George Osborne’s budget speech rang very hollow with people who aren’t feeling any evidence of economic recovery. And the recovery, such as it is, appears to be based mainly on consumer spending, which is puzzling when so many people are struggling to make ends meet. But there may be several factors contributing to this spending which should sound alarm bells.
One industry which the Chancellor cites as evidence of the success of his economic policy is the car industry. Of course we all know the rich are doing very nicely, so it’s no surprise that Bentley and Rolls Royce sales are booming: but how have the sales of other cars grown during such tough times?
"Following the financial crisis, automotive firms identified bank finance and consumer credit as their biggest obstacles to sales. This was due to stricter loan availability criteria and the rising cost of credit.
"Their solution was to eliminate the middle man, the bank. As a result, sales of cars through manufacturer finance arrangement or personal car plan have soared. From 45 per cent of sales seven years ago these arrangements have increased to 75 per cent."
So, the recovery in the car industry cited as a vindication of government economic policy has been achieved by manufacturers ("makers" in George Osborne’s terminology,) becoming moneylenders. And of course, the more money they can lend the better. As KPMG explains further, this "allows car manufacturers to sell more optional extras and grow margins. After all, £19 per month for in-car satellite navigation sounds much better than adding £700 to the sticker price."
Basically, the car manufacturers have realised what the bankers have always known. The ability to issue credit is a licence to print money.
Another factor that has contributed to consumer spending is the growing popularity of whereby people borrow against the value of their homes. Many elderly people are taking advantage of rising house prices to take out further loans to fund holidays, home improvements, or just meet everyday living costs. This of course means that the value of their assets is reduced, and won’t be available to fund personal care, or to leave to the next generation.
The rising house prices that have made equity release schemes so attractive have undoubtedly been fuelled by the government’s Help to Buy scheme, which helps people on good incomes buy properties priced at up to £600,000. The Chancellor praised the scheme in his Budget speech and extended it to 2020. This is good news for those who are in a position to take advantage of it, but puts owning a home further out of many people’s reach and drives up rents, which inevitably rise with house prices.
A day or two after the Budget, Adam Posen, a former member of the Bank of England’s Monetary Policy Committee, called Help To Buy "mistaken", saying "The idea of pumping up credit for middle to upper-middle class people to spend more on housing, when people have already spent too much on housing, is dysfunctional."
The Chancellor said his Budget was for "makers, doers and savers". Arguably it was for lenders, borrowers,and spenders. Having just experienced an economic crisis caused by a property bubble and private debt (which became public debt via the bank bailouts), fuelling house prices and more private debt seems a strange way of "putting Britain right".
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