Britain’s bank mortgage market is still imploding

If you wanted evidence of the problems in the UK mortgage market, look no further than this chart from the British Bankers Association. Mortgage lending annual growth has just dipped into negative territory for the first time since comparable records began*. Full details on the BBA site.

* Well actually, strictly speaking, the first time it dropped into negative territory was last month, but you can see the trend in the chart above.

Further proof, if it were needed, that Britain is the most regionally imbalanced economy in Europe. Chart from Capital Economics. For more on this subject see here.

George Osborne, the IMF and why Plan A never existed in the first place

Here’s a prediction: tomorrow morning some of the country’s esteemed newspapers will run stories saying the International Monetary Fund has just dealt a fresh blow to George Osborne, blasting his fiscal plans. At the same time, some newspapers will run stories saying quite the opposite: declaring a victory for the Chancellor and that the IMF has watered down its criticisms of his plans.

How is this possible? Can they both really be right? To understand, it’s worth stepping back and considering the story.

Yes, in strict terms, the IMF has come out today and told Osborne they want him to change course. They want him to borrow slightly more in the short run in order to fund capital investment projects. Their assessment is not particularly flattering about Help to Buy (who is these days?) and their verdict on the banking system is worrying.

In strict isolation, this does indeed count as an official rap on the knuckles. The reason why many, including myself, consider this to be something of a softening, is that the IMF’s tone was far, far sterner only a month ago. In Washington, the Fund singled out Britain as a country which should consider changing its fiscal plans. The chief economist, Olivier Blanchard, warned that the kinds of policies Osborne was pursuing amounted to “playing with fire” in economic terms.

All of that gave the impression that the Fund was considerably at odds with the Government in simple policy terms. The reality, as depicted by today’s Article IV report, the annual assessment of the UK economy, is quite different. The Fund hasn’t provided a detailed spreadsheet of the kinds of fiscal policies it is suggesting for the Government, but even if you take its advice that ideally the Chancellor should increase spending in order to counterbalance £10bn of austerity this year, that would equate to £5-10bn of extra spending. That’s not tiny, but nor is it enormous.

Nor is this particular brand of spending all that different to what the Government has already done – bringing forward capital expenditure that was previously planned for future years to the present year. Over the course of the forecast horizon (usually three or four years although they’re not specific in this case) the IMF admit that their suggestions are fiscally-neutral, in other words any extra borrowing this year should be balanced out by less borrowing in future years.

The main disagreement (and I don’t want to downplay its significance) is that the Treasury doesn’t want to borrow any more than it already is this year. It agrees that it should and could spend more on capital investment projects (building sites, in short) this year, but insists that if so it will need to cut spending elsewhere. This betrays the Chancellor’s (political) fixation with bringing down the deficit year-on-year.

However, it’s very difficult to construe this as grounds for a major row. There is still a difference of opinion between the Treasury and IMF, but it amounts to fiscal fine tuning rather than a fundamental divergence in outlook.

And this brings me to a broader point which is worth dwelling on. The vast majority of the political arguments over austerity amount to quibbling over tiny fiscal differences – whether it’s the difference between the Conservatives and Labour; or between the Treasury and the IMF. No-one – honestly no-one – disagrees with the very broad framework for the plan: Britain needs to reduce its deficit pretty fast, but not at a speed that unduly harms the economy and prevents it from recovering. Most of the time, the differences between these alternative plans are smaller than the normal margin of error on economic forecasts.

In other words, there is no such thing as Plan A – or indeed Plan B. There are differences in tone; there are differences in attitude, and there are alternate philosophies. But by any reasonable analysis, there is only a paper-thin distance between what the Treasury is planning and what the IMF wants – or indeed what Labour proposes. The reductio ad absurdum in this is, of course, that George Osborne has now borrowed more than Alistair Darling pledged to at the time of the last election.

In part, this is because the actual level of control policymakers have over spending is far less than is often assumed, because the size of the welfare state – and thus the so-called automatic stabilisers that kick in when people become unemployed and the total benefits bill rises – is so large. In part, it is because, for better or worse, there is actually a broad-based consensus behind economic management. But the upshot is that what are often depicted as fundamental fiscal differences in fact amount to mere quibbling.

Which is why arguably the fiscal section of the IMF statement is the least interesting part of all. The Fund believes Britain’s banking system remains in some trouble. It believes the Government may have to pump extra cash into the semi-nationalised banks, RBS and Llloyds. These are more intriguing criticisms; ones the Government would be wrong to ignore.

And yet it is “Plan A” and “Plan B” that hog the headlines. One can understand why: the Chancellor made key pledges on the deficit, on which it is far easier to judge him than on the complex world of financial reform. But, in the grand scheme of things, the IMF making vague micro-suggestions about his fiscal plans simply isn’t a rift of the scale some would like it to be.

Osborne 1 IMF 0

After all the fuss the International Monetary Fund has made over the past month about the need for the UK to change course on austerity, about how George Osborne’s policies are “playing with fire”, one might have expected a harsh verdict from the Fund in its annual survey of the UK today.
In reality, the report is far less stern on the Chancellor than many had anticipated. Yes, there’s plenty of verbiage about the problems facing the economy: about the fact that growth has disappointed, that per capita income is still 6% below the pre-crisis peak, that risks facing the economy remain significant, and that the financial system remains in poor health.
However, the critical parts of the document – those that deal with the Chancellor’s fiscal plans – are far more measured, far less critical, than the Fund’s previous comments might have indicated.
For one thing, the report seems far more focused on slight shifts to the timing of various spending measures (bringing forward capital investment) rather than recommending a massive spending blitz. Rather than saying that Mr Osborne should replace his plans with an alternative, it says he should consider “Further modifying the composition of consolidation to boost growth”. It mentions a couple of possible options on this front: “reducing marginal effective corporate tax rates” or “introducing tax allowances for raising equity”. However, crucially it mentions that these should be offset by higher taxes on property and more VAT-raising measures.
In other words, the report itself doesn’t call for a significant further fiscal stimulus beyond what the Chancellor has already committed to: it is more a case of rearranging the deck of cards rather than throwing it out entirely.
This is not to say that everything the report has to say on UK economic policy is positive – or without interesting recommendations: it warns that under Help To Buy – the Chancellor’s controversial mortgage guarantee scheme, “there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing.” It suggests that the Bank of England should consider giving more forward guidance on interest rates and should regulate loan-to-value ratios – something it has stopped short of so far.
However, many of the more radical recommendations some had speculated would be in – that Osborne should switch to a plan B with more discretionary fiscal stimulus; that the Government should sell off its stakes in the nationalised banks as soon as possible – simply haven’t turned up.
That this is the case is a testament largely to an aggressive behind-the-scenes lobbying operation by the Treasury to try to persuade the Fund’s analysts, who have been in the country for the past fortnight, that they have underestimated the growth-friendly elements of Osborne’s plan. The Chancellor will be delighted that after the criticism he faced in Washington last month, the Fund has quietly toned down its critical stance.