‘It can’t be worse than last year’ was almost certainly the
buzz phrase around the treasury in the run up to George Osborne’s fourth budget
as Chancellor, following the so called ‘omnishambles’ of caravans, charitable
donations and Cornish pasties in 2012.
While his budget has certainly not been torn apart in the
same way, there has been intense speculation and assessment of the measures
Osborne laid out.
The growth, debt and deficit figure were never going to make
for happy reading, although the Chancellor did his best to paint them in a
positive light, however, the alterations to tax and housing policy have been
the main talking points (face it, we do not need the Office for Budget
Responsibility to tell us how badly the economy is performing).
Osborne’s ‘Help to Buy’ scheme was this budgets flagship policy.
The basic idea involves interest free loans of up to 20 percent of the value of
a new house and government guarantees to underpin new mortgages to the tune of
£130 billion.
The expected outcome is an increase in demand for new homes,
resulting in more home building by contractors, leading to greater employment
in the construction sector. However, there are certain flaws in this policy.
Essentially this idea build on the 1980s policy of ‘Right to
Buy’ where council house tenants were allowed to buy homes at a huge discount,
improving their credit rating and making it easier for them to get loans.
The problem was councils, in a desperate attempt to raise
cash, sold almost all social housing and the private sector did not meet the demand
for low cost housing. In the long term this has led to the almost weekly
newspaper articles about a single mother with four children or a large immigrant
family living in expensive properties at the taxpayers’ expense.
Already there have been issues raised with the policy,
although the government has been keen to point out the details have not yet
been decided.
The main issue seems to focus on abuse of the system. The
Labour party and interest groups fear the people who will take up the scheme
will be people buying second homes and buy-to-let landlords, which will not
result in the require increase in demand for new housing or help first time
buyers onto the property ladder.
However, there could potentially be another significant
problem. The economy’s major fault at the present time is non-existent demand
from consumers, the reason for this being a lack of job security meaning people
are saving rather than spending. This issue is then compounded by businesses
and financial institutions sitting on capital and waiting for fair economic
weather before investing or loaning money.
This policy seems to assume there is zero demand in the
housing market, when the fact is people want to buy homes, but just cannot
afford them. The interest free element of this make almost no difference to the
average first time buyer who would still have to pay a substantial deposit,
which many people cannot afford due to stagnant wages.
A welcome policy could help this, with the extension of the
income tax threshold to £10,000. This will be of huge benefit to low and middle
income earners who will see a significant rise in their monthly pay cheques.
However, as welcome as this is, it only partially bridges
the gap caused by inflation and frozen wages. It is this annoying trend which
seems to continue through the rest of the budget.
The proposed 3 pence rise in fuel duty in September has been
scrapped. Again, thank you George, but what good does it do when people cannot
afford the petrol in the first place.
Beer duty as well will be reduced by 1 penny a pint, as if
this is going to make any difference to the amount of money in people pockets or
the profitability of pubs.
A National Insurance cut of £2,000 for every business, while
450,000 small firms will pay no employer NI at all. You will not hear any
company owner complaining about this policy, but its small potatoes and will
likely have no effect on business investment or employment rates.
An extra £15 billion in infrastructure spending by 2020,
starting with £3bn in 2015/16. This is tantamount to battling an inferno with a
garden hose. Many of those calling for increased capital spending are arguing
for at least £15bn straight away, while £3bn will barely cover administration
cost of a new project.
There are essentially two ways to go with the UK economy at
the moment. Firstly large increases in capital spending to increase investment
in infrastructure, support greater employment and encourage growth, or secondly
massive spending cuts to rapidly reduce the deficit and debt, restoring faith in
the fiscal solidity of the UK.
The overriding problem with this latest budgetary offering
from George Osborne is it is neither one thing nor the other.
He came to power claiming he wanted to erase the deficit by
the next election, a target he will not even get close to, and at the same time
he refuses to increase capital spending to improve growth.
Regardless of whether you are a Keynesian or a Friedmanite
what this economy actually needs is action in one or the other direction.
What Osborne has done is land himself in economic purgatory,
where he is neither one thing nor the other, which has resulted in a stagnant economy,
flat-lining growth and a steadily rising, not falling, national debt.
We all have our personal views on what Osborne should do,
now we just need him to make up his mind and actually take some action one way
or another.
The only conclusion it is possible to draw is Osborne
suffers from the same issue as the Con-Dem coalition which, instead of taking
significant long-term action, prefers to deal with an issue of the week, before
it is forced into a humiliating u-turn.
Regardless of your views on the government as a whole and
its handling of the economy specifically it is time for them to do what they
were elected to do and show strong leadership, a quality severely lacking since
it took office.
