Gordon fiddles while our home values burn

N Collins
4 Sep 2008

Alas, the poor Darling. He's a pathetic sight, frantically touring the TV studios, trying to appear in charge, when everyone can see the strings on the puppet.

Well, once a control freak, always a control freak. Gordon Brown, whose record as Chancellor looks more like luck than judgment with every passing day, could never resist micro-managing. He festooned his Budgets with fiddly concessions which provided jobs for pen-pushers, benefited the few not the many, and only made life more difficult. Now he's at it again.

As with so many of his pettifogging policy ideas, some lucky people might benefit from the Mortgage Rescue Scheme, some less lucky people will be sucked into buying a house in a falling market by the stamp-duty cut or an interest-free loan under Homebuy Direct, and a few much luckier people will get into “affordable” housing, effectively being given an asset which is too valuable ever to give up.

There may be worse to come. Brown is said to be saving up a state-backed mortgage scheme to revive his fortunes at the forthcoming party conference, and he might even tell his Chancellor about it beforehand. As for Darling's Guardian interview last weekend — “They're pissed off, and so am I”— we are so unused to a Chancellor trying to tell the truth we were shocked to hear it. After a decade of Brown bludgeoning with his Pollyanna view of the economy, it came as something of a relief.

Chancellors aren't cheerleaders. They are practitioners of the dismal science of deciding where scarce resources should go, and those resources are going to get scarcer in the next year or so. We are not facing the worst prospect for 60 years, but house prices are still much too high, and the Government should concentrate on managing the decline with the minimum pain, rather than trying to prop them up.

The stamp-duty holiday repeats a Tory mistake, and a Treasury post-mortem on their 1991 suspension of the tax concluded it had made matters worse. House prices did not rise, and “once stamp duty was reimposed, the number of transactions collapsed, and house prices fell sharply”. This report was never published, but HSBC's economists forced disclosure under the Freedom of Information Act.

For homebuyers and owners alike, all this fiddling is irrelevant when compared to the impact of interest rates. Consumer debt is around £1400 billion, and the majority is variable-rate, so every quarter-point off borrowing costs saves consumers about £2.5 billion a year, which is why the best policy is one which gives the monetary policy committee the opportunity to cut Bank Rate. Adding another £1 billion to the Government's borrowing requirement will not do that. The best that can be said is that this sum is merely a rounding error, half the amount the state spends every day of the year.

This is Brown's legacy, after riding his luck during the “nice” decade and bragging about how much more he was spending. Today, only the public-sector union leaders believe there is no scope for dramatic improvements in efficiency in health, education and social security, while austerity provides the perfect excuse to scrap disastrous projects like ID cards, aircraft carriers and the computerisation of health records. Worthwhile projects like Crossrail will have to go too. The way out of this morass is by careful housekeeping, attention to costs and patience.

It would be too much to expect Brown to apply this remedy to state spending, but he might like to bear in mind the words of Palmerston when asked about the need for change. “Change? Change?” the Victorian PM thundered. “Aren't things bad enough already?”

We should ignore this Stern warning

It's two years since the Stern Report was published. Entitled, without conscious irony, The Economics of Climate Change, it was immediately accepted as gospel by the Blair administration, along with its dire warnings of “major disruption of economic and social activity on a scale similar to those associated with the great wars and depression...of the 20th century”.

If we didn't change our ways, we'd had it. Alas, the subsequent two years have been a bitter disappointment to the doomsayers. North America had its coldest winter for half a century, Tuvalu hasn't disappeared under rising sea levels, the hurricanes have been puny when compared to Katrina, and as for the English summers…

So far, the climate-change crusade has done little lasting harm. The main damage comes from the subsidy farmers who are covering the land with their windmills. The official targets for carbon reductions are pure fantasy, and will be missed by a mile before being quietly abandoned. The greatest danger is that the nuclear power stations will close before we've built enough new generating capacity to keep the lights on.

It's obvious in hindsight what Sir Nicholas Stern failed to see; oil had already climbed to the dizzy heights of $50 a barrel, and he mused whether the stocks were big enough to meet demand. Now it's twice the price, shifting huge economic power to the producers and squeezing our living standards, but comparing our plight with the slaughter of the great wars is ludicrous.

At $100 a barrel, we will use energy more carefully, and it will become worthwhile to develop other sources. As any first-year economist could have told Stern, it's supply and demand at work. As for the government, the best thing it can do (as usual) is get out of the way.

Look who's noticed this fine mess

Personal Accounts sound like another bank advertising campaign, but in fact are the official version of Lord Turner's National Pension Savings Scheme, or NatsPiSS. The Association of Consulting Actuaries, whose members spend their lives wallowing in the pension swamps, has surveyed small businesses and concluded that the new accounts will be a disaster.

They don't put it like that — they are actuaries, after all — preferring to refer to the “huge challenges there are in achieving wider pension coverage in small firms”. Between them these 1.2 million businesses employ 9.6 million people, and two-thirds of them have no scheme at all. The blunt truth, as the actuaries do not say, is that the burden and cost of running a scheme would put many out of business completely.

At least the actuaries do say that two-fifths of employees of the smallest firms will exercise their right to opt out of the new system. As ACA chairman Keith Barton puts it: “Ideally, government would best launch auto-enrolment and personal accounts alongside a move to lower personal and corporate taxes.” Ah, come on Keith. Why not just admit that the whole idea is rubbish?

They should be as cross as Punch

Giles Thorley may be happy to be snapped standing behind the pumps, but he isn't really in the pub business at all. His Punch Taverns is a financial construct, built on debt. It's trading “broadly in line with management's expectations”, but there were no expectations the dividend would be scrapped.

The £90 million saved “doesn't really touch the sides” of Punch's £4.8 billion debt chasm, in the words of brokers Kaupthing, but Thorley is having to conserve every penny to redeem a £295 million convertible in 2010.

He claims that the shareholders are supportive (the shares were thumped yesterday after the news) and that starving them allows him “to continue to invest in our estate”. Unfortunately, the Punch website suggests otherwise, with 1350 pubs, or 17% of the estate, “available for lease”. Pubs are gasping, crushed by the smoking ban, poorer customers, supermarket alcohol promotions, and the relentless rise in the cost of compliance with health and employment regulations. It's enough to drive Thorley to the other side of the bar.