I remember the days when Budget day was exciting. OK, quite exciting.
Before we had a pre-Budget report and comprehensive spending review things were unpredictable. Now, each autumn, the chancellor uses the pre-Budget report to announce exciting measures he will announce all over again in the Budget.
And the comprehensive spending review gives a sense of direction anyway, so the Budget has become a mere refuelling stop (but don’t mention fuel tax, as that tends to focus voters’ attention).
I suppose we must regard the pre-Budget report and comprehensive spending review – both instigated by Gordon Brown – as part of his famous ‘end to boom and bust’. Readers will recall that Brown introduced this man-tra as chancellor, although it has notably been used less of late.
Presumably, the general idea is that the Budget should not contain shocks that might spook the markets so now, shock economic announcements are made not in the Budget but on seemingly random occasions such as on quiet Sunday afternoons when the An-tiques Roadshow may distract attention from an announcement to nationalise the UK’s fifth largest mortgage lender.
Given that the Budget is not meant to contain surprises, can we expect anything to promote home ownership on March 12?
Given global economic pressures, expectations are low but I’m an optimist and disagree with those who say that now the gov- ernment has a stated aspiration to extend home ownership to 75% we will hear nothing more about how this might be achieved, particularly as home ownership shrank last year.
I could say that this year the chancellor may be persuaded to put fairness before income generation in his stamp duty policy, but that only tends to happen at general election time – and then only for first-time buyers in Labour heartlands.
It remains true that the best thing would be a significant hike in the stamp duty threshold. As well as helping first-time buyers, this would sustain market confidence at a time of fewer transactions.
But fiscal drag has turned stamp duty into a nice earner for the Treasury. It yields a whopping 10 times more a year than it did in 1997. Only once in 11 years has the government done anything significant to cut the impact of stamp duty.
That was in 2005 – an election year – and the effect was small. So few houses were bought below the new £120,000 threshold (and all of them north of Birmingham) that the concession only cost the Treasury around £250m a year in foregone duty.
A year later, when it announced another £5,000 rise in the threshold, the government knew house price inflation would wipe out the impact of the gesture in three months.
Can we expect it to take a different view now? In a less certain environment, the cost of stamp duty is likely to be a deterrent to moving. Individuals are likely to absorb transaction costs if they think they will be offset by growth in the value of their homes. With the scope for cuts in interest rates limited, reducing stamp duty is one of the few options the government has to reinforce market confidence.
Will the chancellor restore our confidence in his ability to deliver on policy objectives? If he doesn’t, what is the government’s strategy for extending home ownership to three-quarters of the population?
So far, we have seen modest measures such as shared equity proposals. We’ve also had a reminders of the benefits of 25-year fixed-rate mortgages but uptake has been low.
A government alive to challenge would see the Budget as an opportunity to reinforce the safety net for home owners. Income support for mortgage interest has been woefully inadequate since it was slashed by the Tories in the mid-1990s. If the government converts state support for home owners into second charges on properties it could provide much more help for owners in difficulty without excessive cost to the state.
The funding of long-term fixed rates is likely to be in the spotlight, as are proposals for a gold standard for covered bonds and mortgage-backed securities.
UK residential assets are better quality than those in the US so action to improve liquidity in wholesale funding would be welcome but we must be careful that introducing a gold standard does not undermine confidence in securities that don’t fulfil requirements, making them base metal.
All things considered, the forthcoming Budget could be the most exciting for years and I, for one, can’t wait.