Greetings from New York.
I have been busy on this side of the Atlantic for the past couple of weeks, hence the lack of blog posts, but have been prompted to write by a sequence of developments.
First there were reports that the government is considering plans to stimulate housebuilding. These were followed by an open letter from Alastair Darling the former Chancellor in which he urged the government to change course and take ‘urgent action to promote growth’ including building more houses and other infrastructure projects. Then this was followed by the grim figures for the public finances just in. July is usually a good month for the taxman, such that government finances were in surplus (by £2.8 billion) this time last year. The latest figures, however, reveal a sharp (£3.4 billion) deterioration, to a deficit of £0.6 billion.
These figures come as no great surprise to me or my colleague Dr Tim Morgan who publishes research for Tullett Prebon. We have both been warning that there are in effect no spending cuts despite the propaganda to the contrary and that the growth on which the government was relying to correct the deficit would not arrive. Now it is proving to be so.
I suppose I also shouldn’t be surprised that both the government and Alastair Darling put forward housebuilding as one of the solutions to this problem of a lack of growth. Neither seems to have considered the following factors:
1. An obsession with home 'ownership' (with a 100%+ interest only mortgage-hence the inverted commas) was part of the cause of the financial crisis;
2. In the most successful economy in Europe-Germany-less than half the population own their home; and
3. No one has ever managed to export a house.
By the way, the government is talking about promoting 'affordable housing'. For those of you familiar with Hutber’s Law, if there is such a thing as 'affordable housing' what does that make the remainder?
So I am not surprised that the UK’s public finances are deteriorating rather than improving, or that the government and at least one member of the Opposition think that promoting more housebuilding is part of the solution rather than the problem, but I must admit I am surprised by Alastair Darling’s intervention because I had him in the sensible camp. It’s particularly disappointing that he points to the current low interest rates as evidence that the government could borrow to undertake a programme of building infrastructure projects and houses. He seems to have missed the fact that such rates exist: a) because of the contrast between the UK’s statements on correcting its deficit and the train wreck which is taking place in the Eurozone. Of course, at any moment, the bond markets may just spot that this is all baloney. The July public finance figures are just the sort of catalyst for this; and b) the government owns over a third of its own bonds through the Quantitative Easing programme. It is unlikely that the government will set the same rate at which it will buy its own bonds as an external investor would.
At some point someone like Ed Balls or Alastair Darling may get to a position of power again and launch a policy of increasing borrowing even more than it is growing already (bear in mind that the public debt is still rising-they are trying to reduce the deficit, there is no likelihood of a surplus) in order to pursue this attempt to borrow and spend their way out of debt crisis.If they do, it will be amusing to watch the outcome, from a safe distance.