Cheap borrowing since 2010 has fuelled property purchases and cappuccinos rather than skilled jobs and improved infrastructure.
The chancellor’s budget remarks on Tuesday, now downgraded as a “policy-neutral” spring statement, will be a chance to look in the rear-view mirror and see what a missed opportunity the past eight years have been.
It was a period dominated by George Osborne’s portrayal of the UK as a sinking ship, where every Whitehall department needed to be scaled down, welfare spending cut and some services provided by the state thrown overboard.
There was a clear ideological drive behind his mission – one that sought a smaller state and favoured corporation tax cuts while workers suffered a prolonged wages freeze.
There are few thinktanks and significant figures who influenced the debate at the time who still agree that austerity was the right medicine. The Paris-based Organisation for Economic Co-operation and Development and the International Monetary Fund were cheerleaders for austerity in 2010. Both later renounced their support.
They came to see what Keynesian economists saw at the time: that the UK version of austerity was a leeches-and-mercury remedy that meant Osborne was more akin to an 18th-century doctor than a 21st-century economic strategist.
There was an opportunity in 2010, and that was to invest in the country’s essential services with the knock-on effect of creating skilled jobs and a lasting legacy of improved infrastructure. The Bank of England’s stimulus package, which has amounted to the longest period of almost zero interest rates in history and £435bn of quantitative easing, provided the confidence and cheap borrowing needed for higher levels of investment.
The UK version of austerity was a leeches and mercury remedy, with George Osborne more akin to an 18th-century doctor than a 21st-century economic strategist
Instead, Osborne encouraged a coffee culture that meant most of the borrowed funds went on property purchases or cappuccinos and barista wages. It meant more people could be employed in the hospitality trade, pushing employment to record highs. But it was all froth and will probably evaporate when the cheap borrowing comes to an end.
While it might be an exaggeration to say that an end to the era of cheap borrowing is around the corner, the UK is now entering its first year of monetary tightening since the financial crash of 2008. Last November’s interest rate rise merely reversed a post-Brexit referendum cut from the year before. In May there is the prospect of a first material rise for a decade, with another later in the year.
Whatever the Bank’s justification for reducing its stimulus, the fact is that it will effectively be withdrawing funds at the same time as the chancellor, Philip Hammond, presses on with Osborne-like austerity.
There will be another benefits freeze in April and a 3% council tax rise. Inflation may start to come down this year, but wages show little sign of keeping pace, meaning that workers face another year of zero or very low real wages growth.
So it makes sense, just to keep the economy on an even keel, to relax the budget purse strings. The shadow chancellor, John McDonnell, is right to say that austerity has pushed essential services to the brink. He says that the spring statement should contain measures to ease austerity.
And the chancellor has the money to do it. Official figures show that in the 12 months ending in January, there was a surplus in the government’s day-to-day spending over the previous year of £3bn. The overall public spending deficit is below 2%.
The Treasury’s independent forecaster, the Office for Budget Responsibility, is expected to say that future borrowing levels will be much lower than previously predicted.
Hammond will defend his frugality by saying that he needs the money in reserve to cope with a potentially disastrous Brexit. That’s a defence he has used at every budget. Now he must attend to Britain’s fraying fabric or risk lasting damage, Brexit or no Brexit.
Slowing housing market doesn’t need pumping up
Why don’t estate agents look out of the window in the morning? Because then they’d have nothing to do in the afternoon. That was the joke that went the rounds in the early 1990s, when the UK property market went through a savage recession that saw arrears and repossessions rise to levels not seen before or since.
It might not be all that long before that joke makes a comeback. The trade body that represents estate agents says new-buyer inquiries have fallen for an 11th month and that the number of properties for sale has hit a record low. Meanwhile, Britain’s biggest mortgage lender, the Halifax, says annual house price inflation slowed to 1.8% in February, its lowest level in five years.
The last time the housing market was as flat as this, George Osborne to hit the panic button. Mortgage lending was boosted by the cheap credit offered to banks through the Funding for Lending scheme while the Treasury subsidised first-time buyers through help to buy.
Up to a point, the strategy worked. The economy had a sugar rush in which a rising housing market led to stronger consumer demand. Osborne was considered a political genius when the Tories won a surprise majority in the 2015 election.
But then prices rose so high that houses became unaffordable to first-time buyers, even with ultra-low interest rates. And unlike in the 1990s, there is no pressure on homeowners to sell, because unemployment continues to fall and it is so cheap to service a mortgage. The easing back of house price inflation has simply increased the incentive for sellers to sit tight.
Activity will recover, but only when houses get more affordable. That will only happen if prices stay flat and wages rise – which may take some time, given that annual earnings growth is running at only 2.5%.
The government should resist the temptation to interfere with this process, no matter what estate agents say. Low house price inflation is both inevitable and welcome.
Ups and downs of the fracking game
It’s been a rollercoaster fortnight for Britain’s nascent shale industry. First, frackers received the perfect gift to bolster their case that the UK needs to extract the gas beneath its feet, when freezing Siberian weather and supply problems forced National Grid to issue a plea to markets for more gas.
A sudden record-breaking jump in prices meant more gas flowed to the UK and no one suffered a shortfall, but the shale industry was quick to seize on the episode as evidence the UK is over-reliant on imports. With the UK importing 60% of its gas today, and National Grid expecting that to rise to 93% by 2040, it seems like a compelling argument.
But then came the setbacks for shale firms last week, which raises the question of whether they will ever get round to extracting gas buried in rocks deep underground.
First, Third Energy started dismantling and removing crucial equipment at its site at Kirby Misperton in North Yorkshire because of delays stemming from government checks on its financial health. A day later, the Barclays-backed firm announced that, rather than becoming the first company to frack in the UK since 2011, as expected, it would now postpone work until autumn.
There was more to come. UK petrochemicals firm Ineos suffered its third rejection by a local authority this year, when Rotherham borough council turned down its bid to drill near the village of Woodsetts. Other shale firms have also been knocked back in recent weeks.
The shale industry says such delays are to be expected in the energy business, and are no different from those facing nuclear and renewables projects. But there is no getting around the fact that there have now been years of false dawns for UK shale. The industry hasn’t even begun its exploration phase, let alone commercial production.
All eyes are now on Cuadrilla, the Lancashire-based firm backed by British Gas owner Centrica, which has also been repeatedly delayed in its efforts. If Cuadrilla can start work in Lancashire in June, as it claims, it would finally show the industry can do more than just talk.
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