The Conservatives have hit the panic button. That’s the simple conclusion from the announcement that David Cameron is bringing forward the start date for the government’s Help to Buy scheme.
Spooked by the positive public reaction to Ed Miliband’s pledge to freeze energy prices, the Conservatives have come up with their own eye-catching measure. Phase two of the programme, providing subsidised mortgages for properties worth up to £600,000 was supposed to start in January. Now the prime minister has indicated it will happen “within days”.
There is certainly a case for re-thinking Help to Buy. But the sensible thing to do would be to scrap the second phase not to bring it forward. There are clear signs of a housing bubble developing, and to inflate it further makes little sense unless you are a government willing to play fast and loose with the stability of the economy in pursuit of cheap votes.
The Conservatives have form when it comes to stoking up pre-election booms with little thought for the consequences. Reggie Maudling left Labour a dreadful mess in 1964 with his dash for growth. Tony Barber did the same a decade later. Help to Buy matches both for its breath-taking cynicism.
Government feathers have been ruffled by Ed Miliband’s announcement that Labour would freeze energy prices for 18 months if it wins the next election. Here, there were echoes of the Conservative coup in 2007, when George Osborne‘s pledge on inheritance tax sowed seeds of doubt in Gordon Brown’s mind about holding an early election. Just as Gordon Brown was thrown off balance by that announcement, so the Conservatives seem to have been discombobulated by Miliband’s coup.
Labour’s economic strategy is still a work in progress. Many voters blame Labour for the recession and will take plenty of convincing that Miliband and Balls are fit to run the country. It would help if the opposition had plans to regulate the City, improve the flow of investment to small businesses and raise Britain’s woeful productivity performance. More work is needed to flesh out the details of Miliband’s energy commitment, but clearly Labour’s pledge hit the political g-spot.
Living standards have been squeezed hard in recent years and rocketing energy bills have been a part of that. The Conservative supporting newspapers that faithfully lined up to rubbish Labour’s price freeze have up until now been vocal in their condemnation of the “fat cat” energy bosses ripping off their readers. It was interesting, for example, to read the “below the line” comments of Daily Mail online readers, which were much more supportive of Miliband’s policy than the paper’s withering editorials.
Claims by the government and its supporters that Labour is returning to the 1970s with a barrage of price controls would ring less hollow if Osborne was not manipulating the housing market through Help to Buy Scheme. An 18-month energy freeze will not in all likelihood mean that Britain is plunged into winter darkness; there is, though, a real chance that subsidised mortgages will create another boom-bust in the economy.
Up until he announced Help to Buy in the spring, even opponents of the chancellor’s economic strategy could admit it had a certain intellectual coherence. Osborne said the crisis was caused by excessive private and public debt, which had to be purged from the system before real recovery could take hold. His message was that tough action to tackle the budget deficit was needed to keep the confidence of the financial markets, which in turn was necessary to keep long-term interest rates (which affect the cost of mortgages and business loans) low. The chancellor’s pitch was that recovery was always going to be slow no matter who was in power.
But Osborne did not realise just how slow it would be. Misjudging the impact of VAT increases, cuts in capital spending and comparisons between the UK and Greece made things worse. The result was a flat-lining economy and fears that the economy would not recover in time for the Conservatives to win in 2015.
First we had Plan B as the chancellor watered down austerity by accepting that deficits would be higher for longer than originally planned. Then he threw caution to the wind with Plan C: boosting the property market through Help to Buy. This is already having an impact on house prices. It will now have an even bigger effect.
Osborne’s gamble is that the economy will go through a Goldilocks phase over the next 18 months when it is neither too hot nor too cold. With national output still substantially below where it was when the recession started, the assumption is that there is plenty of spare capacity to be mopped up before inflationary pressure begins to surface. The Bank of England will therefore be able to keep official interest rates at 0.5% until the next election and will not need to take specific action to cool down the housing market.
This strategy looks less tenable by the week and it seemed the chancellor had belatedly recognised the potential dangers of providing government-backed home loans by asking the Bank of England to assess Help to Buy on an annual basis, starting next September. Even that looked too late, given that all the ingredients are in place for a short-lived property frenzy followed by the inevitable hangover. Starting phase two immediately runs the risk that the Bank of England will not wait until September 2014 before passing judgement on Help to Buy.
A tightening of policy by the Bank of England between now and the election is certainly not in the script, yet it could easily happen. Mark Carney, the Bank’s new governor, put down a marker last week when he said he saw no case for further stimulus through the Bank’s quantitative easing programme. Carney was hand-picked by Osborne to run Threadneedle Street, but is nobody’s fool and nobody’s poodle. He will not want to have his own reputation sullied by being tagged the man who allowed the economy to overheat.
There is tension between the Bank’s guidance that official interest rates will stay low and the upward drift in market interest rates. That tension will become more pronounced if – as expected – the economy continues to grow. Osborne still has many things going for him – not least the reluctance of voters to trust Labour with the economy. But in the past a combination of pegged official rates, rising market rates and unexpectedly strong growth have added up to one thing: a run on sterling. He should have scrapped the second phase of Help to Buy before it was too late. Instead, by bringing it forward, he runs the risk that long before polling day, the Bank will feel the need to show its teeth.