A general election would bring down Britain’s ‘idiot premium’

Liz Truss’s shambolic premiership may be at its end, but despite Jeremy Hunt unwinding most of the measures in her and Kwasi Kwarteng’s disastrous mini-Budget, borrowing costs remain stubbornly high.

If the betting markets are to be believed, there are three realistic candidates to become the nation’s next prime minister. Rishi Sunak is the odds-on jolly, priced at 4/5 at the time of writing. Penny Mordaunt, the third-place finisher in the MPs’ ballot last time, should be getting used to the bronze. She’s a 5/1 shot. Splitting the pair in second place sits the late-night horror movie that reliably has you clutching at your chest: Boris Johnson, at a heavily backed 6/4.

Sunak is the clear favourite of the financial markets. That matters. If he walks into Downing Street, there is a good chance that the idiot premium the investors demand in order to lend to the government falls, reducing Britain’s borrowing costs (and potentially by quite a bit). Simon French, chief economist at broker Panmure Gordon, thinks a Sunak-Hunt team closes the spread between UK gilts and other G7 sovereign debt by a further 50 basis points. That would reduce the black hole in the public finances by £7bn, leading to fewer spending cuts/tax rises.

French has a name for this: the dullness dividend. It comes with competence. It also potentially reduces mortgage rates. The instability delivered by Truss set this market on fire, with hundreds of products being withdrawn. Their number remains depressed.

Fixed-rate deals are priced based on longer-term interest rates, which are linked to gilt yields (the rates on government bonds) through what is known as the interest rate swaps market. More than a percentage point was added to the Moneyfacts pre mini-Budget average mortgage rate of 4.75 per cent for a two-year fix and 4.75 per cent for a five-year product.

Borrowers’ pain has only got worse since then. On Friday, the numbers were 6.55 per cent (two year) and 6.43 per cent (five year). It is years since home loans have been at this level. Rates like that take hundreds of pounds out of the pockets of homeowners every month as their current fixes come to an end and they remortgage. The potential that these rates could fall is down to the fact that Sunak was seen as having laid out a credible plan, as opposed to Truss’s dark fantasy – a fantasy that rebounded spectacularly, as he predicted, onto us.

The Sunak dullness dividend is by no means guaranteed. The Tory party is riven by factionalism, personal enmity and a strong component of outright madness. Sunak, as the man who killed the “Caribbean king” Johnson the first time round, has enemies aplenty.

But the financial situation could get appreciably worse if Johnson succeeds in his ambition to return. His record is a dismal one. He is an agent of chaos, divisiveness and tumult. He is still facing an investigation over allegations that he lied to parliament. He repeatedly lied to the public. There will be a price to pay for that.

French thinks that spread under Johnson widens to 100 basis points – or a full 1 per cent – without Sunak to rein him in (which Sunak did while he was in the Treasury).

This would exacerbate Britain’s problems, further limiting the government’s room for manoeuvre. And those problems are deep. It isn’t just mortgages.

Earlier this week, the TUC published a poll showing that one in seven people across the UK are having to skip meals or go without food to make ends meet. The Financial Conduct Authority, meanwhile, found that 7.8 million people are finding it “a heavy burden” to keep up with their bills – an increase of around 2.5 million since 2020. Another dose of Johnson’s chaos is the last thing those people need.

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The Conservative Party ought to pay close attention to figures like these. But a substantial chunk of it seems to have learned absolutely nothing, and is still burbling on about Johnson being a “winner”, apparently still addicted to so much twisted fantasy.

As a result, Britain finds itself in the midst of a real life Game of Thrones, with the head of the country resting on the block and the king’s justice holding a sword of Valyrian steel poised above it.

No wonder The Independent’s petition calling for a general election has attracted more than 300,000 signatures in a matter of days. There would inevitably be a certain amount of short-term instability created by the calling of one, for which there is now a clear democratic imperative. But the nation’s longer-term economic interests would be well served.

A new government with a fresh mandate to tackle the grave challenges the nation faces would be better placed to bring the idiot premium down and deliver the dullness dividend. Trouble is, the idiots still have a majority in parliament.