We may not have heard the champagne corks popping at the treasury on Thursday, but I would not be surprised if George Osborne raised a Pimm’s to celebrate the 0.6 per cent uplift in Quarter 2 GDP growth figures that were released by the Office for National Statistics.
Indeed, it is good to hear that the economy is now, at last, growing, albeit at a pace much slower than Osborne or anyone else would like. All four core industrial sectors increased output in Q2 compared to Q1 with marginal improvements for the manufacturing and construction sectors.
However, it is important not to get too carried away. Let’s remember that the economy is still 3.3 per cent smaller than it was five years ago and compared to other G7 countries, our recovery has been at best, flat. Adding to this, as reported earlier this year, real wages have fallen by about three per cent since 2010, against consumer price inflation averaging 3.5 per cent over the same period.
Against this backdrop of negligible growth, I believe that there may be a real issue moving forward in the years to come, with one policy idea, the governments ‘Help to Buy’ scheme, likely to make things worse.
The scheme, launched in the spring, has the potential to cause real harm for the UK economy in the medium term. The fundamental aim of the three-year scheme is to stimulate the economy by stoking the housing market, with the government providing state guarantees of up to 20 per cent for homebuyers. In a nutshell, if you want a house but can’t afford it, don’t worry; taxpayers will help you buy it.
In an excellent piece in the Spectator Fraser Nelson goes one step further, believing that the policy is the equivalent of providing sub-prime loans to those who can’t afford mortgages. And let’s not forget, it was these subprime loans that got us into this mess in the first place!
The fundamental mistake Osborne has made however is not just the fact that this policy will ultimately lead to a housing bubble, inflating prices above what the market dictates, pushing house prices further beyond the reach of ordinary people. Nor is it the fact that the policy will create a false sense of security for those who participate in the scheme, many of which may believe that the value of their house makes them ‘cash’ rich, leading them to extend their personal borrowing against the value of their new home. And let’s not talk about the financial risk to the taxpayer, mooted to be about £12-15bn.
The overarching mistake is that this policy will have very little effect on addressing the core issue at the heart of our economy – that consumers and businesses do not feel secure enough to spend or invest.
One of the primary focuses of any government should be the provision of economic security for its citizens and the best way to do this is through providing security of employment. And one proven way to do this, as suggested by the economist John Maynard Keynes, is for government to invest in creating medium-term employment opportunities when exiting a depression, which will lift aggregate demand across the whole economy, rather than just individual sectors.
As closer inspection of GDP figures show, construction and manufacturing are still well below where they were in 2008. Such poor sector performance, five years on from the crash, is unacceptable and flies in the face of the pledge the coalition made in 2010, that they would use their time in power to rebalance the economy.
However, I doubt that Osborne will listen given that he has already knocked back criticism about ‘Help to Buy’ from the former governor of the Bank of England Mervyn King, the International Monetary Fund, the Office of Budget Responsibility and the treasury select committee.
Rather than focusing on a smoke and mirrors policy that stimulates house price inflation, creating and artificial sense of security, Osborne should concentration on building an economy where business feels secure enough to invest in factors of production. This will lead to employment growth and increased GDP output. And this can only be achieved by borrowing to invest – investing in capital projects that are not 15 years down the line, but can get off the mark now, such as building houses, schools and new healthcare facilities.
Osborne has had three years to get UK plc back on the front foot but he has thrown the opportunity away. All I would say to him is that if you build a house on shaky foundations, eventually, it will come crumbling down.
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Credit: BeingSelfEmployed.org