Claims Labour spending proposals could add £5,000 a year to an average family’s mortgage are simplistic with interest rates depending on a wider range of factors than Government spending, according to centre-right think tank Reform.
A pamphlet published by the Conservative Party, Labour’s mortgage bombshell says Labour has made £326m of unfunded spending and tax cutting commitments since May 2011. It says if these were implemented it would knock the Government’s deficit reduction plan off course and lead to “soaring” interest rates adding £5,000 a year, or £400 a month to the average family’s mortgage.
Speaking to Money Marketing, Reform chief economist Patrick Nolan says trying to gauge the impact of Government spending on interest rates is complex.
He says: “While there is clearly a risk that increasing Government spending and debt could mean interest rates go up, it is actually a lot more complicated than that. For example it also depends on the performance of the economy and inflation. It is difficult to comment on the magnitude of the number they put on this, I would not have put a one on it. It is a simplistic calculation, though of course that does not make it wrong.”
The pamphlet says: “Ed Miliband and Ed Balls have allowed Labour frontbenchers to call for a total of £326bn of extra borrowing over the next five years compared to the Government’s plans. Their plan could put up the average family’s mortgage interest bill by £5,000 a year as UK market interest rates soar.”
Nolan agrees with the pamphlet’s view that increased spending would “wreck Britain’s hard-won credibility” with financial markets. He says: “Not hitting fiscal targets because of low growth in the Eurozone is one thing but not hitting them because of increased spending? The response from the markets will be quite different.”
He says while pushing for spending commitments to be costed is to be praised, the Government has also made expensive promises which are not fully funded. He cites the triple lock being placed on the state pensions which will see it rise by CPI, wages or 2.5 per cent, whichever is greater. He says the switch will result in far higher, uncosted spending on pensions in future.
He says: “The pot is calling the kettle black. That indexation change is going to swamp many of the savings from fiscal consolidation. Our research found it would actually increase spending on retirement and pensions by tens of billions. So, good on them for recognising you have to fund spending promises and that increasing spending in this environment means increasing debt which could push up interest rates. But, they have to apply that same logic to their own commitments.”