Leading article

George Osborne has bet the house (and other people's houses) on there being no new crash

The Chancellor may yet be lucky. But the look on his face this week suggests he fears otherwise

29 August 2015

9:00 AM

29 August 2015

9:00 AM

When George Osborne visited Sweden, Finland and Denmark  the stock markets of each country promptly fell by about 5 per cent. As soon as he left, they recovered. A coincidence, of course: Osborne’s tour coincided with stock-market jitters, but this nonetheless forced him to look over the precipice — and panic. Britain, he warned, was ‘not immune to what goes on in the world’. Not for the first time, we saw his lips moving but heard Gordon Brown’s voice. ‘We are much better prepared than we would have been a few years ago for this kind of shock,’ he added.

If only this were true. As the Chancellor knows, we are far more vulnerable than we were last time. In 2008, the national debt was 37 per cent of GDP — a fairly low level, inherited from the Tories, that allowed Labour to borrow its way out of the crisis. Now, the national debt stands at 80 per cent of GDP and we have no more room for manoeuvre. While lecturing everyone about austerity, Osborne has swollen the national debt to some £1.5 trillion and has not finished yet.

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This is not QE-style imaginary money but real debt that has to be repaid by real British taxpayers, working out at about £56,000 per household.

To be sure, Osborne inherited public finances that were out of control — but he has been in no rush to correct things. At first, he said he’d balance the books in five years’ time. He has now given himself ten years because of a freakish blip in world markets. Interest rates everywhere were coming crashing down, so for all of his hair-shirt rhetoric, he could keep running up debt and get away with it.

So far, he has been right. It has suited Labour to accuse him of harsh cuts, despite the fact that he has shaved just 2.9 per cent off state spending in five years.

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Like a drunk holding 2 a.m. toasts to the notion of sobriety, the Chancellor salutes the notion of fiscal prudence while borrowing £190 million a day. He offers words of advice for politicians in Athens, while running up a deficit six times larger than that of Greece. This week, he said that the financial crisis was a reminder for all governments to put their financial houses in order — yet no one needs this advice more than him. The British government is still the worst debt addict in the continent.

As Martin Vander Weyer argues, the stock market crash looks as if it is a test, rather than the real thing. It’s hard to argue that shares are overpriced, as they were at the peak of the last bull market; valuations are around the historical average. The glaring anomaly is the absurdly low cost of borrowing. British banks have spent much of the past few years lending money at rates below inflation: in effect, paying people to borrow. This is just as alarming as the old days of 110 per cent mortgages. Crazy low interest rates mean crazy high house prices, as many would-be house buyers will agree. Yes, there is a lack of houses, but prices are being pushed higher by absurdly cheap lending.

There are not many certainties in politics or economics, but one thing is for sure: we will have a future financial crisis. And how prepared is Britain? The look of panic on Osborne’s face during interviews last week gave this away. He has bet the house (and other people’s houses) on there being no new crash, having become addicted to this new level of cheap debt. The average two-year mortgage fix is 1.9 per cent.

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If this were to double, it would still be less than half the rate it was before the last crash, yet would risk pushing many households towards bankruptcy. And if his government were to be charged normal rates of interest on its debts, it would trigger a far deeper fiscal crisis.

The Chancellor may still prove lucky. There has been much talk about when the Bank of England will raise its rates, but not much discussion about the fact that the markets do not expect a return to the normal rates of 5 per cent. Instead, they predict a crawl back to about 2 per cent.

Long-term forecasts show an era of zero real interest rates lasting for about 20 years. Lots of decisions are being made on this basis, including those of HM Treasury. So the financial markets imagine that we’re entering a debtor’s paradise — which will be hell for Britain’s savers.

In 2007, the same market forecasters assured us that we had a ‘Goldilocks economy’ — not too hot, not too cold. There was talk of a ‘great moderation’ and an end to the era of crashes. How dangerously naive that all sounds now. The Chancellor may still be young, but he has lived through enough turbulence to know that none of these forecasters can be relied upon. They assure us that this week has been about nerves, not about a new bubble or a wider correction. The Chancellor will have to hope that they are right.

Got something to add? Join the discussion and comment below.


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  • Ipsmick

    Well, if it does go tits up, there will be no Chancellor who has deserved it more. We’re all in this together, after all.

    • Yvonne Stuart-Hargreaves

      We have had deflation since 9 July. They will have to own up to this in September or October. No interest rate rises before the trouble kicks in around 2018. The retirement bulge of the UK babyboom and the haemhorraging of pension funds and social payments. From 2017 to 2032 we have to accommodate an extra 1 million pensioners every three years. This will cost us another £50 billion a year by 2032.

      • davidofkent

        Most baby-boomers have been saving into their own pensions. The triple lock on the state pension will be removed soon, I think. In addition, baby-boomers have been contributing to the state pension element of NI for up to 49 years rather then the new 30 years which will apply to the next generation, who will also get a much higher state pension that I have. Luckily, the Left has been encouraging mass immigration for many years to fill the gap left by the baby-boomers when we ‘kick the bucket’.

        • Yvonne Stuart-Hargreaves

          The giant Ponzi of state pensions begins to unravel in the 2020’s.

          • TrulyDisqusted

            Sooner than that.

            Back in Nov, the EU held a series of meetings on how they could steal hundreds of Billions from the private pension funds of Europe’s citizens to pay for their next round of structural follies.

            The EU has decided that it has a higher claim on EU private pension funds than the citizens who fund them.

            There have been no calls to steal or reduce public sector pensions.

          • red2black

            Do you mean the tax on transactions?

          • redrum

            They will do what they did in Hungary – nationalize your private pension for your own security and insist it is invested in government bonds. Pensions are finished – I will be intrigued to see whether this also applies to company pension schemes

  • Man on the Clapham Omnibus

    People persistently forget that a substantial proportion of our national debt, as you say 80% of GDP, is owned buy the Bank of England, in fact about a quarter of the debt: this is never going to be repaid – will be ‘rolled-over’, swapped for perpetual bonds or just cancelled. And, don’t say the BoE will then be bust – it can’t go bust it owns the John Bull printing kit: that portion of the debt has been monetised.

    • davidofkent

      True, but the problem will be that as the National Debt creeps higher as a % of GDP, the country’s cost of borrowing will increase. This will demand more taxation to pay for it. As I’m sure you have noticed, recent Chancellors have found more and more ways of stealing our money. Gordon Brown was quite good at it and stole from our pensions, for example. That has never been reversed and has led to a need for George Osborne to let people simply take their savings out of pensions in a lump sum (generating more tax of course). Now George Osborne is sticking his thumb into shareholders’ pies and increasing the tax on dividends. This is happening in the West in general. Wherever governments see a little surplus they rush to hoover it up to find more ways of bribing the next generation of voters.

  • jeremy Morfey

    Since being pushed into early retirement in my fifties, I have been living off savings and inheritance, which have been getting precious little interest. No question of me being a burden on the State and claiming welfare – I am liable for the full £1000 a year Council Tax on my cottage. Therefore by the time I reach State pension age, it will all be gone, and I might have another 25 years to live. Sooner if a Labour Government opts to tax my assets and force me into rented accommodation (which I don’t qualify for, being all the wrong categories – male, middle-aged, middle class, heterosexual, childless and ethnically indigenous).

    Meanwhile borrowing is still being subsidised out of the interest from my savings, mostly to pay tax-allowable megabonuses for money launderers making a killing redeveloping London in their image.

    Will there be any real money left at the end of this experiment?

    • Steve

      Can’t you get a job?

      • jeremy Morfey

        Not a chance.

        • Steve

          Why not, out of interest? Not being facetious or trying to trip you up.

          • Dave Hill

            He’s in his 50s – he has no chance whatsoever.

          • Alex

            Imagine the apoplexy that would ensue here if a young person said the same, based on lack of experience, qualifications, mobility.

          • Dave Hill

            It would be just as true if some young whipper-snapper said it.

    • Torybushhug

      Why would anyone assume they should be paid a certain amount of interest on cash? Many of us have invested in other assets precisely because rates are so low. Complaining interest rates are too low is akin to moaning about the tide

      • Observer1951

        Genuine question what assets are you in

        • Alex

          He’s a Tory, so probably property

  • Lord_of_Doom

    “In 2008, the national debt was 37 per cent of GDP — a fairly low level, inherited from the Tories”. It was indeed a fairly low level – but not one inherited from the Tories. In 1997, when Labour took office, the national debt stood at almost 49 per cent. Those who voted for this shower need to go ponder.

    • davidofkent

      It topped at 42% I believe and was on a downward trend when Blair took power. Brown allowed this to continue by following the previous Conservative government’s spending plans. He then let rip in 2002 when the National Debt was just over 30%. When you talk of a shower, you clearly mean Brown and Blair. From 2010 to 2015, the Conservatives were not in power. They were part of a Coalition and prevented by the LibDems (another shower) from dealing with the Deficit and Debt in a prompt manner.

      • Lord_of_Doom

        You can believe what you want, but that doesn’t alter the facts. The debt was at just shy of 49% when Blair/Brown came into office (having gone over 51% a couple of years earlier) and, as the Speccie says, at 12 points below that by the time of the crash. This year it is at just shy of 90% of of GDP. Go figure.

        • CortexUK

          On the way down in 1997, and for the next three years Brown pretty much followed the Tories’ economic plans. In 2000 he started introducing his “transformative” policies which took at least a year to filter through the economy. Brown’s economy is therefore from 2002 onwards. That didn’t take long to go wrong, did it. Record tax receipts and growing borrowing.

          And the growth in debt since 2010 is because of the deficit. Labour created the deficit, largely through spending which can’t be switched off just like that – mostly because the same Labour supporters mocking the higher debt rate would have rioted. Well, rioted more than they already did.

          • Lord_of_Doom

            Yes, it was on the way down – I’m glad you were able to compute that from the figures I quoted. They were meant, by the way, to show that the Tories are just as capable of running up debts/deficits as anyone. Incidentally, whatever you think of the debt Osborne inherited, it was the lowest in the G7. I say was. It sure as hell ain’t now – on which, more later.

            You say it didn’t take long for Brown’s economy to go wrong – though from your own calculations it took six years, which is pretty long in terms of events, dear boy, events. And, of course, it was an event that derailed our economy. You might not have noticed, but seven or so years ago the world underwent the biggest financial crash there’s ever been. At one point the UK government had spent nigh on £125bn bailing out the banks (and was at times exposed to a figure ten times that amount).

            Prior to that, though, everything had been going swimmingly – which is why, right up to the eve of the crash, the then Shadow Chancellor, George Osborne, was committed to maintaining Labour’s spending plans should he have been voted into office.

            You say Labour “created the deficit”. Well, there has been a deficit all my life – as there has been all yours, and your father’s and his father’s before him.

            That said, since Mr Osborne has cut the deficit by around £30bn over the course of his first five years at No 11, while watching the debt increase by, give or take, £500bn, I don’t think even you could argue that he’s making a great fist of it.

          • red2black

            You and other people commenting here seem to know about economics. How much would you say the economic system itself determines what the options are for managing the economy, whether the managers of it are Conservative, Labour, or whoever else?

          • Lord_of_Doom

            I’d say until you get global governance (several centuries and many wars off) global capital can and will run the show. In other words, no one individual government can do very much against the money boys. Meanwhile, the rich get richer and the poor get poorer.

          • CortexUK

            The Tories didn’t run up a deficit. They inherited a deficit which they have made smaller. But because the way maths works, a debt will always rise until you manage to get rid of a deficit. Had the Tories done that by now, Labourites would be screaming.

          • Lord_of_Doom

            Just as Labour inherited a deficit off the Tories in 1997 and made it a great deal smaller – as I have already made clear.

            But at the same time, the debt shrank under Labour, dropping from 42% of GDP in 1997 to 35% a decade later. Bang goes your curious idea about “the way maths works”.

            As for the Tories getting rid of the deficit, the history books don’t look too good on that one. True, Gordon Brown ran a surplus for four consecutive years from 1998-2001. But before that you have to go back to the postwar years, when we had surpluses (small ones, but still) all the way from 1948 to 1974. Now, remind me, what was the economic policy both Labour and the Tories followed back then? Oh, yeah, I remember, the now much despised Keynesian model…

          • Pacificweather

            It is a very comforting idea that one political party is good at managing the the economy and the other is not. You don’t have to look very hard to see that neither are very good at it for anything other than a short while. That should tell you that government is not the main driver of the economy. This economic tribalism idea is rooted deeply in the British psyche on both sides of the political spectrum. The need to belong to the successful tribe is stronger than the best that 21st Century education can overcome. That’s why the British like FPTP. it allows them to say, “It’s not my fault I didn’t vote for them” and, for the majority, that will be true.

  • The Bogle

    “Now, the national debt stands at 80 per cent of GDP and we have no more room for manoeuvre.”

    According to the rules, to join the euro an entrant member-state’s national debt must stand at less than 70% of GDP. Well, technically at least, since Italy and Greece had a national debt of 110% and 120% of GDP, yet still were admitted.

    For Brussels, where’s there’s a political will there’s a way.

  • Blindsideflanker

    Don’t trouble George Osborne with such mundane issues like the economy, for today he’s currently playing around as Constitutional expert….no sorry I got his hats mixed up….today he is playing the role as Defence Secretary and deciding our nuclear deterrent.

    • CortexUK

      It’s the 2020 plan. He has a heavily-thumbed copy of “The Gordon Brown Political Playbook” in his back pocket, filled with marginalia and “I [heart] Gordon” scribbled on the cover.

  • misomiso

    Great Article Speccie.

    It’s interesting to think where the extra cuts would have gone had the markets demanded more austerity.

    International Development would not have been so sacrosant, and maybe we would have seen whole departments abolished to save money.

    But the big problem for the UK state remains Health. Nothing is more inefficient or more of a black hole, but equally no where is the opposition to cuts more visceral.

    Hopefully a crash will be an excuse to get us out of Europe though so maybe a Bright side.

    • davidofkent

      The cuts should have gone on welfare. Welfare is destroying the will of the West to succeed in life. Despite the wails of anguish from the usual suspects, benefits have hardly been touched.

      • Torybushhug

        Agreed. And don’t believe the lefty myth that migrants can’t claim benefits. A letting agency working out of my office building has a daily interaction with new migrants on benefits seeking property. Soft touch Britain.

      • CortexUK

        Welfare should be generous – but hard to obtain and hard to keep for long. A civilised society should have a good safety net, not a drag net.

      • red2black

        Corporate welfare as well? Around £85bn a year and rising.

  • ohforheavensake

    Couple of points: once again, government debt isn’t like household debt- so the idea that British taxpayers will have to repay what the government owes is stupid. The real economy doesn’t work like that. Secondly, you note that Labour had a debt of 37% of GDP just before the crash; but that rate was lower than the one they inherited (in 1997, national debt was just under 40% of GDP).

    Please, try to get your facts right. It’s important.

    • CortexUK

      They managed to improve that figure by just three points after a decade of consistent growth, masterful management of the economy by the world’s leading economic genius, a house price boom, a City boom, and record tax receipts? Pathetic. So much for fixing the roof while the sun is shining. Looks like all Brown did was replace a couple of tiles. By the way, another fact: it was already on the way down in 1997, and for the next three years Brown continued the Tories’ economic plan almost to the letter. So credit until at least 2001 goes to the Conservatives.

      The debt is big now because of the deficit that Labour left behind. And it was very hard for Osborne to slash some of the out-of-control budgets given Gordon Brown had built a client state which functions on them existing. Including a massive Housing Benefit bill to support Gordon’s record-breaking house price bubble. Labour supporters fume that he has raised the debt, but they are the ones who would have blown their top if he’d made the cuts necessary to slash it.

      Trust me, I’m no fan of Osborne. There is plenty more he could, and should, have done – and years ago. But it is a fact he inherited a terrible mess. His charge is that he hasn’t been good at putting out the fire, not that he set any.

      • Mary Ann

        You don’t like the idea that the Labour party was managing the debt?

        • CortexUK

          Where did I say that? You completely missed the point of my post.

  • CortexUK

    “Crazy low interest rates mean crazy high house prices, as many would-be house buyers will agree. Yes, there is a lack of houses, but prices are being pushed higher by absurdly cheap lending.”

    Finally a publication which has the guts to admit it. Only all the others to go.

    If we built a million more houses in the next 15 months, and closed the borders, the average house would still cost more in January 2017 than it does today. The only way we will burst the house price bubble is to raise the price of debt.

    The relationship between supply of houses and the price of them was severed decades ago. Asset prices are more heavily influenced by the amount and cost of money available to pay them. In the 15 months from January 2008, prices fell 20% while the rise in demand (in the form of need of housing ) continued to outstrip the rise in supply (in the form of new housing). It was only after the government started slashing interest rates that they recovered and started rising again.

    Here’s an interesting chart:

    http://blogs.r.ftdata.co.uk/ftdata/files/2013/03/House-prices-and-housing-completions.jpg

    • redrum

      Agree that the bubble needs to be burst. We still won’t come anywhere near providing the supply to meet the demand – we now have 8m people in this country who weren’t born here and EUStats today published that we will reach population of 80m by 2037. We will get there before then. Time to buy land with water somewhere where population is at much more sustainable levels methinks …..

  • Torybushhug

    We have no austerity. What we do have is a nation addicted to spending. Take those obese patients that end up costing millions each. That’s just one tiny example of our profligacy, and Labour want even more of it.

    • Abie Vee

      Your turn will come slushbug. Be patient.

    • Mary Ann

      You live in cloud cuckoo land.

    • Dave Hill

      That’s all very well, but what do you suggest we DO with those grotesquely obese burdens on the public purse? Deprive them of medical care? “Assist” them to die? Break them up for their salable organs?

      What’s that? You have no sensible suggestions? You’re just another whining non-entity, safe behind a cretinous pseudonym? Oh, what a surprise!

    • alexw

      *sigh* The right-wing readership here really really really need to get some understanding of macro-economics.

      Let me give you a starter –

      GDP = C + I + G + (Ex – Im)

      Where-
      C = total spending by consumers
      I = total investment (spending on goods and services) by businesses
      G = total spending by government (state and local)
      (Ex – Im) = net exports (exports – imports)

      GDP is basically a measure of the size of our economy. The smaller that number relative to our population the worse off we are. Now guess what happens if you just shrink government (G) as you suggest. Yes that’s right you shrink GDP. You make us all worse off.

      This is why you cannot just shrink the state in the way you seem to believe. If the other bits of the economy are growing then you can perhaps carefully shift people from G to the other sectors. But if you just “cut” you just end up shrinking the economy and making our debt problems even worse, since the level of debt will stay static but the level of economic activity to service it falls.

      This is why austerity does not and cannot ever work. It is snake-oil peddled to those who don’t understand but will readily believe in the miracle snake-oil economic cure they are being sold.

      • CortexUK

        Keynes knew so little about economics he had to invent his own version of it. It deservedly died in the chaos of the 1970s, but then some idiots decided to resurrect it because they didn’t have the courage to make the difficult decisions necessary to reset the global economy. Instead, a cheap money bubble leading to massive malinvestment has developed into an even bigger, cheaper money bubble, with even more massive malinvestment.

        But hey, in the long run, right? Who gives a crap about tomorrow, just spend spend spend now. Our kids will pick up the tab.

        I once heard a very prominent economist say that he understood Keynesianism when he was a kid, living at home with not a care or responsibility in the world – but he just doesn’t get it now, as an adult having to live and pay his way in the real world.

        • ohforheavensake

          I don’t think he was talking about Keynes, particularly. This is pretty standard macroeconomics.

          • CortexUK

            While the first principles may date to Smith, macroeconomics that we see today is Keynesianism by any other name.

        • alexw

          I’m sorry but you make no sense at all. If there is a glut of savings over desirable investment opportunities then of course you will get economic bubbles. The money has to go somewhere.

          This has nothing to do with interest rates. Low interest rates are a symptom not a cause. As in any supply-demand situation if there is an excess of supply (of savings) vs demand (of investment opportunities) then the price of the supply falls. And what is the supply cost of money? Interest of course….

      • ohforheavensake

        And that’s a yes.

  • jeffersonian

    ‘It has suited Labour to accuse him of harsh cuts, despite the fact that he [Osborne] has shaved just 2.9 per cent off state spending in five years.’

    As with so many aspects of the unfortunate Cameron-Osborne duet, one waits with baited breath for the innocent to exclaim: but the Emperor is naked!

    Osborne has been a failure as a Chancellor and Cameron at no 10 is a Toff Tory joke. But we mustn’t say it out loud.

    • 1__1_1

      First the Left, the hard Left and the SNP complain about the swinging impact of “Austerity”, then they go and complain about the level of government borrowing necessary to fund the current level of public spending.

      Bunch of hypocritical prats.

  • Forlornehope

    The long term rate of increase of nominal GDP (real GDP increase plus inflation) is about 5%. That means that with a balanced budget debt halves as a percentage of GDP every 15 years. When discussing these things it is worth bearing that simple equation in mind. It’s why Osborne was quite relaxed about the high rate of inflation in the early years of the coalition. BTW invest in high income equities, preferably through a mutual fund, much better than cash in the bank if you don’t need to touch the capital and can ride out downturns in the market.

  • mickey667

    “In 2008, the national debt was 37 per cent of GDP — a fairly low level, inherited from the Tories, that allowed Labour to borrow its way out of the crisis”

    Inherited from the Tories?

    You what? 11 years prior? eh?

    • Pacificweather

      If you say something often enough…

  • Bonce

    George Osborne’s whole history as Chancellor has been a prime example of the powers of Tory spin. Osborne has been an absolute disaster for the UK economy.
    He has still not controlled government spending, or eliminated the deficit, something which could have been done in 2 years. He has also allowed the National Debt to double. I have zero confidence in the national debt ever being reduced whilst he is Chancellor.

    With the NHS for example, which seems to be like the drunken brother, who always needs another cash injection every few months, so he can do this/do that to improve his life. The NHS just needs to be given a yearly budget at the start of the year- that budget is there to last the year, and if they run out of money, so be it. That is how real businesses operate, you need to work within your budget. The same should be for every government department. Set a budget for the department for the year, and that is it, that is your budget.

    The fact that none of these well educated career politicians & their civil servants have ever had a job in the real world is abundantly clear. Perhaps we need to parachute in some CEO’s with real world business acumen to run things, instead of relying on posh boys who have been passed over for the City and are career politicians. Actually have the cream of the crop running the country?

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