Media Release

SMF Budget response

Creative accounting, inflating the housing market, a further squeeze on welfare

1. The falling deficit

Overview:  Underlying Public Sector Net Borrowing is projected to inch down by just £100m this year from last year’s £121bn. Next year it will edge down by a further £900m to £120bn, allowing the Chancellor to say that underlying borrowing is falling this year and next.

Ian Mulheirn, Director of the Social Market Foundation said:

“The OBR has projected that the deficit will fall by a vanishingly small amount both this year and next. This looks very much like the results of some creative accounting. Next year the deficit will only fall because of new departmental spending cuts that were spun as a switch to fund growth-boosting infrastructure. With the savings arriving next year but the investment outlay delayed to the year after, the move means that borrowing in 2013-14 might just fall.

“Meanwhile, for the current year, it appears that borrowing has only been managed down by the Chancellor pushing £1.6bn of spending due this year into next year – for example, by refusing to pay the bills for our membership of a few international institutions until next year. That won’t do much to convince people that the Treasury is being straight with us about the deficit. But it will rob the Opposition of a devastating attack line. ”

2. Infrastructure investment

Overview:  The Chancellor has announced new funds for infrastructure investment, with a £3bn extra to be spent on infrastructure each year from 2015. The move is funded by cuts to departmental spending, but which take effect immediately. 

Ian Mulheirn, Director of the Social Market Foundation said:

“Investment in the UK’s creaking infrastructure is desperately needed to boost growth, so while the amount may be paltry, on the face of it the Chancellor’s infrastructure bung might seem like a good thing.

“But closer examination of the Budget document reveals that the plan is not quite what it seems.

“First, the capital investment won’t start to take place until 2015 – by which time the economy is forecast have recovered. But the cuts to departmental spending will have already started much earlier. The net effect is that far from being a switch for growth, this aspect of the budget will withdraw demand from the economy over the next two years at just the wrong time. Meanwhile the infrastructure cavalry won’t arrive until the battle is over.

“Second, it appears that there is a political motive for this manoeuvre. Front-loading extra cuts and back-loading investment mean that the Chancellor can just about claim that public borrowing is on course to fall both this year and next. This two-step has therefore saved the Chancellor from the political indignity of a deficit that rises for two years running.”

3. Help to Buy

Overview :  In one of the biggest announcements in the Budget, the government has announced the extension of the First Buy equity loan scheme to all buyers, and has introduced a Government guarantee to encourage lenders to offer better access to low-deposit mortgages. This guarantee will be worth up to 15% of the value of the mortgage and available to buyers with a deposit of between 5% and 20%.

Ian Mulheirn said:

“The ‘Help to Buy’ scheme is ostensibly a scheme to help hard-pressed younger people to get on, and move up, the housing. But the scheme really only helps older home-owners with the tax money of the young.

“That mortgage lenders have cut the availability of low loan-to-value mortgages is a sign that they think the risk of a significant house price fall is too large to want to risk their money. So now the government is stepping forward to risk our tax money instead, and perpetuate the socially damaging disequilibrium in the housing market.

“Overall, the scheme will entice young people to load themselves up with debt to finance overpriced houses, keeping the housing bubble inflated with taxpayer guarantees. And if it all goes wrong and house prices fall, the young will pay twice: once for their overpriced house, and once through their taxes to pay for the losses on this unwise gamble and £12bn contingent liability.

“Older, wealthy home-owners are the only winners from today’s announcement and the causes of our housing problem go unaddressed once again.”

4. Controlling welfare spending

Overview:  The Government announced its plans to cap a proportion of AME (social security) spending. The intention to do this was announced in Budget 2011 and means that rises in one area will force cuts in another.  So, for example if the housing benefit bill rises, entitlements for either housing benefit or some other benefit would have to be cut to prevent the overall social security bill from rising.

Ian Mulheirn said: 

“The government is wisely seeking to control welfare spending in ways that ‘allow the automatic stabilisers to operate’. That means that if unemployment benefit expenditure rises because there’s a recession, they won’t force cuts to entitlements.

“But what benefits does that leave inside this new ring-fence? Expenditure on some benefits are partly driven by structural factors (a housing shortage in the case of housing benefit) and partly by cyclical ones (the state of the economy and more part-time workers has increased the number of claims). So will Housing Benefit be part of the automatic stabiliser benefits that will be outside the ring-fence, or not?

“Beyond that there are benefits that are almost unrelated to the economy – sickness benefits and pensions. But is it really tenable for the Government to say that sickness benefit or disability support have to be cut because an ageing population is pushing up the state pension bill? This could be politically explosive. Watch this space for the detail.”


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