The fantasy money flowed, the promised targets were missed and the manifesto commitments reversed – all to the uncritical acclaim of the British media in awe of the Magician Osborne. It’s hard to imagine any other finance secretary getting this soft soap treatment – would (Chairman) John (Mao) McDonnell? Would John Swinney?
Yet the right wing loony Press was awash with celebration, delighted as rabbits were pulled from the hat with barely a glance at the underlying reality.
This shows deficit reduction targets have been consistently missed since 2010.
Borrowing projections have been wrong too. He pledged himself to the now-largely-forgotten borrowing target of £37 billion, yet actual borrowing for the fiscal year came in at £90 billion, two-and-one-half more than the target.
The rabbits were bought not with real money but as yet fantasy OBR projections, any number of which could be out in any given year rendering his virtuoso performance meaningless. Remember, this is the same OBR which admitted in 2012 that it had predicted growth six times stronger between 2010 and 2012 than the official figures suggest was the case and whose record in forecasting is worse even than the Treasury’s. Among the ways an extra £27b was ‘discovered’ was via the OBR ‘altering its modelling’ of VAT receipts and deciding that by 2020 an additional £3.3b will magically appear. Did ye, aye?
He is also breaching his own self imposed benefits cap after deciding he cannot find enough savings to compensate for the decision to slow the pace of cuts to tax credits. So much for promises and prudent planning…
(There is also a specific manifesto promise broken – he cancelled the £1bn competition for carbon capture and storage (CCS) technology six months before it was due to be awarded, breaking a pledge in the Conservative election manifesto. This is a serious blow to Peterhead. This was championed by Cameron as vital in tackling global warming will be an embarrassment to the UK, just days before the Paris Climate Summit. Industry figures called the move devastating and experts said it would make meeting the UK’s binding carbon cuts almost impossible and more expensive. Yet there will be £250m towards creating a mini nuclear reactor – such are Tory energy priorities.)
Amid a welter of housing measures which at least shows the UK is getting serious about providing a roof over its citizens’ heads, there is one area which points in a worrying direction. Osborne continues to feed the inflationary beast that is the London housing bubble. There was already a government subsidy for London first time buyers giving them 20 per cent state aid to buy a home. That subsidy – in the form of an interest-free loan – has been doubled to 40 per cent of the purchase price. Forty per cent! In an already inflated market where the average price is £530,000. The free money will be available for new-build houses up to £600,000 leaving open the question of how this helps to keep prices affordable – the subsidy to the purchaser is also a subsidy to the builder and vendor and an incentive to keep prices high.
The Help to Buy is an explicit recognition of the imbalance not just in the housing market but in the UK economy. The Tories have abandoned any interest in attempting, as Cameron promised, to rebalance the economy by spreading investment.
In part at least the extra subsidy to London will be paid from the additional Stamp Duty on buy-to-let properties but, given the housing shortage, isn’t it likely landlords, who control much of the housing market, will merely pass on the extra cost in rent rises? It’s worth noting too that some of those benefitting from the first time buyer subsidy will already be receiving another tax-free benefit aimed at boosting the housing market. They can save in a Housing ISA which guarantees a bonus from the taxpayer of up to £3000 when the savings are used to pay a house deposit. So instead of creating an affordable rental sector, the ideology of the Tories uses tax breaks to grow the ownership market.
When you realize house prices went up nine per cent in the last year and in London the average is 15 times the average wage, you can see why the government acts. But isn’t it another example of how the favoured South East corner devours the attention and resources of the whole country? And, of course, it could yet lead to a crash. London has 25 per cent of all UK mortgage debt and more than a third of that is made up of interest-only mortgages in which the capital sum borrowed is not being paid back as buyers bet on the market growing so their house price goes up and will eventually allow them to repay from the proceeds. And it’s true the rate of increase is outstripping the FTSE index so more people pile into property.
Yet the Bank of England continually talks of interest rate increases and many owners will be in a precarious position between monthly costs and property value. It might not take much adjustment to take the air out of the bubble, prices to tumble and negative equity to bite. The financial crash of 2007/08 was triggered by sub prime mortgages. The Centre of Economic and Policy Research in the USA explains: ‘…increase in demand had the effect of triggering a housing bubble because in the short-run the supply of housing is relatively fixed. Therefore an increase in demand leads first to an increase in price. As prices began to rise in the most affected areas, prices increases got incorporated into expectations. The expectation that prices would continue to rise led homebuyers to pay far more for homes than they would have otherwise, making the expectations self-fulfilling.’ This was fuelled by what we also have today – historically low interest rates. That encourages borrowing but discourages savings so family budgets have no reserves for tough times ahead. Five billion pounds is owed by families in financial difficulty. Five million others are struggling with repayments, according to the Children’s Charity.
Meanwhile the austerity programme rolls on, its bitter effects merely delayed, not abandoned. The real conjuring trick isn’t sorting the national finances, it’s deluding the spoon-fed media.