Comment on today's Budget

Posted on 22 June 2010 by Ray Boulger

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One of the opening comments in George Osborne’s Budget speech was that he was “not going to hide hard choices from the British people or bury them in the small print of the Budget documents.” He added “You’re going to hear them straight from me, here in this speech.”

This was a hugely welcome change from the policy introduced and regularly followed by Gordon Brown, whose budget speeches almost ceased to be worth listening to because so much of the meat, at least the nasty bits, was left out, the budget numbers were reeled off in an unintelligible way and many of the figures he announced involved double or triple counting.

The impression gained while listening to Osborne’s speech was that he was living up to his opening promise and this was confirmed by a subsequent checking of the budget papers. There was of course detail in the budget papers that wasn’t in the speech but little, if anything, in the way of nasties hidden away.

Much of the broad outline of the budget had been leaked and some of the detail, such as the £1,000 increase in the personal allowance leaked yesterday evening.

I liked Osborne’s early example of Government waste when he announced that he was abolishing the Treasury Euro Preparation Unit and although most people will have taken it as read that this government would not do anything as stupid as join the Euro I guess in view of the Liberal Democrats’ previous strong support for joining the Euro it was important to make the commitment that the coalition would not be joining the Euro in the life of this parliament. What state the Euro will be in at the end of this parliament is anyone’s guess.

As one of the few successes one can credit Gordon Brown with was inventing five impossible tests the UK would have to pass before joining the Euro as a way of fending off Tony Blair’s enthusiasm for the Euro experiment (he obviously learnt nothing from our ERM debacle) it is disappointing, but perhaps not surprising, that he chose to waste money for so many years on a unit in the Treasury with such a non function.

One can always pick holes with individual parts of the budget but my overall impression is that, within the constraints imposed on him, the Chancellor has broadly achieved his stated objectives and it will be seen by most people as being fair, a key and necessary objective. No doubt we will have at least one opinion poll on people’s view of the budget within a couple of days.

There was little in the budget to specifically impact on the mortgage and property markets, but its general economic impact, and in particular any effect on interest rates, is always important to the housing market and this budget reinforced the expectation that interest rates will remain low for quite some time, which will provide support for both the residential and commercial property market.

The measure that had the most potential to seriously impact the housing market was a change to capital gains tax (CGT). However, I don’t think that increasing the CGT rate for higher rate taxpayers to 28%, as opposed to the 40% widely expected, despite there being no actual taper relief, will have too big an impact on the Buy to Let market. The fact that the £10,100 annual exemption has not been reduced, and furthermore that its current indexation will continue, albeit now linked to CPI rather than RPI, means amateur landlords, i.e. those with only one or a small number of properties, will still be able to mitigate their tax liability by selling one property a year and if they defer a sale until retirement may well still only have to pay tax at 18% on the taxable profit. Also, for married couples where one is not a higher rate tax payer it will still be possible to pay CGT at 18%. This is one way the Conservative pre election promise to introduce a tax benefit for married couples, and those in a civil partnership, is being implemented, albeit only for some couples. 

I also don’t expect the CGT increase to have any significant impact on the second home market. Most people who buy a second home will be relatively well off and will not be buying it for any tax benefits but because they want, and can afford, a second home, whether it is a pied a terre or a country home. If they end up paying more CGT when they eventually sell most will see that as a price worth paying for the benefits of having the second home. In any case by the time they come to sell it is quite likely the CGT regime will be different anyway, maybe better, maybe worse. However, The Chancellor’s comment that The Treasury’s calculations suggest that any increase in CGT above 28% would have a negative impact of tax revenue provides some comfort that CGT rates are unlikely to rise further.

One other specific measure affecting the mortgage market is the promise to readjust Support for Mortgage Interest payments. The rate of interest used to calculate the amount of this benefit has been left unchanged at just over 6% during the period of steep interest rate falls over the past 2 years. This has been very nice for those receiving this benefit, and their lenders, because as mortgage rates have fallen the amount paid by the government has progressively exceeded the actual interest charged to most borrowers and the surplus has been credited to borrowers’ accounts and used to pay off arrears or repay capital.

This is not what the scheme was designed to do. It was meant to meet the interest payments for up to 2 years of those who qualify for this benefit and so a reform is well overdue. It may be that in the past when there was a much smaller variation in most mortgage rates than is the case today the saving in administration achieved by using a single interest rate to calculate the benefit outweighed the cost of making individual calculations based on the actual rate people are paying. However that was never fair. Some people benefited and some lost out. I trust that “re-adjusting” the amount of this payment is code for making the scheme fairer by linking the amount of benefit to the actual amount of mortgage interest claimants are being charged.

The new bank levy based on their balance sheets will be charged at 0.04% in 2011 and 0.07% subsequently and from 2012 is expected to raise £2bn p.a. This is unlikely to have a significant impact on mortgage or savings rates but applying a lower rate for longer maturity funding, as well as Tier one capital and insured deposits, is very sensible once one accepts the concept of such a tax.

The reason Northern Rock, HBOS and Bradford and Bingley failed, but Paragon survived and continued to make good profits, despite all four relying heavily on the wholesale markets for funding, was not primarily because the first three lenders made bad loans, although HBOS’ commercial lending was a major problem, as was fraud for Bradford & Bingley, but because the average maturity of their borrowings was relatively short, whereas Paragon matched the length of its borrowing to the life of its mortgage lending. Hence when the wholesale markets froze the first three lenders were unable to roll over or refinance their borrowings, whereas Paragon did not have to worry about that, although they had to suspend lending to new borrowers.

Although borrowing for a longer term will normally increase costs to some extent it also significantly reduces the risk of a bank running into liquidity difficulties. By charging a lower rate of tax on longer maturity funding the government is proving that it has learnt something from the banking crisis and this lower tax charge should encourage the banks, as the FSA is in any case already doing, to lengthen the average maturity of their funding by partially mitigating the higher cost. It may even mean more lenders offer longer term fixed rates, say for 10 -15 years, in due course, hopefully while rates are still low enough to make them worth considering.

Categories: Property market, Bank of England, Buy to let, Mortgages, Interest rates

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