Wednesday 22 November 2017

Hammond's Excruciating Budget

Philip Hammond has a reputation for being a bit boring, and true to form his budget was a snorefest. It was almost as if he intentionally tried sending the chamber to sleep before forced to break the grim news: growth forecasts down, productivity down, borrowing up, and sticking with the cuts to government departments already programmed in. The dismal jokes reflected the dismal budget well. Though, as Westminster watchers should know by now, the measures outlined today had very little to do with the needs of the economy and addressing its problems. But we'll come on to that in a moment.

This was certainly no omnishambles budget, a feat Hammond's predecessor achieved on two occasions, but it was an embarrassment nonetheless. Arriving on the BBC News website this afternoon, visitors witnessed the chancellor's big splash: the abolition of stamp duty for first time buyers for houses under £300,000 and some sort of relief for the first £300k for purchases over that amount. It quickly disappeared. On the surface this is a nice little bung for layers who've scraped together enough for a deposit to join Britain's property owning democracy, but the whole thing was shredded within moments. According to the Office of Budget Responsibility, the quango Tory chancellors are normally happy to hail, the abolition of stamp duty is likely to stimulate demand over supply, leading to an increase in house prices (there is, after all, nothing here to incentivise house builders to get building more) and therefore benefiting existing home owners. That these disproportionately vote Tory is, I'm sure, a coincidence. However, Hammond can relax. His proposed measure won't overheat the housing market because the OBR estimates only an extra 3,500 purchases because of it. What a farce, a "surprise" flagship policy falling flat at the first step. Still, these are the people who brought us the dementia tax.

Apart from the eyecatching headline, this was a no change budget. A bit more cash for the NHS (not enough, of course), money put aside for Brexit, some tinkering with council tax, more dosh thrown at the Tories' peculiar maths obsession, but nothing substantial. No huge new cuts were announced, but then again they didn't need to be. They'll be going on under the radar as the Tories carry on gutting the institutional and social infrastructure of the country. And they wonder why the productivity figures are so rubbish.

None of this should surprise anyone. Any expectations Hammond was to row back on austerity or indulge the perversions of Thatcherite fetishists were naive in extremis. This is because the budget was a politically determined budget. The only feature of any permanence in the government presently is instability, of a balance between all the factions that want to see Theresa May gone versus their not wanting their opponents to take the prize, and so paralysis and timidity is the practice, chaos and fractiousness the display. The problem is May's foolish reappointment of Michael Gove to the cabinet has proven to be a destabilising force. Not only have he and Johnson "unexpectedly" sunk their differences, they're throwing their weight about. As the cloud continues hanging over Damian Green, the press were helpfully tipped off that May was considering bringing back William Hague to replace him. Within 24 hours and reflecting the new balance, Gove's name was now in the frame. Therefore Hammond, one of the ministers Gove and Johnson no doubt had in mind when accusing unnamed others of not enthusiastically embracing their Brexit idiocy, needed something more or less acceptable to all sides of the Tory party. That meant tinkering with no bold moves, no retreats on public sector pay or social security (changing the Universal Credit waiting time from six to five weeks for new applicants is hardly a climb down), and nothing that could paint it a Brexiting or Remainia budget. By playing safe and not pleasing anybody Hammond managed to please everybody. There was no pretext for any faction to make a move, and this unpopular chancellor gets to keep his job for a while longer - and so does his nominal boss.

This is nothing new. From austerity to the Scottish independence referendum. Through Brexit to the general election earlier this year, the actual requirements of economy and society have come a poor second to the immediate interests of this gang of dysfunctional poltroons. Whether bestriding the political stage or cowering before a hostile audience, the Tories are prepared to inflict incredible damage for their position and their profits. After all, they don't have to pay for it. Unfortunately, the political torture they're suffering is scant comfort for those on the sharp end of their vindictive, penny pinching policies. History will come to condemn them, but posterity won't ease the misery they dispense.


BCFG said...

There is nothing unusual about the Tories math obsession.

Most financial instruments that seek to extract money out of people and which brought the world economy to its knees in 2007 were the product of math 'geniuses'.

The algorithm is the rentiers best friend!

Show me a great con artist and I will show you a great maths geek!

Thomas said...

What is truly astonishing with the narrative coming out from the budget is the way these huge epochal statements are being bandied about - '2 decades of wages stagnation' '10 more years of wage misery' 'the national debt will not fall back to normal levels until the 2060s' as if they were purely matters of an technical-managerial nature and not the kind of indictment of an entire way of organising economic and social life. The idea that these kinds of things will just 'happen' without radical changes in the political and social system is absurd and is the sort of thing that only wonks and journalists could believe (cf today's Evening Standard front page).

Ultimately I think this lack of imagination is down to how economic thought is compartmentalised in much of this country away from social and political life. Of course these realms aren't separate, and if we had had the IFS making their wild pronouncements in the 1940s with our level of postwar debt we would have probably have given up there and then.

Boffy said...


"According to the Office of Budget Responsibility, the quango Tory chancellors are normally happy to hail, the abolition of stamp duty is likely to stimulate demand over supply, leading to an increase in house prices."

Actually, even the increase in demand is rather ephemeral. If demand and supply are balanced at say 1,000 units when the price of a house is say, £100,000 including say £3,000 for stamp duty, they will still be in balance at just 1,000 units at a price of £100,000 if the stamp duty of £3,000 is removed.

In other words, the removal of the stamp duty might have an ephemeral effect of raising demand, but any rise in demand will then cause the market price to rise. Where sellers would have sold at £97,000, and the full price with stamp duty was £100,000, the increased demand will push up the price to £100,000, at which point the demand sinks back to the original 1,000 units.

So, as the OBR said the actual beneficiary here is the existing home owner not the house buyer, because the £3,000 of stamp duty goes straight into the sellers pocket rather than into the Treasury. The immediate benefit for the home buyer is that, whereas previously they had to find £3,000 up front to cover the stamp duty, the £3,000 is now incorporated in the price of the house, and so in terms of cash they only have to find an additional 5% of this £3,000, and the bank lends them the other 95%.

Whether this is beneficial or not depends on your viewpoint. To me its not, because if you have a 25 year mortgage, then borrowing the remaining 95% of this £3,000 means that with interest you will pay back far more than £3,000 over 25 years. That is particularly the case given that in that time interest rates are likely to rise way above current levels.

If the average rate of interest paid over that time is 7% - the historic average for mortgage rates - it would mean paying £210 of interest per year over 25 years = £5250 in interest alone. To use one of the government's favourite arguments currently, it would mean paying more in interest per year, just to cover borrowing this additional £3,000 than might be spent on buying something to actually consume.