Is it really a case of borrowers versus savers?

24th March 2013

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The Budget has been described as one in which the Chancellor George Osborne had to choose between savers and borrowers. The prevailing view, of course, is that he chose borrowers.

But is it really such a black and white choice? Mindful Money considers the issues.

Borrowing

The Budget saw one concrete proposal to help borrowers – a £3.5bn extension of what is effectively a Government-backed shared appreciation mortgage scheme. The Budget extended the scheme beyond first time buyers to other borrowers.

Of course, it is not free money for borrowers but perhaps better described as cheaper money – an interest free loan up to about 20 per cent of the value of the property. Borrowers will be expected to pay the Government back, and after five years, that will be at market rates, but it still represents the diversion of some public money. Maybe that could have helped savers in some way.

But the real potentially game-changing help for the mortgage market is the £12bn guarantee scheme to encourage lenders to extend lending, possibly backing as much as £130bn in loans.

The idea is that the Government will provide a guarantee for part of the mortgages so that lenders will not restrict themselves to lending to those who already own a significant proportion of their house – but also loan to many more high loan to value borrowers more cheaply.

Lenders themselves have extended this sort of mortgage to borrowers but generally this involves parents and family of new borrowers using their own cash or assets to play the role that the Government may now take on.

This scheme has been criticised on many fronts – Robert Peston on his BBC blog argues that this the Treasury taking on housing risk rather than the risk of business loans.

The Guardian reports on the views of mortgage market experts suggesting that the scheme could certainly make high loan to value mortgages cheaper. This could ultimately feed through to higher prices and in many ways make people or certainly homeowners feel a little bit better off.

What is significant however is that the scheme is still really at the drafting stage. Will these loans under the guarantee become a liability on the Government’s books or not?

It is also uncertain how the financial regulators will view the scheme, in terms of the capital it requires mortgage banks and building societies to hold to back their borrowing. Much of the work of the Financial Services Authority on mortgages has been to design regulations to help the UK avoid the worst excesses of the mortgage boom. Without some sort of regulatory compromise on capital requirements, the whole scheme could be non-starter.

Other pessimists have suggested that all we will see is another mini mortgage and house price boom. When interest rates rise, it could merely create another tranche of vulnerable borrowers.

For now, at Mindful Money we think the jury is still out on the scheme. What the Chancellor has done so far is not devote huge amount of national resources, but to try to find ways to adjust the existing system to make what money and resources are in the economy work harder. That approach also underpins other initiatives such as trying to harness pension funds to help convert  the High Street’s unused retail space into residential accommodation. But again, it’s not state money.

Savings

But what about the savings part of the equation? Well this Budget tweaked the mandate of the Bank of England. The Bank may now say, for example, that it is planning to leave interest rates low of a long time to come. It stopped short of targeting a certain level of employment or GDP growth.

The inflation target stays the same – at two per cent of the Consumer Price Index – though the target must be becoming one of the most missed in economic history. For savers, this new stance brings certainty – certainty that their savings accounts are unlikely to pay very much for a long time to come.

The Government is increasing its National Insurance take from Defined Benefit schemes by bringing in the new state pension reforms early in 2016. This will abolish contracting out. It may also hasten the end of this type of scheme.

There were changes to the total amount you can save in a pension during your lifetime before facing tax penalties – cut to £1.25m from 2014. The trajectory is down and this clearly sends the wrong signal. It also binds in an unfairness between private and public sector pensions.

Yet most of this money appears to be going to the general pot. It is not giving a helping Government hand to borrowers.

We would argue that the Budget wasn’t a victory for one side or the other. It is not, in this case, a zero sum game. Low interest rates and QE helps borrowers, but the real target is helping the UK’s flat-lining economy. Perhaps it is not that borrowers were so much favoured. It is that savers were ignored.

16 thoughts on “Is it really a case of borrowers versus savers?”

  1. Forbin says:

    so why are the Banks so scared of dis-inflation ?

    surely if my wages are suffering from it ( and they are ) and over the past , what 5 years , we’ve already had 10% drop ( deflationary wages ? )

    then surely the prices of goods and services must drop or not be bought?

    the headlines really do worry me, esp. the media seem to think just because we have a one months figure thats low we’re all safe and dry ……. so the last 5 years was just an illusion ?

    for my own account since 2009 I’ve had to find another 28% to buy my food. ……. from a wage thats dropped 10%

    madness

    Forbin

    Damm might have to give up the popcorn just to buy a loaf of bread

    1. Mike from Enfield says:

      Hi Forbin,
      I suppose inflation/disinflation raises different levels of concern depending on where you sit. If you live in the real economy then it is rather nice if prices stop rising to – maybe – give wages chance to catch up. A massively indebted government with no concerns beyond the next election would see things differently for obvious reasons. And if you are playing the casino economy then I don’t suppose it makes much difference as there are always pickings to be had. To them, maintaining money printing is probably more of a priority as – it would seem – it does not produce inflation outside of a few specific areas (e.g. the stock market and, by extension their profits, salaries and bonuses).

    2. Jim M. says:

      No need to panic, Forbin old chap!

      Allow me to offer you a solution to that very conundrum!
      http://www.washingtonpost.com/pb/recipes/cheesy-popcorn-bread/13506/

      That’s Dairy, Popcorn and Bread.

      All the food groups in one tasty bite!

      1. Anonymous says:

        Hi JIm M

        And we worry about an obesity crisis! It is somewhat symptomatic of these times that obesity and food poverty seem to be travelling hand in hand.

  2. therrawbuzzin says:

    Good article Shaun.
    I don’t need to tell anyone where the impact that essential commodity inflation has, is felt most, especially if your benefits rise is capped at 1%.
    We’re all in it together.

    1. Anonymous says:

      Hi therrawbuzzin

      Inflation in the price of essential products always hits the poorest hardest. They are also the least likely to benefit from the current asset price inflation in houses and equities.

      As to falling energy prices Ed Davey has a plan to fix that apparently.

      “However, he added that the measures would add 2% to household energy bills by 2020,”

      http://www.bbc.co.uk/news/business-27121801

      Such estimates are usually to be found in the fiction section of the local library

  3. just a thought says:

    Hi Shaun,

    I will not be surprise that for the end of this decade food stuff price will have double from the current level…

    https://www.youtube.com/watch?v=GvIT3cfffh0

    Food price the shocking truth…

    1. Anonymous says:

      Hi Just a thought

      Thanks for the link. The matter that is particularly troubling is the decline of the Bee population (which is vital for pollination..). There was a good documentary on BBC 4 on it a while back and this report has now been released.

      http://sos-bees.org/reports/

  4. Anonymous says:

    Very interesting, Shaun. In Canada, things are much as you
    describe in Britain, with food and energy prices sparking a jump in inflation, while the deep thinkers continue to worry about inflation being below target. In March, natural gas prices were up by 17.9% from March 2012, while in Alberta they were up by 81.5%. The way Alberta regulates natural gas prices makes prices in that province unusually volatile; just the same the natural gas market is tightening. The next biggest contributor to inflation was electricity prices, up by 5%, and continuing large increases in electricity prices seem to be a virtual certainty. Meat prices, which you highlighted in your column, were up by 3.4%; prices of fresh fruit (8.8%) and fresh vegetables (5.3%) showed even stronger increases.

    In the Bank of Canada press conference on April 16, Governor Poloz said: “I would remind you that inflation today [i.e. the February 2014 rate of 1.2%] is almost exactly what it was in January [i.e. the December 2013 rate of 1.1%], when we last put out an MPR (Monetary Policy
    Report).” This was a strange thing for him to say, since the very next
    day, Statistics Canada would report the March inflation rate shooting up to
    1.5%; the very MPR he was speaking about had also forecast an increase in inflation. The BoC had revised its much-too-low forecast of 1.0% inflation in 2014Q1 from January to 1.3%, consistent with a 1.4% inflation rate in March. The actual monthly inflation rate of 1.5% led to a 1.4% four-quarter increase for 2014Q1. If the BoC’s inflation forecasts for the rest of 2014 are as badly off on the low side as its forecast for the previous quarter, then the 2014Q2 inflation rate could already be at the 2.0% target rate. For the third and fourth quarters the inflation rate will be accelerating above the target rate. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      I am afraid that central bankers are the new politicians! They too now scour events for something which can be quoted out of context to suit their case.

      If we move to a currency theme the commodity boom has boosted the Canadian $ which depressed inflation. But should we see a further dip in the Loonie ( a headline writers dream..) then Canada will be on a road to inflation that is very familiar in the UK.

  5. Noo2Economics says:

    Hi Shaun I find it very revealing that chinese food price inflation accounts for 35% of the total chinese inflation rate. This seems a good demonstration of just how “wealthy” the chinese have become as the sub contract manufacturer of the world.

    As to your question – isn’t it the case that inflation figures are always backwards looking?

    The best you can do is look for momentum indicators in the latest monthly and quarterly numbers although I’ve never heard the authorities doing that, even when inflation has been letting rip. This is probably because they don’t have any “experts” who know how to look for momentum indicators. For myself I am completely unperturbed by current inflation numbers as I know we can always rely on the good ol Government to introduce some more institutionalised inflation, for instance they could reinstate the fuel escalator or order the water authorities and Rail operators to increase prices even more or introduce more Green energy levies or how about a nice easy increase in VAT? There are a multitude of possibilities open to them.

    Then again, there is the whole issue of falling per capita productivity in the UK combining with increasing wage rises. The best they could do is absolutely nothing and let this dynamic take it’s course with the resultant inflationary effects, after all the GBP can’t keep going up forever can it?.

    1. Anonymous says:

      Hi Noo2

      I think that VAT has hit the Laffer curve so they will refrain from raising it for a while. However Ed Davey can be relied on to raise energy prices. From the Guardian.

      “The combined projects are expected to add 2% to an average household electricity bill by 2020, or £11 per household, but energy and climate secretary, Ed Davey, said the government’s “whole package” on energy reforms would ultimately lower consumer energy bills.”

      Ah yes, up is once again the new down!

  6. Tom says:

    I think there may be correction in food prices on its way. I remember food prices being significant on my parents budget when I was growing up, and the vegetable patch in the garden brought recognised financial gain.

    If you look at the change in food prices to wages over the last 25 years –

    http://www.inflationarypressure.com/food.php?inputa=Total%20Food&inputb=Average%20Earnings%20Index

    You can see wages have increased significantly faster than food but the trend is closing over the last 5 years.

    We have become used to cheap food and also used to spending our money elsewhere, but maybe we’re on journey back to where food prices should be.

    1. therrawbuzzin says:

      If we’re going back to the old prices, can we go back to the old quality, from the old production methods?
      View the 40 year cost of a colour tv.

    2. Anonymous says:

      Hi Tom and welcome to my part of the blogosphere.

      I note on your chart that the rate of food price rises has accelerated in the credit crunch era when we are supposed to be poorer! Something is not quite right is it? Another rigged market perhaps…

  7. Anonymous says:

    Hi Chris

    It is an interesting outburst by Paul Krugman as he thinks this.

    “In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.”

    Whereas the Swedish government thinks this.

    “GDP growth in Sweden is expected to increase in 2014 and 2015 as a result of the stronger international outlook and increased confidence among Swedish businesses and households.”

    And ne’er the twain shall meet to coin a phrase.

    I last covered it back last May.and had my concerns as you can see below.

    http://www.mindfulmoney.co.uk/wp/shaun-richards/what-is-happening-to-the-economy-of-sweden/

    Since then the Europe/UK/US recovery has helped but disinflation has come back with the annual rate of CPI in March being -0.6%. I will take a closer look..

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