Chancellor reveals budget to create economic recovery, but will it be the right type of recovery? - The Share Centre Blog

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Michael Baxter

Chancellor reveals budget to create economic recovery, but will it be the right type of recovery?

Written by: Michael Baxter on March 21st 2013

Category: Thought for the day

There was a lot in the latest budget revealed by George Osborne I liked. And actually, I think there is a chance it may create an economic recovery – of sorts. There are reasons for much of the UK to cheer our George. He has also increased the chances of the current government being re-elected. Investors note, one sector in particular will probably do very well. It is just that I think he has made a fatal error – actually, I think he is repeating the errors that created today’s economic woes in the first place.

Let me say, before I get going that I was not much impressed with the Labour prescription either. I make no political point here, just an economic one.

Two big numbers stand out. They are £3.5 billion, and £130 billion. The former is hard cash, money that George has dug into his pocket (or is that our pocket?) to find. The latter is a just a guarantee, meaning he will only need to find cash if something goes wrong. And he is doing his level best to make sure that something does not go wrong. But George is gambling on one particular area of the UK creating the seeds of growth.

See it this way. George Osborne has put our money on one particular pocket on the roulette wheel. But the wheel is not pure. There is a good chance that the ball will indeed land as planned. It is just that Mr O will be creating boom by cheating, and in the long run, I don’t think we will prosper.

Interest rates, as you may have noticed, are very low. They are so low, in fact, that when you take inflation into account, it pays to borrow. Given this, the interest on buying a home makes the whole property ladder thing look very appealing. House prices may be high, but thanks to low interest rates the cost of most mortgages is not, and throughout much of the UK it is now cheaper to buy than rent. There is no mysterious reason for this. It is because interest rates are less than inflation, pure and simple. Despite the cost of mortgages being so low, the housing market is running along bottom. The reason for that is simple too. It is because mortgages are cheap, but they are hard to get. The size of the required deposit is so enormous that it would take an average family the best part of a working life to save up the equivalent of a 25 per cent down payment.

So George has come up with a fix. A total of £3.5 billon is being made available to fund a 20 per cent deposit in the form of an interest free loan.  This would be made available to both first time buyers and those wanting to move up the so called ladder. All that the potential mortgage holder has to do is find a 5 per cent deposit. On top of that, Mr Osborne is committing £130 billion to act as a guarantee of new mortgages. Guarantees are dangerous things to offer, but providing house prices go up, this one will be as safe, as it were, as houses.

I don’t see how these measures can do anything other than lead to a rise in house prices. Shares in house builders rose pretty much immediately on news of the plans being released, and – frankly – with good reason. Certain tabloid newspapers like to celebrate the tiniest hint of good news on house prices. If Mr Osborne can create the housing boom I expect, he will be hailed as a hero by those same papers. When Roman generals returned home after winning glorious battles, they were often treated to a Triumph. Maybe the UK media will give him a similar honour, hurling praise at their saviour.

If house prices do rise, consumers will feel a lot better off. Soon to be retiring baby boomers may feel that funding their retirement from their home has become more realistic. Yes, I think this may be the route to recovery.

Yet is the scenario I paint not dissimilar to the boom Gordon Brown orchestrated? Is this not a copy of the circumstances that created a US boom? George used yesterday’s budget to laugh at the idea that the key to getting borrowing down is to borrow more. But he has just announced measures designed to solve the problems facing indebted households, by getting them to borrow more. If is it okay for households to borrow, because interest rates are so low, why is it not okay for the government?

I believe house prices remain way too expensive. If we lived in a rational place, then rising house prices would not be celebrated – they would be lamented. It is surely in the best interests of Brits that house prices are cheaper, and thus more affordable.

Booms created off the back of rising house prices look like bubbles.

Now, if that £3.5 billion was instead used to providing funding for entrepreneurs, and created a boom based on innovation and rising productivity, I would be calling for George’s deification.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: budget and housing boom, cheaper to buy than rent, house prices remain way too expensive, mortgage guarantee, new housing bubble, Osborne mortgage boost, Shares in house builders

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