The claim
“For the vast majority of people in the country today they have never had it so good ever since this recession – this so-called recession – started.”
Lord Young, interview with the Daily Telegraph, 19 November 2010
Cathy Newman checks it out
The background
Lord Young really put his foot in it after a delicious lunch with the Daily Telegraph at the Roux restaurant in Westminster. Echoing Harold Macmillan’s famous analysis of the post-war economic boom, Lord Young said that “people will wonder what all the fuss was about” once the biggest spending cuts since the war have been made.
A Downing Street official told me the prime minister had decided to give his enterprise adviser an “almighty roasting”. Less than two hours later Lord Young handed in his resignation as a result of the outcry.
But there were some people on the right who agree, to some extent, with Lord Young. The director general of the Institute of Economic Affairs, Mark Littlewood – speaking before Lord Young’s resignation – said: “He is, in many respects, right. The coalition’s cuts are modest, not enormous.”
And former MP Howard Flight, who was today awarded a peerage, told Channel 4 News that although Lord Young had appeared callous about people who might lose their jobs “there was a lot of what he said that was perfectly valid comment – his comments about interest rates”, for example.
So was there any truth in what Lord Young said?
The analysis
There were a number of claims rolled into Lord Young’s statement, and we’ve been wading through them.
‘So-called recession’
First off, we have to take issue with his “so-called recession” verdict. The technical definition of a recession is two consecutive quarters of negative growth in the economy, and in the UK we had six consecutive quarters of negative growth between the second quarter of 2008 and the third quarter of 2009.
At its peak it fell by 2.4 per cent in the first three months of 2009 and down 4.9 per cent on the year before – as the Financial Times pointed out, “the UK economy has never before shrunk so much so fast”.
‘Paying very little each month’
Lord Young started his justification of the “never had it so good” saying “anybody, most people with a mortgage who were paying a lot of money each month, suddenly started paying very little each month. That could make three, four, five, six hundred pounds a month difference, free of tax.”
Clare Francis, the Editor of moneysupermarket.com told FactCheck that some people will have benefited from lower mortgage payments, but “everything else seems to be getting more expensive.”
Interest rates have fallen dramatically as the Bank of England looked to boost the economy during this recession, from 5.5 per cent at the start of 2008 to 0.5 per cent in March 2009.
Ms Francis calculates that someone who had a Base Rate Tracker mortgage of 0.5 per cent above the Bank of England rate would have been paying £614.08 a month when base rates were 5 per cent on a £100,000 mortgage to be repaid over 25 years.
That would have fallen to £376.87 a month with Base Rates at 0.5 per cent, saving £237.21 a month, she calculates.
There are around 10 million households with a residential mortgage. Two thirds of those are on variable rate loans, including tracker mortgages linked to the Base Rate.
In order to save £600 a month, a homeowner would need to have a mortgage of around £250,000 on a tracker mortgage – two and a half times the average loan amount.
But not all homeowners on standard variable rate mortgages (SVRs) would have received the full benefit of the fall in interest rates. The banks have more discretion over these rates, and more than three quarters did not pass on the cut to 0.5 per cent to their standard variable rate mortgage holders.
Today, some standard variable rates are as high as 6.08 per cent.
Michelle Slade, from Moneyfacts.co.uk pointed out that savers are the worst affected by low interest rates, and as there are more savers than mortgage holders, the majority of people aren’t benefiting from rock-bottom interest rates, contrary to Lord Young’s claim.
“Savers have really been hammered hard and there are more savers than borrowers,” Clare Francis agreed. “Savers are finding life tough, coupled with increasing inflation which is eating into that.”
To make matters worse, it’s quite clear that the cost of living is still going up. Figures out this week put the consumer prices index (CPI) higher than expected at 3.2 per cent – well above the 2 per cent target – and the retail prices index (RPI), which includes housing costs like mortgages, stands at 4.5 per cent.
Bank of England Governor Mervyn King warned, in an open letter to George Osborne, that “over the next few months the inflation rate might rise further”.
It is true that interest rates and inflation are much lower than in the 1980s and 90s. Interest rates reached 12 per cent and threatened to hit 15 per cent on Black Wednesday in 1992.
But all in all, as Ms Francis told FactCheck, “as a nation we don’t feel better off at the moment.”
‘Retail sales’
Lord Young said that people saving on their mortgage bill “is why the retail sales have kept very good all the way through.”
But the Nationwide Consumer Confidence index sank to a record low of 43 in January 2009, only hitting to 52 now amid “continued pessimism towards the future situation”.
‘Short of money’
Lord Young’s assessment of the cuts planned by the Coalition included a familiar claim made by members of the cabinet that government spending would be back to 2007 levels after the Spending Review. “Now, I don’t remember in ’07 being short of money or the government being short of money,” he said.
It’s true that in 2014/15 total government spending as a proportion of GDP is set to be 40.9 per cent, exactly the same as it was in 2007/08, and down from last year when it was 47.4 per cent.
But that comparison masks what will actually happen to public services. The Institute for Fiscal Studies points out there is a caveat in the comparison – much more of the spending will be on things like debt interest payments and pensions for the baby boomers.
A more accurate measure would be central government spending on public services, which will fall to 1999/2000 levels by 2014/15.
‘The margin of error’
Lord Young also dismissed the 100,000 job cuts expected each year in the public sector as being “within the margin of error” in the context of a 30 million-strong workforce – a statement widely pilloried as insensitive.
FactCheck has looked at the potential job losses resulting from the Spending Review before. George Osborne said the headcount in the public sector would fall by 490,000 jobs over the spending review period.
On top of that, the Chartered Institute of Personnel and Development points out that the number of jobs in the public sector could fall by an additional 50,000 this year (2010/11) as a result of the emergency budget and the £6bn of cuts George Osborne announced shortly after taking office.
That all takes the total reduction in jobs to 660,000 under the coalition plans – 170,000 more than in the Spending Review alone.
Cathy Newman’s verdict
Lord Young’s verdict on the age of austerity to come was: “So, you know, I have a feeling and a hope that when this goes through, people will wonder what all the fuss was about. Of course, there will be people who complain, but these are people who think they have a right for the state to support them.”
It is possible that if the private sector grows strongly, we’ll conclude that the doomsayers were wrong. But the 660,000 public sector workers contemplating redundancy would be quite justified in feeling that just at the moment there’s plenty to “fuss” about.
