Wednesday, April 2, 2014

George Osborne's budget and the recovery: flying with your eyes closed

George Osborne's recent budget has been considered much more accomplished than his infamous "omnishambles" budget of 2012. Then again, that wasn't difficult to achieve.

There are two stand-out changes brought in: the "reforms" to the pension system, that allow someone to "buy back" their pension once they reach retirement; and the the expansion of the ISA system to allow people to save more of their money at a higher interest rate each year. Also, the "help-to-buy" scheme is being extended further. More on that point later.

On the first two points, what's clear is that from these stand-out changes, Osborne is marking out his political territory quite ruthlessly, aiming for the "strivers" on one hand, and those reaching the end of their working lives with the other. The first problem with this approach is that it looks too obviously political in its motivation (as was with the budget this time last year), and more importantly, demonstrates how Osborne's sense of priorities are all wrong.

Dealing with the wrong problem

As Andy Burnham wonderfully pointed out on BBC's "Question Time" about the budget recently, these changes make it appear that Osborne thinks that the main problem British people have is not being able to make the most of their savings. In reality, many people are simply struggling each month to manage paying the bills and not get into debt. Many others cannot manage without using their savings, and for still others, living with debt each month is now the norm. For these people, Osborne has no answer.

In other words, Osborne's budget looks like it benefits those who already have a decent sum of money stashed away, but are unable to make the best use of it financially. These stand-out measures simply help most those who are already earning well above the average national income. To remind ourselves, the average national income is around £25,000 pa. For many people on that salary, it is near-impossible to save any serious amounts of money to start thinking about making better use of ISAs or buying back their pensions. These are the daydreams of the comfortably middle-class; not the average family.

These changes simply demonstrate Osborne's out-of-touch view of Britain, thinking that they could seriously benefit most people. In reality, they can only truly benefit (and politically influence) people who already vote Conservative, or may consider voting Conservative. This is the clinical political calculation behind these changes that Osborne has no doubt thought about: how will they go down in the marginals?

Not dealing with the real problem

Meanwhile, Osborne has further extended the "help-to-buy" scheme, another partly political ploy. The effect this has had on the property market is there for all to see: an out-of-control property bubble that is economically separating London and the South-east from the rest of the country. I wrote about this same topic in the article I wrote this time last year about Osborne's budget then. Since then, as experts have predicted, the disparity has grown further.

The statistics speak for themselves, in the link in the "Telegraph" article. Economically, Britain is two countries, which are getting further apart economically under the current housing and credit policy of the government. In some ways, the current property bubble (calling a "housing boom" just seems deluded and completely missing the point) is even worse than that which ended with the financial crisis. For a start, current London housing prices are twenty percent higher than they were in 2007, before the market crashed. This is insane. There is no economic logic to this whatsoever, other than that it is being inflated by artificial (and extremely dangerous) factors. People in London are not twenty percent richer than they were in 2007; practically no-one in Britain is. The only explanation for this is reckless speculation, rich foreigners inflating the average price, and Osborne's "help-to-buy" scheme.

Osborne's "help-to-buy" scheme is economically more dangerous than anything Labour did because it is essentially state-sponsored property inflation. This is the worst form of "help" imaginable for many people, especially in the South-east of England, where the property market is already far overpriced. It simply gives a green light for the market to "factor in" the extra cash available to buyers.

No-one in government seems to have the intellectual capacity, or political courage, to do the only thing that can make the housing market sane again: build lots more houses, and therefore bring down the price of property down .
The evidence suggests that Osborne simply doesn't want to go down the road of a state-sponsored house-building programme for three reasons: first, the effects would be long-term, and so there would be little short-term political benefit; second, it gives an open goal to Labour to call him a hypocrite; and thirdly, it would be electorally suicidal on the opinions of those who live in the "marginals".
Because property has become ingrained into British psyche as the ultimate "must-have" asset (as opposed to Germany, where no such attitude exists), people would find it hard to understand that more houses are a good thing for the country; they would only care about the effect it has on the value of their "asset". This pervasive mentality has also been the result of thirty years of right-wing neo-liberalism.

Britain as a one-trick pony

Thirty years of Conservative economic orthodoxy had their effect on Labour, because although they made some modest improvements to social affairs, from an economic point of view, they simply followed on much of what the Conservatives had done before. While its undeniable that Labour spent too much money, the Conservative implication that "they're paying down the debt that Labour left" simply misses the main point. Why did the financial crisis happen?

The Conservatives seem keen to play up the idea that the "austerity" that Britain faces is because of Labour overspending. It isn't. The "austerity" we're facing is because the financial system (in Britain as well as around the world) collapsed because the banks got into massive debts dealing with money that didn't exist. The banks ignored the first rule of economics, because they thought they were smarter than the system. They weren't, and now that the British Labour government bailed out the banks' stupidity, the taxpayer is left paying the bill in the form of "austerity".

The real mistake that Labour made in power was that, in terms of economic policy, they were too similar to the Conservatives. Labour wanted to out-do the Conservatives in kissing-up to the financial sector while in power, feeding it full of financial steroids and turning a blind eye to their conduct in order to cover over the lack of serious investment in others sectors of the economy. In this sense, Blair and Brown in power simply followed much of Conservative financial and economic policy. This is the truth that the current Conservative government cannot be seen to admit.

After thirty years of neo-liberal economic policy, Britain is now so reliant on the London-centred financial sector, those in Westminster don't know how else to run the country.

Britain now has one of the highest household credit problems in the Western world, due to a combination of high cost of living, a "credit card culture", and the ease of getting credit from banks and people like "Wonga", even after the lessons of the financial crisis. The "recovery", as people in the know are aware, is a London-centred affair, dependent on a weakness for credit, which acts as a fuel on spending. Where does all this "money" come from?

Like many people spending in the high street, George Osborne doesn't seem to fully know where the "recovery" has come from. Like many others, he is flying with his eyes closed. He should look for the wall that may be fast approaching...

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