Inflation and migration: Sunak’s problematic pledges

This is an audio transcript of the Political Fix podcast episode: ‘Inflation and migration: Sunak’s problematic pledges’

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George Parker
Cutting inflation and stopping illegal migration — two of the government’s five core priorities. But there’s no let up in inflation and a lot of unhappiness with the government’s policy on asylum seekers.

Justin Welby
It is isolationist. It is morally unacceptable and politically impractical.

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George Parker
Welcome to the Political Fix, your essential insider guide to Westminster from the Financial Times with me, George Parker. You heard there the Archbishop of Canterbury, Justin Welby, speaking in the House of Lords. While Westminster is focused on illegal boat arrivals, what about legal migration? That’s soaring too, in spite of the Conservative promise in 2019 that numbers would come down. I’ll be discussing that and the UK’s sticky inflation problem with our economics correspondent Delphine Strauss and economics editor Chris Giles. Plus, the country’s stretched public finances are steeled for a mammoth compensation bill. Ministers privately say that anywhere between £5bn-£10bn in payouts could go to those affected by an historic NHS contaminated blood scandal. We’ll get the details from the FT’s Sarah Neville, and hear from Barry Flynn, one of the victims who was infected with hepatitis C and has severe haemophilia A.

So inflation is gonna be sticking around for a while yet — the next three years at least. So says the Bank of England, which raised interest rates by a quarter of a percentage point to 4.5 per cent this week, its 12th consecutive rate rise since December 2021. Andrew Bailey, the Bank of England governor, said the source of inflation was unexpected.

Andrew Bailey
Inflation is . . . it’s just under 1 per cent higher at this point in time than we expected it to be in February. That difference is actually really not really about the persistent element of inflation. So if you look at services, if you look at wages and remuneration, they are actually pretty much on track with what we report in February. The news is mainly on food and clothing.

George Parker
Chris Giles, Delphine Strauss, thank you for joining us. So Chris, Andrew Bailey said in the past he’s sensitive to cash-strapped households, but there isn’t really that much the Bank of England can do, is there, when inflation’s proving so hard to budget. Rates only seem to be going one way and that’s up.

Chris Giles
They do. And there was nothing in what the Bank of England said to make people think their interest rates aren’t likely to go up a little bit further. It’s reinforced expectations that they’re going to go up from 4.5 per cent, possibly up to 5 per cent. But, you know, we’ve been saying this every time. Well, first of all, it was about 3 per cent and four, now five. The key thing that’s happened is inflation hasn’t got under control. And the Bank of England’s forecasts show it’s a lot higher over the next three years than they expected, only as recently as three months ago.

George Parker
You were at the press conference with Andrew Bailey and they’re normally fairly genteel affairs. Is he starting to feel the heat a bit?

Chris Giles
It was quite a hostile press conference, actually. He was asked whether the bank had any credibility anymore. He was asked how he would evaluate his own performance if inflation’s above target for five years consecutively. He was asked what policy mistakes he would accept. And so it’s quite tough because the central bank has normally got a much easier ride than politicians and the bank, it pushes back. But also I think sometimes feels a little bit hurt that people are actually holding it to account for its target. This is a law, it has to keep inflation at 2 per cent at all times. And what we’re looking at is that the bank’s own forecasts show basically a 50-50 chance of it being above 2 per cent for five years consecutively between the middle of 2021 and the middle of 2026.

George Parker
That’s incredible. What does it mean for Rishi Sunak’s economic pledges and in particular his promise to halve inflation?

Chris Giles
Well, at the moment the Bank of England still expects Rishi Sunak to meet his pledge to halve inflation because the Treasury did define it in the Budget and so they defined it to be halving from the Q4 2022 rate of 10.7 per cent to the end of this year, which the bank thinks will be just over 5 per cent. There’s a 50-50 chance of it being around 5.3 so where it looked a few months ago as if there’s no chance he wouldn’t meet it. And that’s why the Treasury designed it to be halving because they thought they could just meet it. People didn’t know that inflation was gonna drop away, but now is looking all pretty tight.

George Parker
So, Delphine, how much of this inflation is being driven now by higher wages?

Delphine Strauss
So the bank on Thursday pointed to food inflation as the big reason why its inflation forecasts look higher than they did in the short run. But they’re obviously really uncomfortable about wage growth. Bank of England officials make themselves extremely unpopular whenever they suggest that people shouldn’t be pushing for big wage rises. There’s still a huge amount of pressure in the public sector for the government to be more generous with the pay deals that are still disputed. There are lots of unions running fresh strike ballots and looking quite likely to get them through. And in the private sector, while pay growth has slowed a bit, pay settlements are still running somewhere around 6 per cent. That’s a long way below inflation and it’s a lot higher than the Bank of England would like.

George Parker
And by the time inflation is finally under control, how much poorer will we all feel?

Delphine Strauss
I didn’t think there’s a sort of clear-cut answer to that. I think a lot of people’s pay was boosted over the last year by one-off bonuses or sort of cost of living compensation payments that employers conceded either because they were very hard pushed to find staff or because they were genuinely sympathetic. And a lot of people are thinking that they’re really gonna feel the pinch over the next year. They may get a slightly higher consolidated pay rise, but they’re still gonna be poorer.

George Parker
And when people hear the prime minister say he wants to halve inflation, the polling suggests the public think that means prices are going to be falling and they could be in for a nasty shock, couldn’t they, Chris, next year when they find out that actually they still are finding it even harder to make ends meet.

Chris Giles
Yeah, absolutely. I don’t want to sort of speak ill of the public, but the public’s understanding of what inflation is — and this is probably a failure of us as journalists and economists — is very, very bad. And they don’t understand that inflation is the change in prices rather than the level of prices. And the public’s real concern is about the level of prices that they’ve gone up a lot and their salaries and payments — unless their pension or something like that is protected — haven’t gone up so much. And so even when the rate of change of prices, inflation falls to 5 per cent, the level will still be high, prices will still be going up. And if you are unlucky, your salary will not have gone up or you will be paying a lot higher mortgage payments so you’ll still be worse off. That won’t happen to just a few people, that will happen to many millions of people and households by the end of this year. So the idea that by having inflation halve, everyone will suddenly feel better is ludicrous.

George Parker
And you know, we’ve just been talking about the Bank of England’s patchy forecasting record. From what we can tell from what Andrew Bailey was saying this week, how will the economy be looking and how will people be feeling, let’s say in the autumn of 2024, as we go into an election?

Chris Giles
Well, the good news is that wholesale gas prices have fallen very, very sharply since the forecasts in November, August last year. And so that means you can have faster growth. We no longer have a recession in the Bank of England’s forecasts and you can have lower inflation. So that is just the good news. So in that sense, things will be looking up but it all depends on how bad people expected it to be. I don’t think anyone’s gonna be feeling the world is suddenly much better, they’re better off than five years ago. Loads of people won’t be. So even though it’s much better than we feared — it could be last November when it was looking absolutely dire — it still isn’t gonna be a very pretty picture.

George Parker
And Delphine, when you look at real wages over the lifetime of this government, how are people gonna feel compared with how (laughing) they felt back in 2010 when the Conservatives first took office in that coalition government?

Delphine Strauss
They’re gonna feel like not much has changed and that’s not what they were expecting. I mean, real wages have pretty much flatlined for about a decade. And at the moment, they’re falling and this should correct itself over the next few years, but it’s certainly not a good picture. And I mean, as Chris said, a lot of the increases in mortgages are still feeding through.

Chris Giles
Only a third of the effect of higher interest rates so far on households’ cash flows has happened so far. So two-thirds is still to come and that’s before the Bank of England starts raising rates even further, which is with, where markets think they will do.

Delphine Strauss
One of the other things the bank sort of acknowledges that rise in mortgage rates hasn’t been matched by the extent of the rise in savings rates. That spread is narrowing and people aren’t really happy.

George Parker
So Rishi Sunak’s pledge to cut inflation is proving a little bit more problematic than he probably imagined, but so too is his pledge to cut the number of migrants entering the UK. The government’s pushing through a bill which would bar almost anyone entering Britain on small boats or without prior permission from claiming asylum. Justin Welby, the most senior cleric in the Church of England, wasn’t impressed. And as you heard at the top of the programme, he called the bill isolationist and said parts of it were morally unacceptable. Here’s how the immigration minister Robert Jenrick, responded to that.

Robert Jenrick
Since 2015, half a million people have come to the UK for humanitarian purposes. So those who say that the UK or this conservative government is in any way inhumane or ungenerous are just factually wrong.

George Parker
But while Rishi Sunak and the media focus on small boat arrivals the real rise in migration to the UK is happening through legal routes. The FT reported this week that official data due this month is expected to show that in 2022, net migration hit record levels — over 500,000 and some think could go above 700,000. For a government that promised to cut net migration, that’s a bit of a problem. So Delphine, what’s driving it?

Delphine Strauss
There have been quite a lot of one-off factors in the last year’s surge, and some of them are indeed humanitarian. There have been quite large numbers coming in from Hong Kong as well as from Ukraine. There’s also been a very large pick-up in student numbers, which might be partly a post-pandemic bounceback and it’s not something that you would necessarily see sustained. There’s also the fact that most international students don’t stay in the UK forever. Most go home. But that’s causing the government a bit of discomfort, as we saw with these reports, that they’re going to want to stop postgrads bringing their dependants with them when they come.

George Parker
Will that make much of a difference?

Delphine Strauss
I mean, there is a number of people coming in through that route. I think what people see is a more significant role for students is the route that’s been reopened recently to stay and stay and job-hunt for two years after people graduate. That’s not a bug. That’s a feature of the policy. The idea is that it’s good for the UK to have people who are pretty highly qualified, pretty well settled in the country already come and move into good jobs. So ministers aren’t revisiting that policy. There were reports in the past that they might want to redraw the boundaries, but at the moment there doesn’t seem to be a suggestion they’re going down that route.

George Parker
Mmm. I think the idea of stopping students working after they graduate would be over the Treasury’s dead body, wouldn’t it Chris?

Chris Giles
Yeah, I mean, it’s only relatively recently, isn’t it Delphine, that this had been brought back in, that you could stay for two years, but it’s a thing that the Treasury likes for two reasons. One is because you have people who are highly qualified, who are likely to work and pay taxes and pay more than they receive, so the Treasury sees that as a plus. But also, universities are one of the great export earners of the UK economy. I think one of our colleagues, Alan Beattie, worked out this week that the UCL was nearly as large in terms of exports as the fishing industry. It’s always the fishing industry.

George Parker
Yeah, good old fishing industry, yeah (laughs) . . . 

Chris Giles
Because it’s small.

George Parker
Half a billion pounds, University College London. And the student fees, incredible.

Chris Giles
Yeah, it is just extraordinary. So these numbers are very large and the Treasury certainly don’t want to give that up.

George Parker
Yeah. So the Office for Budget Responsibility, the official watchdog, said in its report in March that they expected net migration to run about 245,000 a year. Do you think that’s realistic?

Chris Giles
I think it’s realistic in terms of the supply and demand. You could have it higher than that if you let people in, and we certainly did when we had free movement in the, when we were a member of the European Union. It’s not always the case that Britain is hugely attractive. This is happening in very, very many advanced economies. And the figures such as 245,000 a year is not excessive and it’s something that the UK has dealt with quite easily over the past 10 or 15 years. But it might be a number that at some points begins to have massive political salience like it did in 2016. And it might do particularly because of things like housing, where housing numbers are not rising probably as much as 245,000 per year. So you get a bigger squeeze on one of the real costs that everyone has to face.

Delphine Strauss
The other thing it seems to show is that the post-Brexit immigration system we now have is more liberal than people thought it would be, and in particular it’s more liberal for employers who want to bring people in.

George Parker
Mmm.

Delphine Strauss
And there’s been a lot of business lobbying for the government to widen these routes to make it easier to bring in people in some of the lower-qualified roles that were coming freely from the EU before Brexit. But what we are actually seeing is much larger numbers of people coming in on skilled worker visas than we expected, especially into the healthcare sector through the government’s own recruitment drive, but also in roles that we haven’t particularly seen people using visas for in the past. And that’s actually one area where inflation is gonna play a role because there is a salary threshold for using skilled worker visas. And at the moment it’s being eroded quite a bit by inflation.

George Parker
And it’s fascinating that the Brexit referendum was, to a quite a large extent, about controlling migration. Since Brexit, net migration from the EU has been broadly flat. And what we’ve seen is there’s this very large increase of non-EU migration to the UK.

Delphine Strauss
Well, I think the story is that this is controlled migration in that it’s what the policy achieves.

George Parker
Yeah, global Britain. I mean this is a bit of a simplistic question, Chris, but is net migration at quite high levels good for the economy?

Chris Giles
Depends on who comes in, of course. So you can say that low-skilled, high net migration probably has very little benefit overall for the economy. It doesn’t have big costs either. High-skilled inward net migration is generally thought to be good for the economy, good for the public finances, but less good over the very long term when people come settled and then start having kids and all the things that cost the state money. So in the short term, better than the longer term.

Delphine Strauss
But it does make your public finance forecasts look better over a five-year horizon.

Chris Giles
Oh, massively. Absolutely, yes.

George Parker
Good for the Treasury. OK. But so tough in Madeleine Sumption from the Oxford Migration Observatory was saying that she expected in the next few years net migration numbers to fall off as this big surge of arrivals starts to leave again. The problem for the government is the other side of the election when that starts to happen, right?

Delphine Strauss
I’m not sure how the politics on this will play because one thing we have seen in the polls is that people care a lot less about migration than they did at the time of the referendum. We haven’t yet seen enough new fresh research to know how that stands up to the latest small boats developments. But there is also just a very strong narrative coming from business and I think a perception that’s sort of shared by lots of people that we have seen labour shortages emerging in lots of places where migration from the EU was shut off.

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George Parker
Delphine and Chris, thanks for joining us.

This week, the FT revealed that ministers are grappling with the likely cost of compensating victims of what’s been described as the worst treatment disaster in the history of the NHS. The contaminated blood scandal, which dates back to the 1970s and ’80s, is a grim saga. Ministers accept the moral case for compensation and are privately saying it could cost between £5bn-£10bn. I’m joined by Sarah Neville, our global health editor, and by Barry Flynn, ex-chairman of the Haemophilia Society. He’s in his sixties and was infected with hepatitis C and he and his family have suffered terribly. Sarah, first of all, can you explain what happened?

Sarah Neville
Yes. Well, if I can inject a slightly personal note here. I remember back in the mid-’80s when I was a young reporter on a regional paper in South Wales, and the shock we felt when it emerged that some of the local hospitals had got blood that was contaminated with HIV and HIV itself was quite a newly diagnosed disease. And I think this started to slightly sort of reframe the narrative around HIV, which at that time was still being depicted by the tabloids as a gay plague. And suddenly here was evidence that you could go into hospital and have a regular blood transfusion or particularly be a haemophiliac looking to have a blood clotting agent called Factor VIII and you could end up contaminated with this disease. The key issue was that the supplies of Factor VIII that were contaminated had been imported from the United States. So I think perhaps one of the sort of ironies, you know Barry will tell us more about this, but that Factor VIII, this relatively new clotting agent, was seen as almost like a sort of miracle treatment that meant that haemophiliacs no longer had to spend very long periods in hospital. And so this emergent evidence in the mid-’80s that in fact, it had proved profoundly damaging to many of them was really shocking.

George Parker
And when did the NHS and the government accept that this has happened?

Sarah Neville
Well, even back then in the mid-’80s, it was already acknowledging that this had happened and that was when they started to heat-treat the Factor VIII, the clotting agent. So I guess you could say almost 40 years ago it was accepted. But what’s taken a painfully long time is to get to the point of achieving any sort of a framework for workable compensation. And I think some of the ministers who gave evidence to the public inquiry that’s still ongoing were very frank in acknowledging that this had been a serial failure of administration after administration. It had been, I think, Jeremy Hunt, who’s now the chancellor, but of course was a very long-serving health secretary. He told the inquiry that the failure of successive administrations to find a resolution represented a failure of the British state. So there’s certainly been no lack of acknowledgment by the current crop of politicians that something went very, very badly wrong here.

George Parker
So Barry, what was your own experience and that of your family of this dreadful event?

Barry Flynn
Well, you’ve got it dead right there, Sarah. The treatment from the point of view of myself and my brother was after a lifetime thus far growing up with long spells in hospital, unable to do any kind of sport virtually, pretty much stuck in the house, damaged joints because we spent a lot of time either in wheelchairs or on crutches or wearing calipers, etc. Just in time for us to get our O-levels and A-levels, my brother and I started taking home treatment just in time to get us off to university and life was transformed and I did biochemistry.

It was kind of in the ’80s when, having sort of stayed in touch with certain scientific papers and things, I got wind of this HIV black cloud that was coming over from America and, you know, rumours of it going down through blood. And I guess I started modifying my behaviour somewhat because the haemophilia treatment centre I was calling in to to get my medication, you’d get various brands of it and I was frankly nervous of American brands. So I would undertreat myself, build up stocks of the UK medication and try not to use the American stuff. Sometimes it was unavoidable and tried to get my brother to do the same. I don’t know how much he listened to me, I mean brothers don’t.

I distinctly remember the day when I got a call from a doctor because I’d been getting a test for HIV, and he said, “You’re negative”. And so I was happy. But he said, well, you’re negative, but that’s just one test. It’s not a very good test. We’ll have to do four, five, six tests before we can say you don’t have it. And then I had to ring my brother and he told me he was positive. I mean, we had no idea what the ramifications of that were at the time, thank God in a way. But that was when the nightmare began, if you like, around about 1986.

George Parker
So you were infected with hepatitis C, weren’t you, I think at this point?

Barry Flynn
Yes. So at that point, people were vaguely talking about non-A, non-B hepatitis because virtually everybody who’d got blood products got hepatitis B, which meant they had, you know, flu-like symptoms for a while and went a honey colour and what have you. But then it tended to settle down to all intents and purposes, but nobody knew much about this non-A, non-B but it became vaguely, you know, known that most haemophiliacs had that as well.

George Parker
So both you and your brother were infected by contaminated blood?

Barry Flynn
Yes.

George Parker
What was it like trying to be heard by the NHS, by the government? What was the official response?

Barry Flynn
I wasn’t aware of a response at the time, frankly. You know, at the time, HIV was, you know, death sentence. So I just felt awesome sorrow for my brother. And, you know, we tried to rally around him. As you know, the situation became more and more stark because, frankly, the doctors were in shock as well. I don’t know how much training they got in how to deliver these messages, but they pretty much you know, gave it to them right between the eyes. You know, I remember my brother in tears ringing me up because him and his wife were trying for a family and I’d be paraphrasing, but it was something like I wouldn’t bother because you’re not gonna live long enough to enjoy being parents. Unwittingly, my brother had infected his wife, so tragically she ended up dying as well.

George Parker
And your brother died too?

Barry Flynn
Yep.

George Parker
So Sarah Neville, Sir Brian Langstaff published an interim report into the scandal last month, making it clear that ministers should set up a compensation scheme immediately. Is that going to be straightforward?

Sarah Neville
It’s not, because I think one of the things that still has to be decided is how the payments are going to be weighted, how they’re going to place a value on different aspects of loss of earnings power. I mean, one of the things that Sir Brian announced in his most recent report was that he wanted the relatives who could be compensated to be expanded from bereaved partners who he mentioned in a report last year should be compensated. But the latest report, he said, also children who had lost parents should be compensated and indeed parents who had lost children.

George Parker
Mmm.

Sarah Neville
So that, of course, greatly expanded the pool of people who are going to be entitled to compensation.

George Parker
And I think siblings of children who are infected, carers. I mean, quite a big group of affected people.

Sarah Neville
Which I guess is how we’re getting up to that very high figure, George, that you had a good scoop on just a few days ago. I think that was £10bn, wasn’t it?

George Parker
£5bn-£10bn.

Sarah Neville
Is being bandied around within government as a likely cost. So, yes, it’s an extraordinary bill coming home to roost after all these years, after these, you know, 40, 50 years since this actually happened. It was the supplies in the US that were contaminated. And what happened was I think there was originally a pledge that the UK would become self-sufficient in Factor VIII — that hadn’t happened. There was a huge demand. The NHS, the government wound up filling that demand by importing from the US.

George Parker
So Barry, what sort of compensation do you think those infected and affected should be receiving after all these years of suffering?

Barry Flynn
I think, you know, talking about the cost is the wrong way of looking at it. If you’re talking about the cost, it’s a fraction of the cost of the nuclear submarines program, it’s a small fraction of the cost of High Speed 2 and its dubious benefits. You know, we are a gigantic economy and focusing on the cost is the wrong way around. I would much rather focus on the value to the thousands of people who have had their lives massively blighted by it. You know, imagine being a young child who watches his parents, at least one of his parents or both of them, you know, take years to die a hideous, protracted death. It’s one then the other one has to give up work to look after them. If they were left orphans, brothers and sisters were split up and sent into some parts of the country to be institutionalised in various ways. My parents had to watch their daughter-in-law and son die an awful death. You know, any hopes they had of grandkids went out the window from that point of view. Both died. Didn’t even care about compensation, I don’t suppose. But, you know, it’s blighted lives and compensation is some measure that the government accepts that as their fault.

George Parker
Sarah, you’ve covered the NHS for many years. Does it surprise you that there was a sort of period where the authorities just seemed to be in denial and not hearing voices like Barry’s?

Sarah Neville
I think sadly there’s a long history of the NHS trying to avoid acknowledging scandals like this. I mean, we’ve seen it particularly through multiple maternity scandals which have only come to light many, many years later. I mean, I’m not saying that whistleblowing particularly came into play with this affair, but it is very hard to be a whistleblower in the NHS because it’s a culture of closing ranks where there is resistance to acknowledging anything that could lead to a compensation bill. So sadly, I think this does come in a long line of similar occasions where there’s been fault and the NHS has been slow to acknowledge it.

George Parker
Barry, finally, do you think we’re finally getting towards the point of closure of this whole sad affair?

Barry Flynn
Well, my faith in government has been shaken over the decades. So, you know, I’ll believe it when I see it. They still seem to be, you know, trying to focus on the cost rather than really genuinely seeming to be giving regular updates on how they’re getting along putting this mechanism together and finding the money. You know, the numbers are terrible, but the statistics are even worse when it comes to people with bleeding disorders. You know, they talk about 3,000 people having died, but what isn’t focused on is that there are only, any time, about 6,000 haemophiliacs in the country because it’s one in 10,000. And of those, 2,000 are severely affected. So in the context of that, when you read statistics, you know, like 1,300, 1,400 people with haemophilia were infected with HIV. That is 50, 60 per cent of severe haemophiliacs. There’s not many other instances where you could point to a segment of the population and say, the NHS responsible for the deaths of half that group of people.

Every three weeks, another person dies of either HIV or hepatitis. I didn’t say, you know, this HIV thing, you know, it was like a rapid wave hitting you. So the deaths came quickly, and then the treatment came and the deaths stopped. But the hepatitis is just like a creeping death thing, because it takes place over years and even decades. But once you’ve got cirrhosis and liver damage and liver cancer, then, you know, it’s just slow and inexorable and it isn’t gonna stop. So the longer the government faff on with this, people are dying every month. It’s a disgrace. It should have been done decades ago. Several countries, even Ireland, they paid out in the nineties. So all this talk about £5bn-10bn — well, you should have spent £50mn 40 years ago, and there wouldn’t have been a problem.

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George Parker
Barry Flynn and Sarah Neville, thanks for joining me. And that’s it for this episode of the FT’s Political Fix. If you like the podcast, we’d recommend subscribing. You can find us through all the usual channels to receive episodes as soon as they’re released. We also appreciate positive reviews and ratings. The FT’s Political Fix was presented by me, George Parker and produced by Anna Dedhar. The executive producer is Manuela Saragosa. The sound engineer is Breen Turner. Until next time, thanks for listening.

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