No wise person criticises cats for trying to catch mice. It’s what they do. It’s part of the job description for being a cat.
Likewise, we should expect politicians to try to win elections. But this does not mean that we should watch their electoral manoeuvrings without comment, particularly where those activities are gravely damaging to the general public.
With government clearly planning a property-based borrowing binge ahead of the election, here are a couple of figures that might give you pause for thought:
– Over the last ten years, the annual disposable income of the average British wage-earner has increased by £2,080.
– Over the same period, average household debt has increased by £28,300.
Now I know that the average worker and the average household are not quite the same thing, but they are close enough for this to be a valid comparison. Some households are workless, and some are retired, but it’s difficult to rack up debt without an income, so the comparison is close enough.
Since 2002, then, average household debt has increased by £13.60 for each £1 increase in average disposable incomes.
And now George Osborne wants people to borrow more?
Yes, he does. The “Funding for Lending” scheme is intended – I quote government here – to “create incentives for banks to increase their lending to UK households”. ”Help to Buy”, meanwhile, will guarantee up to 20% of the cost of buying properties up to a maximum price of £600,000. (Just for the record, average property prices are £168,000 in Britain as a whole and £287,000 in Greater London, so this isn’t aimed at first-time buyers).
Let me explain my figures here. Between 2002 and 2012, average wages increased by £6,480 (36%), from £17,910 to £24,390. Of this nominal increase, however, £4,400 (68%) was eaten up by the 62% increase in the cost of essentials (as measured by the TM UK Essentials Price Index), leaving disposable incomes just £2,080 (19%) improved.
Second, average mortgage and credit debt per household increased by £28,300 – from £31,510 to £59,810 – over the same period.
Let’s remember how often the Conservatives and the Liberal Democrats have accused Ed Balls of trying to borrow Britain’s way out of a debt crisis. It’s a valid criticism. But now, instead of the state loading up on debt, as Labour would have liked, households are going to do the borrowing instead. Either way, then, the panacea to a debt-burdened economy is more borrowing.
The logic, of course, is that rising house prices will make consumers more relaxed about loading up on credit, giving the economy a Brown-style ‘borrowed growth’ spurt in time for the election. Two questions surely have to be asked – will it work? And should it?
Well, pumping up a credit bubble ahead of an election has worked before. This time, however, we ought to take note of what is happening in bond markets, which could wrest control of interest rate policy out of central bankers’ hands long before the 2016 “guidance” date for the continuation of cheap money.
As for whether it should work, I’ll leave that to you. But my sympathies will be with first-time buyers when – and, I emphasise, when, not if – rates rise from their historic lows. Anyone sucked into taking on debt over the coming couple of years is likely to learn, the hard way, that anyone supping with the official line on monetary policy should do so with a very long spoon. As savers, of course, have already learned to their cost.