The new economic model is the old economic model
Last week I argued that the new OBR forecasts signalled an apparent abandoning of rebalancing by the Chancellor in favour of a strategy based on house price inflation and consumer spending:
in the June 2010 Budget, the Chancellor expected 57% of all growth to come from his preferred (and ‘sustainable’) sources of business investment and net trade. By this time last year, that contribution had fallen to around 52%, lower but still more than half of all growth.
Yesterday’s forecasts have business investment and net trade contributing only 31% of all growth to 2017…
Three years ago George Osborne argued that “that we cannot go back to the last decade’s debt-fuelled model of growth”. As I listened to his housing market announcements yesterday, I thought “it sounds like he is going to try”.
The estate agency Knight Frank estimates that it will take until at least 2019 before property prices are back to the levels of 2007. Add to that the Office for Budget Responsibility’s forecast that real wages in Britain in 2015 will be 9% lower than they were in 2010. So the housing market looks less of a sure thing than at any time since 1994, and Britons’ personal finances are a wreck. Osborne may think he’s found an update of right-to-buy, but it looks more like right-to-be-repossessed.
Still, back to that coalition catechism. Government borrowing to build council housing: forbidden. Individual borrowing to buy an overpriced two-bed flat: encouraged. The way to make the economy stronger is to make it more fragile. And we’re all in it together, except really, when it comes to managing your way through this depression, you’re on your own.
[Osborne] told MPs: “The key difference this time is that I am making it much easier for people with no money to get a mortgage.
“So then, right, they will have a house and the value of that house will just keep going up and up and so every few years they will borrow a bit more money against the value of their house and then spend it in the shops.
“The value of the houses will always go up because most of them will be those lovely new red brick ones that will be built next to dual carriageways on the outskirts of provincial towns.”
As Conservative MPs cheered, he added: “I know. And it’s actually a bit weird that no-one has thought of it until now.”
The economic rationale for designing a mortgage market intervention in this way is almost impossible to understand. There are well-known market failures in both the retail and wholesale markets for mortgages, so there’s plenty of scope for radical reform. But, instead of explaining what problem it is trying to solve and how, the Treasury has created yet another subsidy for banks. Worse still, the structure of the subsidy will weaken competition even further by propping up incumbent banks and perpetuating an unreconstructed housing finance market with fundamental weaknesses.
What about housebuyers? To the extent that they see any benefits, it will push up demand and hence prices, resulting in further distortions in an already distorted market. This will redistribute wealth from the poor to the rich and from those who don’t own houses to those who do. It will neither build any new houses nor make existing ones more “affordable” in any meaningful sense.
Their criticisms add to a long chorus of economists who generally argue that the scheme is at best ‘good politics but bad economics’.
But perhaps the best attack on the Government’s growth strategy, it’s lack of rebalancing and the role of house prices was not made last week. In was made in November 2003 by one Dr Vince Cable:
On the housing market, is not the brutal truth that with investment, exports and manufacturing output stagnating or falling, the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level? If the Bank of England is correct in its expectations of a market correction and rising interest rates, what action will the Chancellor take on the problem of consumer debt, which is rapidly rising, with 8 million annual visits from the bailiff?
10 years on, there is a lot of truth in that statement.
In February 2010 George Osbonre argued we need a ‘new economic model’. Now it seems he is happy to return to the old one.