At the last election, during a TV debate between the three putative chancellors (Messrs Darling, Osborne and Cable), Krishnan Guru-Murthy asked, "Do you agree that cuts we are going to be facing will be deeper than the cuts that Mrs Thatcher had to put through Britain?" Alistair Darling answered, "Well … they're going to have to be pretty deep." The other two men simply said, "The answer is yes."
The economic realism of that (brief) period wasn't simply about cutting Government spending. It also had to do with the kind of economy we wanted. No longer one dependent on property, finance and borrowing, but led by industry, investment and exports. If the Coalition Government had walked that walk, the British economy would be on the road to real recovery. A long, arduous and stony road, for sure, but still one heading in the right direction.
Alas, that road proved too stony, too steep. After some real-world setbacks (eurozone recession, a poor manufacturing performance) and predictable political hiccups (the rise of UKIP, some backbench restiveness), George Osborne has, in effect, chosen to revert to the economics of fakery. The clearest indicator is the nonsense of the Government's help-to-buy scheme. Every single thing about it is terrible, starting with its basic premise. An interest-free government loan guaranteed by taxpayers is intended to make it easier for buyers to raise a deposit, so buyers can purchase homes with as little as 5 per cent of a home's purchase price.
The first obvious point to make is that the scheme does nothing to increase the supply of properties. Britain already has the smallest homes in Europe. Our planning rules are so restrictive that house builders are resorting to ever more marginal brownfield sites. No new towns are planned. Antiquated Green Belt rules are still enforced. Investment in mass transit schemes and high-speed rail is being squeezed by budget cuts. In short, nothing that would make a real-world difference is being done.
Since supply is restricted, easing the financial challenge of property ownership can only lead to higher prices. Those higher prices are artificial (based on Government subsidy) and make the prospect of a housing crash ever more certain – because at some stage, interest rates will need to come back to normal levels and the Government will have to stop wasting cash on meaningless subsidies. Since we've already lived through one boom and bust, it seems astonishing that we should choose to re-awake those evil genies.
The problems don't end there. Higher house prices don't just mean a greater likelihood of a crash, they also mean that, yet again, the Government is deliberately using debt as a growth strategy. Indeed the basic design is, as I've argued in my book Planet Ponzi, simply a Ponzi scheme designed by the Government. You take an already overvalued asset (housing), throw a load of debt at it (mortgages in the household sector, guarantees in the Government one), keep the merry-go-round moving (by keeping house prices on the up), then get re-elected before it all collapses.
The problems escalate all the time. In the US, the federal government used to guarantee mortgages. When the solids hit the air-conditioning in 2008, the US Treasury ended up committing $187bn (£120bn) in saving the two main agencies from collapse. MrOsborne's scheme is smaller, but heading the same way, built on the same disastrous foundations.
The worst thing about the whole scheme is the thinking behind it. The UK currently ranks 159th of 173 countries in terms of investment as a share of GDP, outranked by nations like Mali and Guatemala. Spending on machinery has fallen by a third since 2008. That lack of investment squeezes output today and restricts the economy of the future. It's an economic catastrophe unfolding in slo-mo in front of our eyes.
Certainly solving those problems would be hard – but the issues really, really matter. In chasing the wrong target, in the wrong way, Mr Osborne has shown where his priorities really lie: the good of his party, not the good of his country. Shame on him.
Mitch Feierstein is the author of Planet Ponzi and chief executive of the Glacier Environmental Fund
- More about:
- Loans And Lending Market
- Moving And Relocation
- The Black Market