Good morning.
You probably don’t remember, but last year we ran an edition of this newsletter all about gilts, government borrowing and an economy that was teetering on the edge of a recession. It really felt like, economically speaking, things could not get much worse.
Unfortunately, in some ways, they have. Last week, the Treasury paid its highest borrowing costs this century at 5.6% on £4bn in government debt. Borrowing costs have risen above even the levels hit during Liz Truss’s tumultuous time in office.
When Rishi Sunak took over in October last year, his promise to halve inflation to 5% was seen as an easy win – over six months later, there is good reason to doubt whether this will happen by the end of the year.
The economic picture has confounded experts, the government and the Bank of England, who have struggled to make sense of why inflation has not declined at the rate they had hoped it would. Households are still facing a significant and growing squeeze on their budgets. The UK is now the only major economy where inflation is still rising – consumer prices rose from 7.8% in April to 7.9% in May, compared to the previous year. And ultimately, all of this makes it harder for the government to invest money in public services.
For today’s newsletter, I asked the Guardian’s economics editor, Larry Elliot, to break down all the jargon and explain the potential fallout of an economy that keeps getting worse. That’s after the headlines.
Five big stories
BBC | The BBC has suspended a prominent male presenter and called in the police over allegations that he paid a teenager for sexually explicit images, as the corporation struggles to contain a rapidly escalating crisis. It has been alleged that the unnamed BBC star gave £35,000 over three years to a young person who used the money to fund their crack cocaine habit.
Westminster | The Guardian has revealed that more than 50 MPs have owned stakes in publicly listed companies that raise questions about possible conflicts of interest and that until now have been in effect secret. Parliamentary rules mean MPs’ shareholdings, including ones that were held by the former prime minister Theresa May and the former education secretary Gavin Williamson, do not need to be publicly disclosed in parliamentary registers. But as a result voters are left in the dark about some of the financial interests of their elected representatives.
China | Six people have been killed and one person has been injured in an early morning knife attack at a kindergarten in southern China. Local police have said that a 25-year-old man has been detained over the fatal incident.
France | France has banned fireworks outside authorised public displays during the 14 July Bastille Day holiday weekend, amid simmering tensions over last month’s police killing of a teenager and a brutal arrest at the weekend leading to fresh allegations of police violence.
Sudan | Sudan is on the brink of a “full-scale civil war” that could destabilise the entire region, the United Nations has warned, after an airstrike on a residential area killed 22 civilians.
In depth: ‘They imagine the state of the economy is going to cost them dearly – and I think that’s absolutely right’
Interest rates, borrowing costs, gilts, bonds – these are words that send most of us running from an early-morning newsletter. But wait, come back! They are also the words that determine how expensive a shop will be and how much money will be spent on the NHS. So, let’s break it down.
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Why is the cost of borrowing so high?
The UK has struggled more than other countries to tackle stubbornly high inflation rates, which have declined in Germany, Spain, France, Japan and the US. While pleading with a struggling population to accept lower wages, the Bank of England has been using the only weapon in its arsenal to try to bring inflation down: putting up interest rates. “Higher interest rates affect everybody,” says Larry. “It affects private individuals, businesses and the government. The higher inflation goes, and the higher interest rates go, the more people have to pay to service their borrowing.” Earlier this month, the Guardian reported that cheaper fixed-rate mortgage deals will come to an end this year for 1.6 million homeowners, increasing the typical borrower’s annual repayments by roughly £2,300.
The Bank’s goal is to bring inflation down to its 2% target which would, at some point in the future, bring interest rates down and thus reduce borrowing costs. “They’re hoping that a lot of the inflationary pressure will subside naturally over the course of the next couple of years and that interest rates will come down from their current level of 5% to closer to 2% or 3%, which would help the government,” Larry says.
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Where does it leave the government?
Most obviously, there is upward pressure on public spending: “Higher inflation means that you get less for the government’s allocated trillion pounds on public spending,” Larry says. But the other area is more political. Because the government is miles behind Labour in the opinion polls there has been a clamour from some Tory backbench MPs, who are worried about losing their seats, for tax cuts. “The scope for tax cuts under the government’s own rules was already quite limited because of the slow growth of the economy and the high level of debt but that leeway has been further reduced [because of borrowing costs],” Larry says.
This is not to say that there aren’t going to be any tax cuts at all – governments have always found “creative” ways of cutting spending – but the space for the kind of pre-election “tax giveaway bonanza” that they perhaps envisioned no longer exists. The Treasury finds itself in a bind: the potentially popular economic measures that could save them from a devastating loss in the next election would be the same policies that would make inflation, in the short term, worse.
“It’ll be interesting to see how the Treasury can get around this problem because inflation has proved to be much stickier than people thought, it’s taking much longer to come down,” Larry says.
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Is the government running out of money?
“No”, Larry says, we are not running out of money. “A government that’s in charge of its own currency can never run out of money,” he says. “The government can always print money to finance its own spending.” The question is whether or not the government is willing to do that, because printing more money could add to inflationary pressure, which in turn could force up interest rates, and ultimately cost the taxpayer more in an already inflation-prone economy.
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What might happen next?
If interest rates remain high, there is a risk that in the coming year the UK will go into a recession. The chancellor, Jeremy Hunt, has suggested that this could be a price worth paying if it means that the UK will be able to bring down inflation, a comment that was heavily criticised because of the implications that has for prolonging the cost of living crisis.
“The impact of higher interest rates will slow the economy. The higher they go, the more severe and more prolonged the recession will be,” Larry says. Inflation, and with it interest rates, should eventually start coming down in 2024, but it will probably be too late for the Conservative government to reap any of the benefits before a general election.
“You can see why spirits are so low on the Conservative benches in the Commons,” says Larry. “They imagine the poor state of the economy is going to cost them dearly – and I think that’s absolutely right. It will.”
What else we’ve been reading
Rachel Reeves has been easily caricatured as a dull, Blairite presence in the shadow cabinet – constantly calling for restraints on spending promises. Simon Hattenstone’s wonderfully revealing interview chips away at that facade to uncover the teenage Gordon Brown fan at the heart of the shadow chancellor. Toby Moses, head of newslettters
In the latest instalment of the Guardian’s Cotton Capital series, Cynthia R Greenlee visits the new International African American Museum in Charleston, South Carolina, which opened last month. Greenlee speaks to local people about what the museum means to them and whether it can effect radical change. Nimo
If you’ve tuned in to Wimbledon, you may have noticed that Russian and Belarusian tennis players are appearing without their nationality or flags represented. It’s all part of the sport’s efforts to reintegrate them, but as Politico reports, it’s far from straightforward when they’re playing alongside Ukrainian athletes, many of whose families are living with the realities of the invasion. Toby
Gabrielle Canon spent a day journeying down the Colorado river with a team of federal scientists from the US Geological Survey to explore the US’s most endangered river. What she finds is a mixed picture of loss and hope. Nimo
Put down that bacon sandwich and take a step back from the pepperami – Joel Snape is here to tell us that, yes, processed meats do increase the risk of bowel cancer. But no, that doesn’t mean you need never touch a pepperoni pizza. Everything in moderation. Toby
Sport
Cricket | England kept their hopes of Ashes victory alive with a four-day win over Australia in the third test. Sitting 2-0 down before this pivotal third Test, England were tasked with reaching a target of 251, which was sealed at 3.38pm when Chris Woakes (pictured above celebrating with Mark Wood) hit Mitchell Starc through cover for four to see the total reeled.
Tennis | Belarusian Victoria Azarenka was booed off court after her fourth-round loss to Elina Svitolina of Ukraine 2-6 6-4 7-6 (9) at Wimbledon. World number one Iga Swiatek saved two match points to come through a marathon match with Belinda Bencic 6-7 (4) 7-6 (2) 6-3 and reach the Wimbledon quarter-finals for the first time. Novak Djokovic will return on Monday afternoon to complete his fourth round match against Hubert Hurkacz while leading 7-6 (6) 7-6 (6) after play was halted by the All England Club’s strict 11pm curfew.
Football | Bayern Munich have made an improved offer of £70m for England captain Harry Kane. Tottenham rejected the German champions’ first offer of £60m plus add-ons for Kane last month, deeming it too low for a player they value at at least £100m despite the fact his contract expires next summer and he has shown little indiation of wanting to sign an extension. Kane is thought to be open to a move to Bavaria.
The front pages
An exclusive leads the Guardian’s front page today: “The ‘secret’ stakes held by MPs in top UK firms’”. The Times has “BBC refers ‘sex photos’ presenter to Met police” while the Mirror says “Presenter suspended / BBC calls in cops”. “BBC calls in police over star sex scandal” – that’s the Daily Telegraph while the Daily Express goes with “BBC suspends star accused of paying teen for photos”. The Daily Mail version is “Now BBC calls in police over sex pictures claim”. The Sun touts an exclusive take: “Suspended BBC man’s panic call to youngster”. The i’s headline is “BBC in crisis as police called in over star accused of teen sex scandal”. “Beeb’s briefs crisis” says the Metro. “Nato allies pile pressure on Germany and US over Kyiv” – looks like the Financial Times didn’t have enough space to put “Ukraine”.
Today in Focus
Payback or play? The orcas sinking yachts
Since May 2020, there have been hundreds of reports of orcas interacting with boats in the strait of Gibraltar. Philip Hoare reports
Cartoon of the day | Edith Pritchett
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The Upside
A bit of good news to remind you that the world’s not all bad
Everyone processes grief differently but generally the expectation is that it happens in private, with your loved ones or perhaps in a therapist’s office. Not for the artist Annie Frost Nicholson, who has collaborated with the Loss Project, a social enterprise focused on ways of processing grief, to create a space that allows people to grieve in a “non-traditional” way. Nicholson has created The Fandangoe Discoteca, where you can dance away your existential pain.
The mini disco will take place in a brightly coloured kiosk that holds up to eight dancers in Canary Wharf this month before touring the rest of the UK and Europe over the summer. As well as DJ sets, there will be meditation and yoga workshops, dance classes and “grief raves” where people can request tracks which remind them of lost loved ones. Nicholson lost most of her family in a helicopter accident in 2011 and has been making uplifting art that focuses on tragedy since. “Post-pandemic, people were desperate to share their experiences and talk – words were falling out of their mouths. Now there’s a real shift to wanting to shake it out,” Nicholson says.
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Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until tomorrow.
