24th March 2013
The Budget has been described as one in which the Chancellor George Osborne had to choose between savers and borrowers. The prevailing view, of course, is that he chose borrowers.
But is it really such a black and white choice? Mindful Money considers the issues.
The Budget saw one concrete proposal to help borrowers – a £3.5bn extension of what is effectively a Government-backed shared appreciation mortgage scheme. The Budget extended the scheme beyond first time buyers to other borrowers.
Of course, it is not free money for borrowers but perhaps better described as cheaper money – an interest free loan up to about 20 per cent of the value of the property. Borrowers will be expected to pay the Government back, and after five years, that will be at market rates, but it still represents the diversion of some public money. Maybe that could have helped savers in some way.
But the real potentially game-changing help for the mortgage market is the £12bn guarantee scheme to encourage lenders to extend lending, possibly backing as much as £130bn in loans.
The idea is that the Government will provide a guarantee for part of the mortgages so that lenders will not restrict themselves to lending to those who already own a significant proportion of their house – but also loan to many more high loan to value borrowers more cheaply.
Lenders themselves have extended this sort of mortgage to borrowers but generally this involves parents and family of new borrowers using their own cash or assets to play the role that the Government may now take on.
This scheme has been criticised on many fronts – Robert Peston on his BBC blog argues that this the Treasury taking on housing risk rather than the risk of business loans.
The Guardian reports on the views of mortgage market experts suggesting that the scheme could certainly make high loan to value mortgages cheaper. This could ultimately feed through to higher prices and in many ways make people or certainly homeowners feel a little bit better off.
What is significant however is that the scheme is still really at the drafting stage. Will these loans under the guarantee become a liability on the Government’s books or not?
It is also uncertain how the financial regulators will view the scheme, in terms of the capital it requires mortgage banks and building societies to hold to back their borrowing. Much of the work of the Financial Services Authority on mortgages has been to design regulations to help the UK avoid the worst excesses of the mortgage boom. Without some sort of regulatory compromise on capital requirements, the whole scheme could be non-starter.
Other pessimists have suggested that all we will see is another mini mortgage and house price boom. When interest rates rise, it could merely create another tranche of vulnerable borrowers.
For now, at Mindful Money we think the jury is still out on the scheme. What the Chancellor has done so far is not devote huge amount of national resources, but to try to find ways to adjust the existing system to make what money and resources are in the economy work harder. That approach also underpins other initiatives such as trying to harness pension funds to help convert the High Street’s unused retail space into residential accommodation. But again, it’s not state money.
But what about the savings part of the equation? Well this Budget tweaked the mandate of the Bank of England. The Bank may now say, for example, that it is planning to leave interest rates low of a long time to come. It stopped short of targeting a certain level of employment or GDP growth.
The inflation target stays the same – at two per cent of the Consumer Price Index – though the target must be becoming one of the most missed in economic history. For savers, this new stance brings certainty – certainty that their savings accounts are unlikely to pay very much for a long time to come.
The Government is increasing its National Insurance take from Defined Benefit schemes by bringing in the new state pension reforms early in 2016. This will abolish contracting out. It may also hasten the end of this type of scheme.
There were changes to the total amount you can save in a pension during your lifetime before facing tax penalties – cut to £1.25m from 2014. The trajectory is down and this clearly sends the wrong signal. It also binds in an unfairness between private and public sector pensions.
Yet most of this money appears to be going to the general pot. It is not giving a helping Government hand to borrowers.
We would argue that the Budget wasn’t a victory for one side or the other. It is not, in this case, a zero sum game. Low interest rates and QE helps borrowers, but the real target is helping the UK’s flat-lining economy. Perhaps it is not that borrowers were so much favoured. It is that savers were ignored.