The Pre Budget Report Disappoints
Posted on 24 November 2008 by
Most of the positive aspects of the Pre Budget Report (PBR) had been well leaked, but many of the negatives were worse than expected. For example leaking the 2.5% VAT cut, leading to anticipation that the cost of fuel, alcohol and tobacco would come down, but not leaking that fuel, alcohol and tobacco duty would be increased by the amount of the VAT cut, was not clever. For those in the VAT system it actually means a tax increase on fuel, as duty can not be offset against VAT receipts.
Having got the Budget forecast for this year’s borrowing requirement so spectacularly wrong I doubt many people will give much credence to borrowing requirement forecasts as far ahead as 2015, especially when they are based on what appears to be wildly optimistic forecasts of the speed of our economic recovery. The “scorched earth” policy of announcing tax increases to come in after the likely election date of Spring 2010 appears to be more about politics than sound economics.
The PBR contained little really positive news for the mortgage market. (See separate comment on the Crosby Report.) Increasing the maximum size of mortgages covered by ISMI (Income Support for Mortgage Interest) from £175,000 to £200,000 is certainly helpful, coupled with the previously announced plan to reduce the qualification period before interest payments are met by the state from 9 months to 3 months. This should avoid some repossessions where the borrower’s situation previously resulted in the lender not being prepared to wait 9 months for interest payments to re-commence.
I note that, despite Mervyn King being at pains in the press conference following the November rate cut to emphasize that the correct term was Bank Rate, not Base Rate, the Chancellor added “I have also agreed that, for six months, the level of interest rates covered by the (ISMI) scheme will remain, despite the base rate fall, at just over 6 per cent.” Oh dear.
When commenting about borrowers with payment difficulties The Chancellor said, implying he had just got lenders to sign up to this principle: “it is right that …. repossession should be the last resort. I am pleased to say that this has been recognised by the lenders. The major lenders have agreed today that, where someone is facing repayment difficulties with their home mortgage, they will wait at least three months after the borrower falls into arrears before initiating repossession proceedings.” The Chancellor appears to be insinuating that lenders currently generally initiate repossession proceedings within 3 months of borrowers falling into arrears. This may happen occasionally, mainly with a second charge or sub prime mortgage, but it is certainly not normal practice for lenders covering the majority of the market. Lenders already see repossession as a last resort and so this statement appears to simply state what current practice generally already is.
Housing minister Margaret Beckett said: "It is our priority to make sure that hard-working homeowners who suffer a loss of income through no fault of their own have the option to stay in their homes.” I am glad she referred to “hard-working homeowners” rather than just the “hard-working families” the Prime Minister always refers to. It must be very galling for hard-working single people to permanently be made to feel unimportant by the Prime Minister!
A big disappointment in the PBR was the failure to take advantage of this golden opportunity to at least reduce stamp duty land tax, if not temporarily abolish it. A complete temporary suspension would have provided a very positive stimulus to the housing market, but as there is nothing in the PBR to yet help increase the supply of funds to lenders maybe The Chancellor was worried they wouldn’t be able to meet the additional mortgage demand resulting from any meaningful pick up in the housing market.
One piece of good news for the mortgage market is that as the tax cuts are not at the top end of the range of expectations the Bank of England should not feel too inhibited about a further significant cut in Bank Rate next month.
Categories: Property market, Mortgages, Personal finance, House and home
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