In his ‘emergency’ budget in 2010, George Osborne pledged to create a less debt-fuelled economy. Where is that promise now?
The late Eddie George, in 2002, brought the phrase “two-speed economy” into common parlance, telling an audience in Scotland: “We have taken the view that unbalanced growth in our present situation is better than no growth – or, as some commentators have put it, a two-speed economy is better than a no-speed economy.”
But his words could just as well have been applied to last week’s GDP figures. While it was undoubtedly great news that the UK has skirted around a “triple dip”, the breakdown of the numbers suggested that, far from achieving the rebalancing George Osborne hoped for, away from consumers and towards industry, the mix of growth looks much as it did a decade ago. Manufacturing output declined; services expanded; government spending made a positive contribution. Industrial output is still 10% below its pre-crisis peak.
Yet far from acting to redress the balance, the coalition’s latest policies read like a desperate attempt to return to the unstable, unsustainable norms of the early noughties.
Help to Buy, announced in the budget, will offer taxpayer backing for up to £130bn worth of mortgage lending, while last week’s extension of the Funding for Lending scheme will allow banks to receive £10 of cheap funding for every pound they lend to small businesses in 2013 – and lend it back out again in any way they like, including to buy-to-let investors.
Back in 2002, George wanted to reassure consumers they would not face a runup in interest rates – because with other sources of growth, such as industry and exports, struggling, the Bank was willing to allow Britain’s shoppers to continue propping up demand with their buy now, pay later spending habits rather than risk economic stagnation.
When he spoke, the cost of the average home was less than £96,000, though prices were already rising at double-digit rates; by the peak of the boom, little more than five years later, it had all but doubled, to £183,959.
Alongside that extraordinary growth in house prices came an unprecedented explosion in household debt. But constantly rising prices bred a warm feeling of confidence among homeowners and fuelled a sense of entitlement to the unearned benefits of rampant housing-market inflation, creating a ready-made lobby group opposing changes to inheritance tax, council tax or any other method of sharing the windfall more widely.
In Osborne’s first, “emergency”, budget in 2010, he carefully laid out his intention of building a safer, more stable economy, less reliant on debt-fuelled spending. Yet three years on, scarred by the failure of the pound’s 20% depreciation to spark an industrial renaissance, he appears to be banking on the two-speed doctrine to lift him clear of trouble.
Osborne has insisted that Help to Buy is not aimed at pushing up prices. But encouraging first-time buyers to take out mortgages with high loan-to-value ratios – on properties whose value may be unsustainable even at current levels, let alone after another market bounce – is hardly a recipe for a fairer or more stable economy.
The Treasury claims to hope the policy will stimulate housebuilding, helping to ease the chronic shortage of homes that has driven up prices; but as the Treasury select committee rightly pointed out in its report on the budget, if the government really wanted to kickstart building, it should act to do so directly. That might mean taking advantage of record low gilt yields to invest in council housing, for example. But as Pete Jefferys of Shelter put it in a blog last week, Help to Buy is a “Thatcher-style home ownership revolution, not a Macmillan-style housebuilding boom”.
Neither does pumping out a new generation of cut-price loans – which, remember, will be available to anyone buying a house worth up to £600,000 – tackle the problem of banks still saddled with shaky-looking mortgages from the boom years. It just postpones the reckoning – and risks making it worse when it comes.
There is agreement across the political spectrum that Britain faces a housing crisis: a generation of young people have little or no prospect of affording a place to live, and find themselves trapped in insecure, poor-quality rental housing owned by landlords out to make a quick buck.
But first-time buyers need cheaper homes, not bigger loans, and the chancellor’s argument is reminiscent of those who used to claim vehemently in the mid-noughties that allowing low-paid workers to borrow six times their income was socially necessary, because otherwise young people wouldn’t be able to afford a home.
A mass programme of publicly funded housebuilding, along the lines stirringly recreated in Ken Loach’s documentary The Spirit of ’45, could boost supply dramatically and help to rebuild the shattered construction sector, while tougher regulation of the rental market could ease the pain for those unable to afford their own home.
And taxing housing more heavily – whether through a more progressive council tax system, heftier inheritance levies or a land value tax, under which homeowners would pay a small percentage of the value of their property each year – could help to prevent the next bubble inflating. Instead, the government appears intent on subsidising it.
Chancellor to beef up £80bn loans scheme amid US calls for Britain to tone down austerity measures
George Osborne will announce an expansion of the Bank of England’s £80bn funding for lending scheme (FLS) ahead of a visit to Britain by the International Monetary Fund next month, as he seeks to head off calls for a softening of government austerity plans.
High-street banks are to be given added incentives to extend credit to small and medium-sized businesses in an expansion to the scheme, due in the next fortnight.
An IMF mission arrives in London for two weeks of talks on 8 May and Osborne plans to launch the beefed-up FLS in an attempt to persuade the fund that the coalition can boost growth without doing a U-turn on its deficit-reduction strategy. Discussions between the Treasury and the Bank have concluded that high-street lenders need further inducement to pass on the benefits of subsidised lending to companies.
The FLS was launched last August and offered subsidised credit to high street banks, provided they passed on the benefits to households and businesses. Figures so far have shown a pick-up in lending for mortgages but no increase in business lending. The Bank always envisaged that it would take time for loans to SMEs to increase, but minutes of the April meeting of its nine-strong monetary policy committee, released last week, signalled support for an expansion of the scheme.
With the business secretary, Vince Cable also pressing for action to help SMEs, Osborne has been keen for the Bank to increase the generosity of the FLS, but the need to target help to the corporate sector has been given added urgency by the imminent arrival of the IMF for its annual article IV consultation.
Last week, the IMF embarrassed the chancellor by urging a rethink of a tax and spending policy that will involve cutting Britain’s structural budget deficit by 1% of national output this year.
The fund has told the chancellor that it is worried about the weakness of demand in the UK and will be asking whether he has any alternatives to changes his budgetary stance.
The chancellor was stung by last week’s criticism from the fund. He argued that he had already taken steps in the budget to boost growth. He pointed out to Christine Lagarde, the fund’s managing director, during talks in Washington last week that the government had already adopted a flexible approach to austerity by pushing back the timetable by two years for debt to peak as a share of national output.
But the IMF is convinced that the UK is still operating well below its full potential. It is keen to discover in its talks next month why the economy has failed to respond to four years of unprecedented monetary stimulus. During this time bank rates have been pegged at 0.5% and the Bank has created £375bn of electronic money through its quantitative easing programme.
The fund believes that its rich-country members have generally been over-hasty in their aggressive approach to deficit reduction, and that less of the fiscal pain should have been front-loaded.On Saturday, a communique released at the end of a meeting of the IMF’s policymaking committee said that where country circumstances allowed, governments should avoid responding to weak growth with fresh attempts to cut deficits, focus on the underlying health of public finances once the effects of the ups and downs of the economic cycle were taken into account, and allow borrowing to rise if activity was depressed.
It added that monetary policy alone was not sufficient to produce a lasting global recovery, noting that a credible medium-term plan to improve the state of public finances together with structural reform were needed.
“Eventual exit from monetary expansion will need to be carefully managed and clearly communicated”, it said, reflecting widespread concerns in Washington last week that central banks faced a tricky task when the time came to raise interest rates and to sell the government bonds purchased under QE programmes.
YouGov-Cambridge surveys shows majorities in Germany, UK and US remain pessimistic about economic future and personally hit by slump
Clear majorities across the western world claim to have been personally affected by the economic slump that most citizens expect to drag down living standards for decades to come, according to YouGov-Cambridge.
The academic polling thinktank found 57% of Britons, 64% of Americans and 54% of Germans had been personally affected by the economic problems of their countries during the last five years to a “great” or “fair” extent. The French, whom happiness researchers routinely find are given to accentuating the negative, are gloomier – 80% of them claim to be feeling the pinch personally.
More shocking than the reporting of present penury is abject pessimism that sets in when YouGov-Cambridge’s questioning turned to the future. Respondents were asked whether, despite the recession, they were “basically confident that our children’s generation will end up enjoying a better standard of living than our generation, just as our generation has mostly been better off than our parents”, the reassuring rider reminding them that – whatever the ups and downs of the cycle – the slow miracle of economic growth has eventually touched most family’s lives, by roughly doubling the size of the world’s big economies every 30 years. But even after this prompt, 19% of Britons, 15% of Americans, 16% of Germans and 17% of the French agree with this statement. Instead, overwhelming respective majorities of 64%, 65%, 66% and 59% incline to the view that “the younger generation will find it harder than ours to enjoy a reasonable standard of living”.
Within the British economy particularly, there is evidence that recent personal experience is feeding through into a dismal view of distant future horizons. Only 15% of those who have suffered materially from the recession incline to the view that the rising generation will end up better-off in the end, compared to 27% – nearly twice as many – of those who have escaped the big squeeze. In the other economies, the link between personal experience and expectations for the distant future are far more muted, suggesting that the recession may be exerting a particularly divisive effect on British psychology.
A separate series of questions on the opportunities available to young people also suggested that recession-hit Britons are becoming gloomier in a distinctive way. The 57% of Britons, for example, who believe that “whereever you start in life, enough hard work will bring you success”, is very much in line with the 61% of French respondents who say the same, but in Britain the recession-hit are considerably less-likely, by some 14 points, to take this cheery view than those who are not feeling the personal squeeze, whereas in France personal experience makes no substantial difference.
In Britain alone, YouGov asked a near-identical question in August 2012, and at that point 59% feared that the younger generation would find it harder, as against just 23% who then feared that the young would find it tougher to achieve a reasonable standard of living over the course of their lives. The 64%-19% split of British opinion in favour of pessimism today represents a four and a half point swing towards gloom since mid-2012, a likely response to the run of mostly negative economic news over the last 20 months.
Forecasters Item Club say chancellor’s Help to Buy scheme will get people moving but broader economic outlook still gloomy
The housing market will finally return to life this year with more than a million people expected to move home – the highest number since the financial crisis struck.
The Ernst & Young Item Club, which uses the Treasury’s economic models, predicted that housing transactions this year will rise by 7.5% to 1m. In its spring forecast the respected economic forecaster said the chancellor’s plan to use £12bn of taxpayer funds to underwrite up to £130bn of mortgages will push home moves up a further 7.8% next year to 1.08m.
House moves are also expected to be encouraged by falling mortgage costs due to the Bank of England’s Funding for Lending scheme.
Property prices are not expected to rise this year, but are predicted to increase 2.1% in 2014 and 5% in 2015.
Peter Spencer, chief economic adviser to the Item Club, said: “With export markets continuing to disappoint, the chancellor has focused his firepower on the home front. And the timing couldn’t have been better. Real incomes are already starting to recover, mortgages are becoming more readily available, and homes are more affordable as the house price to earnings ratio continues to fall.
“Although it’s not a long-term strategy, stimulating the housing market and the high street will keep GDP growth positive. Unbalanced growth is better than no growth.”
Spencer said the chancellor’s Help to Buy scheme had the potential to get people moving again, and dismissed claims that it would just put up prices rather than increase supply and make it even more difficult for first-time buyers to get on the ladder.
“We expect [the scheme] to boost the number of housing transactions, particularly at the lower end of the market where the deposit and low equity have been a major constraint,” he said.
However, the Item Club had a gloomier view of the prospects for the economy as a whole, predicting that the UK will have to wait until 2015 before exports start contributing to growth.
It expects GDP to expand by just 0.6% this year and said that with the rebalancing of the economy on hold, the UK will again have to rely on the consumer.
“We should start to feel slightly better off this year, which will help to loosen the purse strings. Consumer spending added 0.7 percentage points to GDP in 2012 and the chancellor’s budget will help ensure the tills continue to ring for some time yet,” Spencer said.
Consumer spending is set to increase by 1.2% this year and 1.9% in 2014, but the 2.2% growth predicted in the following two years is still well down on the 3.7% a year it averaged in the decade prior to the financial crisis.
Spencer added: “Consumers have been burnt by the experience of the recession and are much more cautious with their finances. Households are likely to continue paying down debt rather than racking up huge credit card bills.”
The bitter March weather dragged high-street footfall down 5.2% last month, according to the British Retail Consortium. It was the weakest month since April 2012.
Helen Dickinson, the consortium’s director general, said: “The prolonged cold was the main culprit for deterring shoppers, especially compared against the far milder March of 2012. Although footfall did pick up around the Easter weekend, it couldn’t fully compensate for a weak showing across the month as a whole.”
As a million home sales are forecast for year, analysts warn of dangers of new price boom
George Osborne’s controversial efforts to rekindle the housing market will help to prevent Britain’s economy from flatlining this year, according to a forecast.
In its quarterly health check of the economy, the Ernst & Young Item Club said a million homes would change hands in 2013, 5% more than in 2012 and the highest number since 2007.
“We expect a million households to move this year, helping growing families and labour mobility,” said Peter Spencer, author of the report, which is the only independent forecast to use the Treasury’s model of the economy. “Sales of household appliances and other expenditures involved in moving home will also be buoyant.”
The Treasury has announced a series of measures to underpin the housing market, including a “funding for lending” scheme, which offers cheap loans to banks and aims to bring down mortgage costs. In last month’s budget, the chancellor also promised to introduce a taxpayer-backed mortgage guarantee scheme from 2014. The policies have been criticised by some analysts, who warned that because many households were still sitting on heavy mortgage debts from the boom years, reinflating house prices would be dangerous.
With the new scheme set to be available on properties worth up to £600,000, Osborne has also been accused of giving help to wealthy buyers.
However, Spencer insisted that the “rebalancing” that Osborne had hoped for – away from debt-fuelled growth and towards exports – would be impossible while the eurozone economy, Britain’s biggest export market, remained so weak. “Although it’s not a long-term strategy, stimulating the housing market and the high street will keep GDP growth positive. Unbalanced growth is better than no growth,” he said.
He added that household debts in the UK had fallen since the start of the financial crisis, from an average of 174% of annual income to 146%. Even with a housing market revival, Item expects the economy to eke out growth of just 0.6% this year and 1.9% in 2014, which is still a more optimistic projection than other forecasters. City consultancy Fathom, for example, has pencilled in growth of just 0.2%.
A Treasury spokeswoman said: “The government is committed to building a stronger economy and this report highlights the real and positive impacts of government policies to support hard-working families and those who aspire to own their own homes.”
Richard Donnell, director of research at housing research company Hometrack, said: “I definitely think the air of optimism will continue to grow, but I don’t think we’re suddenly going to see strong house price growth.”
He pointed out that while prices in London and towns such as Oxford and Reading had already regained the dizzy heights set at the height of the market in 2007, in Liverpool and Glasgow they remained 20% below their peak.
The government is watching anxiously to see if the latest GDP figures, to be published on 24 April, will reveal that the economy slipped into an unprecedented triple-dip recession at the start of the year. The latest jobs figures, to be published on Wednesday, could also show that unemployment has begun to increase, after declining through much of last year.
Howard Archer, of information analysts Global Insight, said: “We expect the labour market data to show further signs of fraying strength in reaction to the economy’s persistent softness.”
As well as encouraging British families to head to the estate agents, the government is also hoping that the arrival of the new Bank of England governor, Mark Carney, this summer will mark a shift to a more aggressive policy in Threadneedle Street – by promising to keep interest rates at their current rock-bottom levels for an extended period, for example.
However, Spencer suggested that monetary policy was unlikely to provide much extra support to growth. “Although monetary policy is good at cushioning a recession, it is bad at stimulating a recovery,” the report said.
It is nonsense to suggest that Britain cannot afford not to invest in infrastructure. Now is just the right time to do so
Before 2008, an avowedly modernising Conservative party committed to match Labour’s public spending totals. However, two weeks after Lehman Brothers went bust in 2008, George Osborne took to the rostrum at his party’s conference and reverted to Tory type, sternly announcing that “borrowing is out of control”, and – recalling an establishment phrase from the Depression – promising to “put sound money first”. There is something ironic in this ancient echo, for – as we will show – the Osbornian claim that Britain is broke is dependent on eschewing the long view.
By the time the coalition was created, the early stirrings of a debt crisis in southern Europe lent superficial credibility to fears that Britain was teetering on bankruptcy. And so the cutting began, with the squeeze disproportionately concentrated on capital outlays, such as building projects. In just two years, net public investment almost halved from £48.5bn in 2009/10 to £28bn in 2011/12, and despite recent budget hype about renewing the infrastructure, the smallprint of the red book reveals that this net investment total will stay on the floor, averaging only £25.8bn per year during the first half of the next parliament.
The defining narrative remains that There Is No Alternative, because Britain is “broke”. But can this story be squared with the facts?
The figure below shows that UK debt/GDP was above 80% for most of the last 300 years. Enthusiasts for austerity tend to ignore the vast majority of that timeframe, focusing on the increase in debt from below 40% to around 80% of GDP in the last few years. But If Britain is broke at the moment, then the graph shows that it was also broke for a whole century between 1750 and 1850, and for 20 years after the second world war. In reality, in neither case did the UK default, and reveal itself as bust – both periods were times of investment, growth and national renewal.
Other advocates of austerity suggest Britain is broke because the cost of servicing debt is bankrupting us. However, UK debt interest payments are now actually lower as a share of GDP than at any point up to the year 2000. So if this is the yardstick for being “broke”, Britain has also been broke over the whole second half of the 20th century.
Of course, modest current costs would be of no comfort if they were liable to rocket soon. The reality, however, is that there is no sign at all of increased public debt pushing up public borrowing costs. Since the slump first swelled the debt in 2008, interest rates have drifted not up, but downwards. Most chancellors in the late 20th century would have given their right arm to be able to borrow at anything like the current 2%.
Furthermore, research by Jonathan Portes, of the National Institute of Economic and Social Research (NIESR) suggests that rates fell to such lows during this slump because the prospects for growth are so weak – not because austerity has persuaded investors that the UK is less likely to default.
All evidence, then, points against Britain being too bust to invest. But shouldn’t the UK still fear going the way of Greece – losing control of the public finances, and then – after a delay – being savagely punished by the markets.
Not really: the problems of Greece and other stricken continental economies arise because they have no flexibility to unilaterally loosen their monetary policy, owing to euro membership. In contrast, with its own central bank the UK enjoys more freedom to grow its way out of recession. Indeed – while inflation remains depressed – if the UK were in a tight corner it could simply print the funds required to avoid outright default.
Britain, then, is not “broke” – in any historical terms, it is ludicrous to claim that. As for Britain not being able to afford to invest, the truth is the exact opposite: with the cost of borrowing at historic lows, Britain cannot afford not to invest. As in the 1930s, George Osborne’s “sound money” philosophy is distinctly unsound economics.
• This mythbuster is part of a series co-ordinated by the New Economics Foundation and the Tax Justice Network. You can read the full length piece here
Office for Budget Responsibility members say mortgage subsidy will push up prices and have little impact on demand
George Osborne has strongly defended his budget policy aimed at boosting Britain’s struggling housing market after his own economic watchdog warned that subsidies for mortgages would drive up property prices.
The chancellor insisted the Treasury’s Help to Buy scheme would encourage housebuilding by countering fears that a lack of affordable finance would leave new homes unsold.
Giving evidence to backbench MPs, Osborne said potential buyers were being asked for deposits they couldn’t afford and that there was no risk of a housing bubble.
He used last week’s budget to announce a twin-track scheme for the mortgage market. People buying new homes up to a value of £600,000 can borrow 20% of the value of their property interest-free for five years, in return for the government taking a stake in the equity. He also introduced a new “mortgage guarantee” to help more people get a home loan without the need for a prohibitively large deposit.
But the chancellor’s plan was given a frosty reception by the Office for Budget Responsibility, which provides independent economic and financial forecasts for the Treasury and gave evidence to the committee hours before Osborne’s appearance.
Two of its three members – the chairman, Robert Chote, and the former Bank of England policymaker Steve Nickell – said Help to Buy would push up prices and have little impact on demand.
Nickell said: “The key is: is it just going to drive up house prices? By and large, in the short run the answer to that is yes. But in the medium term will the increased house prices stimulate more housebuilding, and our general answer to that would probably be: a bit. But the historical evidence suggests not very much.”
Chote said strict planning laws limited housebuilders’ ability to build more homes, so the Help to Buy scheme was more likely to push up prices than increase the supply of new housing.
“If you were to note the fact that the planning system remains an important reason why the supply of new housing is relatively inelastic [and] the need of housebuilders for working capital, I suspect that more of it would have shown up in prices than in quantities,” he said.
The OBR chairman said his organisation had been unable to make a detailed assessment of the impact of the scheme because ministers had not provided enough information on how it would work.
At his appearance, Osborne was asked by the committee chairman, Andrew Tyrie, whether he was not concerned that “we are just ploughing money back into the boom-bust property cycle?”
The chancellor replied: “I don’t detect that we are in the middle of a housing boom. I think we are in a very unusual situation after the financial crisis. Families are being priced out of the housing market and that is neither economically right nor socially fair.”
Dismissing the idea that the UK could enter another housing bubble, the chancellor added: “If you look at the UK housing market at the moment, the number of first-time buyers has halved, the amount required for a deposit has trebled, the deposit required from first-time buyers has doubled as a percentage of their income.”
The chancellor also refused to rule out breaking up Royal Bank of Scotland – 83% owned by the taxpayer – into a good and bad bank in an attempt to increase lending.
The idea of splitting off all the toxic assets of RBS into a separate institution so that the rest of the bank would have a clean balance sheet has been looked at repeatedly by the Treasury in recent years. Osborne said the good bank/bad bank option could not be delivered overnight but the leading civil servant at the Treasury, Sir Nicholas Macpherson, told the committee there might be a time when officials recommended a breakup.