% in April. In real terms, borrowing is getting more expensive month by month.
The impact of rising real interest rates is already evident in the housing market. Mortgage demand and property prices had both been rising since the last few months of 2023, in expectation that the Bank would cut rates this year. Financial markets still think the MPC will reduce borrowing costs but have become less optimistic about the timing and the scale of the reductions. Put simply, markets now believe that rate cuts will come later in 2024 and that there will be fewer of them.
As a result, mortgage rates have started to edge higher and house prices have started to soften. Spring normally marks the moment when the property market emerges from its winter hibernation, but both Nationwide and Halifax reported falls in prices in March. That’s good news for potential first-time buyers struggling to get on the housing ladder, but not especially welcome for a chancellor desperate for the feelgood factor that rising property prices usually generates among owner-occupiers.
The Bank is highly unlikely to announce a rate cut when the MPC next meets in early May, although it will probably signal that one might be on they way in June. Further rate cuts can be expected in the second half of 2024 but policy will remain restrictive and the economy will suffer as a result.
Hunt’s argument is that the economy is on the mend, the cost of living crisis is coming to an end and that voters are becoming better off. Having inherited a terrible mess from Liz Truss and Kwasi Kwarteng in the autumn of 2022, the chancellor will say that he has stabilised the economy, taken steps to repair the public finances and found scope to cut taxes.
All these things are true. Despite the Bank of England’s inaction, the economy is over the worst. Inflation will be below its 2% target within months. Wages have been growing faster than prices for several months. The average worker will be almost £1,000 a year better off as a result of the cuts in national insurance in the autumn statement and last month’s budget.
Unfortunately for Hunt, while people might be better off than they were a year ago, they are poorer than they were at the time of the last election. Likewise, tax as a share of national income is still on course to be its highest since the late 1940s despite the cuts in NI. Food prices may now have started to fall slightly but they remain 25% higher than they were two years ago. Things are getting better but with an election rapidly looming they are not getting better quickly enough for the Conservatives.
The government has had to grapple with two massive external shocks in the past four years, first the pandemic and then the war in Ukraine, and attempted to cushion the blow by increasing public spending. The furlough scheme and energy price caps prevented mass unemployment in the first half of the parliament, while energy price caps helped to temper the impact of the cost of living crisis that followed Russia’s invasion of Ukraine. It is unlikely a Labour government would have acted that much differently.
But politics is a rough old business. Voters seemed to quite like Boris Johnson’s upbeat message at the 2019 election, but the optimism lasted only a matter of months before the pandemic arrived. The period since has been tough, with lockdowns and the war leaving deep economic scars. Political scandals, most notably Partygate, have further soured the mood, but the fundamental problem is that people know they are poorer and think the government is to blame. There is not a lot Hunt can do about this apart from wait and hope.
