‘The world’s gone mad’ – Institute of Directors on Osborne’s Help to Buy scheme

Yesterday was probably a good day to bury bad news. It was also very probably an opportune moment to promote a bad policy in the hope that it would slip under the radar of those with critical voices.

World's gone mad

Yesterday was probably a good day to bury bad news. It was also very probably an opportune moment to promote a bad policy in the hope that it would slip under the radar of potential critical voices.

Perhaps it should not have been a surprise, then, that chancellor George Osborne chose yesterday to reveal more details of his Help to Buy scheme, which will essentially underwrite £130 billion of mortgage lending with state money.

The scheme was first announced in April, and yesterday Osborne promised stricter testing of those who can afford mortgages and a ban on second home purchases through the scheme.

That more flesh was put on the bones of the Help to Buy scheme at a time when much of the media was distracted, however, has not stopped the criticism pouring in, with the chief economist at the Institute of Directors (IoD) calling the scheme “dangerous”:

“The housing market needs help to supply, not help to buy and the extension of this scheme is very dangerous,” said Graeme Leach, chief economist at the IoD.

“Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued.

“When the scheme is withdrawn any rise in prices that has taken place will be undermined, with potentially disastrous results.

“There is a real risk that the housing market will become dependent on the underwriting by government, making it very difficult politically to shut the scheme down. This should be of great concern.

“The world must have gone mad for us to now be discussing endless taxpayer guarantees for mortgages.

”Instead of trying to pump-up prices, the government should focus on relaxing planning laws and reducing Local Authority charges on developers to make it easier to build more homes.”

This follows hot on the back of criticism of the scheme when it was proposed by the treasury earlier this year, with former United States secretary of the treasury Larry Summers saying the scheme went “against basic things taught in economics textbooks”.

And in June Albert Edwards of French bank Societe Generale called the policy “truly moronic”

“I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business,” he said.

Presumably, having refused to stimulate the economy with significant investment, Osborne is hoping for an economic recovery on the back of another housing boom.

As everyone apart from Osborne seems to realise, however, the last house price boom didn’t end particularly well.

12 Responses to “‘The world’s gone mad’ – Institute of Directors on Osborne’s Help to Buy scheme”

  1. OldLb

    It’s a bonkers policy. Driving up property prices and the state underwriting the risk is just mad.

    IOD is correct.

    1. Deal with the demand. ie. Curtail low skilled migration. The easy solution which has huge other benefits, such as cutting the welfare bill.

    2. Stop accruing pensions debts. ie. Divert NI into savings accounts. Not only will people be better off but the growth generate is huge.

  2. TristanPriceWilliams

    So we bail the banks out because we need them to survive to keep the wheels of the economy turning. They then refuse to lend the money we have given them. We accept this and set up a fund to do their job (or the slightly riskier side of it) and they keep the money so their books look good and they can pay big bucks.

    Sounds like the Tories and Alistair Darling.

  3. VacantPossession

    Sounds suspiciously like Fanny Mae… Politicians manipulating markets using our money and ultimately failing.

    Guess who ends up with the bill. (unless you are on welfare).

  4. madasafish

    So how will we replace the NI money? Cut spending? Or raise taxes?

  5. OldLb

    Cut spending. There’s a solution for you.

    Now, the pensions debts come to 6,500 bn according to the ONS. It’s rising at 734 bn a year. Taxation raises 600 bn. Spending currently is 722 bn. The gap is 122 bn + 734 bn or 856 billion this year alone. [All government figures]

    So you need to find an extra 856 bn of taxes on top of 600 bn currently being taxed, just to stand still.

    So what’s your plan for paying the pensions?

  6. OldLb

    They have lent all the money they have been lent. Bar the odd bit of bailout money to RBS etc, they haven’t been given they have been lent.

    What have they done with the cash? Exactly what the government insisted they do. Lend it back to the government who has spent it.

    What made you think that the money (QE) was to be used to lend into the real economy?

    On top, the government has lowed capital ratios for the banks. If you drop the ratio from 12 times geared to 8 times geared, then you have to call a huge number of loans. Similarly, if someone defaults on a grand, and you are 12 times geared, you can’t loan 12,000 any more.

  7. madasafish

    Well it’s obvious. Increase the pension age to 70 for men and women.

    If you have paid no NI, pension halved. And thereafter a sliding scale based on years of NI payments.. (I mean actual payments )
    Cut pensions by 25%.

    And so on.

    Anyone who thinks the UK State pension is affordable is deluded .
    It’s hardly rocket science…

    And giving the bill to our children is criminal… they should and will refuse to pay.

  8. OldLb

    It’s not that obvious.

    The debts increasing at 850 bn a year.

    So you need a combination of cuts and tax increases that come to 850 bn a year to stand still.

    So what does a 26K a year worker lose by your 5 year increase from 65 to 70?

    1. 5 years lost income. 25K taken from someone who only earns 26K a year.

    2. 5 years more NI. Another 25K taken.

    Hmmm 50K lost for someone earning 26K a year.

    http://en.wikipedia.org/wiki/National_Insurance_(United_Kingdom) contains a table.

    84 bn in. 93 billion out.

    So on the pensions that’s 80 bn. You’re going to save 20 bn from the cuts part.

    So you’ve got another 836 bn to find.

    OK, so 5 years extra work on a 40 year working life, is 12.5% extra income [Roughly] 10.5 bn. Lets call it 11.

    Ok, now there is another 825 bn to find.

    Now in that increase are civil service pensions. By how much are you going to hit them?

    Now I think you’ve cottoned on why you point out those that think tis affordable are deluded. I agree. The biggest impediment there is the hidding of the pensions debts off the books.

    I also agree giving the bill to the children is criminal. Not paying the pensions is also criminal.

    So what’s going to happen. Well on the wikipedia link above, there is one important bit of evidence. Compare income to expenditure. It’s already tipped. 7 bn a year deficit, and its going to rise.

    Now they have some funny money (25bn of loans from the government to the government). That goes in under 4 years. First thing to watch for.

    Then they have to start sqeezing more.

    1. Raise retirement age. – Inevitable

    2.Break the triple lock.

    3. Means testing.

    4. Cuts in civil service pension with exceptions for judges. Have to force it through the courts. They are already exempt from lots of pensions law.

    [Starting to look like Greece]

    Then whole scale default.

    5. Confiscation of private pensions and company pensions, replaced with a promise that is then broken. See Hungary for an example, ruled legal by the EU.

    Now if you can’t pay pensions you can’t pay welfare in its place.

    So here are some other things to look out for

    1. Caps on welfare spending.

    But never discussed in conjunction with

    2. Pensions are part of the welfare budget.

    ie. Get people to argue for cuts, not realising they are the target.

  9. EppingBlogger

    Blimey – the left complaining about an asset bubble.

    It’s not a NuLab asset bubble so it’s definitely not OK.

  10. Brian Powell

    How about making the super rich pay 12p in the £ National Insurance on every £ they earn. At present someone who qualifies to pay 45% income tax rate only pays 2p in the £ NI on every £ that is income tax rated at 45p. That should help take care of the pensions shortfall to come. Then make it illegal for the chancellor of the exchequer to touch the NI fund, as Gordon Brown did when he robbed billions from it.
    Another way to get the government out of the financial mess it has created is to make everyone pay the tax they owe. Including international corporations and if they don’t, bankrupt them.

  11. John Ruddy

    A good idea, however, there needs to be some corrections – firstly, there is no NI “fund” it always has gone into general taxation.

    Secondly, Gordon Brown didnt rob billions from it (partly because it doesnt exist), he increased NI to pay for a better NHS.

  12. Brian Powell

    John Ruddy I am afraid you are very badly educated on NI.
    National Insurance has never been part of general taxation and is kept in a separate fund to pay for people’s pensions. When he came into power as Chancellor of the Exchequer in 1997, Gordon Brown did in fact ruin the pension funds of the business world by removing their tax relief. His idea was that because these funds were so cash rich, they could afford to lose between £5 and £6 billion a year. Later on he did raid the NI fund, as it has always been called. I suggest you read an article by Alex Brummer in the Mail-On-Line dated Wednesday 09 – 2013. This deals with the robbery that Brown and his accolytes, including Ed Balls committed on the general public who had been paying into private pension fund schemes for years and it’s part in setting up the economy for the future fall that happened.
    I also suggest you check, very simply by googling ‘national insurance fund’ and reading the article in Wiki-pedia, on the existence of this fund.

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