By Michael Baxter
If house prices boom all over again, then the chancellor may be able to take much of the credit. In fact, it rather looks as if he is gambling on rising house prices. It’s a shame, because there is something else the UK really needs to rise, and that is its stock of entrepreneurs and wealth creators.
George Osborne is spending £3.5 billion on helping people chasing a new mortgage, that’s a lot. He is also guaranteeing £130 billion worth of mortgages. That is a risky thing to do, but perfectly safe, if, and it is a big if, house prices rise.
The plan then is for the UK government to extend its share equity scheme, such that the government will offer an equity loan worth up to 20 per cent of the value of a new build home to anyone looking to move up the housing ladder. House buyers will be required to put down a five per cent deposit from savings, and the government will then loan a further 20 per cent interest free for the first five years and repayable when the house is sold.
“It’s a great deal for homebuyers” said George.
The government will also offer a new mortgage guarantee, to be available to lenders to help them provide more mortgages to people who can't afford a big deposit. These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending. In all, the government will guarantee £130 billion of mortgages.
These are bold moves. But what affect will they have?
The risk is that these measures will push up on house prices. House prices will soon become unaffordable again, but for a new reason. At the moment the challenge for home buyers is raising finance. If house prices rise, the challenge will relate to being able to afford a mortgage, even if the finance is available.
If the government really wants to help more people own their own homes, it needs to try and get house prices down, not up. It can do this by taxing land that is lying idle, and reforming planning regulation. It can do this by forcing zombie banks and home builders to revalue the value of land on their balance sheets. Such measures will benefit the UK in the long run, but will be hugely controversial.
You can’t blame George for not implementing them, because if he didn't an election disaster may await, but it would have been the right thing to do, nonetheless.
For too long the UK has grown on the back of rising house prices, giving consumers confidence to borrow and spend.
The UK needs to grow via businesses making bold investments, entrepreneurs creating wealth by dint of their ingenuity, and through creating an innovation culture in which innovators are not afraid to risk failing.
Instead George tweaked. Sure corporation tax is falling to 20 per cent; “the lowest business tax of any major economy in the world,” he said. But US companies are sitting on $1.4 trillion worth of cash, according to Moody’s. Companies in the UK and across the world have money, they are not spending it.
Cutting UK corporation tax will give the UK an advantage over rivals, in much the same way that a trade subsidy would benefit UK exporters, but it will do nothing to solve the problem of cash lying ideal and sitting on corporate balance sheets around the world. There is a case for saying we need to see a fixed level of global corporation tax. Mr Osborne is pushing for the opposite.
The chancellor is also cutting £2,000 from every employer’s contribution to national insurance. This is a bold move. George put it this way for “a person who's set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000, or four people on the minimum wage, and pay no jobs tax.” Hats off to George, that is an interesting move.
But the UK’s underlying problem is productivity. According to the ONS, output per hour in the UK was 16 percentage points below the average for the rest of the major industrialised economies in 2011, which was the widest productivity gap since 1993. On an output per worker basis, UK productivity was 21 percentage points lower than the rest of the G7 in 2011. To enjoy sustainable growth, the UK needs improvements in productivity, reducing the tax on jobs will not help.
The chancellor announced other measures: a fivefold increase in the value of government procurement budgets spent through the Small Business Research Initiative, vouchers available to small firms seeking advice on how to expand, but these are little more than tinkering.
The most interesting idea to help business may have been his plan to cut stamp duty on shares traded on the AIM market. The chancellor said “Many observers of the British tax system complain that it has long biased debt financing over equity investment.” So the reform to stamp duty will encourage equity investment over debt.
Now it time to turn to the missed opportunity. What entrepreneurs need is hard cash. Money they can see, touch and smell.
Supposing that £3.5 billion sent aside to help home buyers was instead spent on funding entrepreneurs, perhaps spent on a sort of student loan system but for entrepreneurs, or just invested into venture capital firms and business angel networks. Now that really would have created the foundations for the UK to become the most dynamic economy in the world.
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