Perhaps the best outcome from the Chancellor’s budget announcement that the UK Treasury is to underwrite billions of pounds worth of mortgages has been the muted reaction to it.
In a budget which was distinctly underwhelming, the Chancellor must have hoped that his latest attempt to ‘get the banks lending more’ would be hailed in the same way that previous populist capitalist measures, such as the ‘Right to Buy’ scheme were.
Most economic decisions are empirical, and there are valid points to make on either side of any argument.
But the Chancellor’s plan has nothing to recommend it. It will do nothing to strengthen either the drivers of growth in the economy, nor the transmission mechanisms to get increased levels of capital into the marketplace, while increasing the level of risk in the economy, by increasing the proportion of capital employed which is reliant on house price levels rising.
The greatest virtue of the coalition’s economic policy to date has been its reluctance to chase easy options, choosing to tackle the systemic problems within UK PLC rather than simply deliver very high short term growth rates.
That’s why I’m disturbed by the Chancellor’s latest move on mortgages, which is an ill-conceived and mistimed grope for populism following a by-election disappointment, rather than part of a broader economic strategy.
The first problem with the plan is that it’s a supply side measure. As I have repeatedly written on this site, the problem at present in the UK is not simply with the supply of credit, it’s with the demand for credit. At a time when consumer confidence is low, and inflation is high due to previous supply side measures going awry, it’s a misdiagnosis of the country’s economic malaise to pronounce that the problem is banks not lending enough. So this measure quite simply won’t work.
Secondly, supply side measures take longer to have a tangible impact on the wider economy as they work through the system, from central bank, to commercial bank, to consumer. Demand side measures, such as actually building new houses, have a much more rapid impact, for better or worse. If Osborne wants to increase demand and live with the risks inherent within it, then he should do that, not embrace halfway house solutions.
The third problem is that by committing the government to guaranteeing loans against the value of family homes, the Chancellor is merely re-inflating the housing bubble, which put us into this mess in the first place. At a time when bank’s are rightly having stabilizers applied to their capital ratios, Osborne is freewheeling downhill.
The government needed to produce either a ‘shock and awe’ budget, or a ‘steady as she goes’ budget, what has emerged is a mess, a clumsy embrace of short-termism, with the best outcome being a can kicked further down the road, and the worst case scenario seeing market confidence decline for no appreciable benefit to the economy or society.
* David Thorpe is a member of the Liberal Democrats in Newham, and works for an economics publication.