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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

Showing 2 comments

  1. Joe Bleasdale

    I agree about the danger of fuelling a house price boom with the latest budget. I think the money would be better spent in repairing our rotten roads, thus helping commerce and giving constructive work to the unemployed.

  2. Garry Hawkins

    £3.5 billion in a £1.4 trillion economy doesn’t amount to a stack of beans: it’s not even a rounding error. As Roger Bootle commented last night: there’s no growth to be had in everyone selling each other houses.

    At least with the logjams in the planning system, combined with a lack of funding for social housing – at least a huge increase in the supply of housing will be avoided by accident rather than by design. Ergo, prices will likely rise and another bubble will be well on its way to being popped around 2018-20.

    I was rather disappointed there was no news in the budget re: agreement of (if you’ll excuse the pun) charging policy for Hinckley Point new nuclear electricity supply between HM Govt. and EdF. Planning permission is one thing: the final go ahead for project commencement is quite another.

    As for £3 billion extra for infrastructure projects from 2015 (FROM 2015 ???) more rounding errors.

    Did I miss the extensive supply side reforms to help the economy? What has happened to OFTAX – the Office for Tax Simplication? Where was the elimination of National Insurance, ie the merger of NI and Income Tax?

    And finally, how about this for a prediction from the OBR – wage rises in 2015 will be running at 4.6%?

    It’s just as well OBR predictions are as reliable as a sundial, because if wages are rising at this level – we’ll either have a booming economy in 2015 – or – far more likely, inflation of between 5% to 10%.

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