Pump up the Bubble!

D J Webb

I have been meaning to address the centrality of the land issue—and particular the crucial role of a land value tax—in libertarian thought, but have not got round to it. Any writing on that will have to await my final wrap-up on the gold standard after I’ve completed my reading of Nathan Lewis’ excellent Gold: the Monetary Polaris, the only book I know of of its type, explaining in explicit detail the actual way in which a gold standard is operated.

However, today’s atrocious Budget Speech deserves some kind of quick intervention. There is much to deplore, including horrible plans to “manage your tax affairs like a bank account”, by automatically bringing in all sorts of bank account and other data. This seems to be rubbing it in just how much the state has manoeuvred itself into the (unlawful) position of oversight of everyone’s personal finances. Slower deficit reduction, to allow for the maintenance of a larger public sector, is another depressing “highlight”. Claims the deficit will be £73.5bn in 2015/16, before a lurch down to £39.4bn in 2016/17, are among the implausible assumptions: such a rapid single-year cut in the deficit is unlikely, going by the evidence of David Cameron’s first term as prime minister.

Of course, there are a number of welcome measures, including a tax allowance for savings, allowing some savings at least to be sheltered from tax, and the proposal to add flexibility to ISAs, such that if you withdraw cash from your ISA you can easily put the same amount back in, despite the fact that you have already used up your full-year allowance. In truth, there should be no allowance: all savings should be tax-free, and I’m guessing these “concessions” are both partly related to the low interest rates that obtain on savings accounts in this extended era of manipulated low interest rates. Another welcome measure is the pledge to abolish Class 2 national insurance contributions for the self-employed. This is the old NI stamp, and amounts to £143 a year. However, no clarity on what will happen to Class 4 NICs was given.

However, what cannot be accepted by anyone with an interest in the financial stability of this country and the financial interests of the people of this country are the “Help to Buy ISAs”. This phrase is worthy of inverted commas, because this is a scheme designed to prop up house prices, and thus exacerbate the risk of a property price correction foisted on first-time buyers. If the government were really interested in “helping” people buy, the greatest help that could be given would be to bring forward measures to lower house prices, specifically by withdrawing a large range of policy measures that artificially prop up the property market.

It seems the government will directly fund one-fifth of the deposits of first-time house-buyers. The government is now directly in the business of subsidizing property purchases. All things being equal, this will have the effect of holding up house prices, not in the interests of the people of this country as such, but, rather, in the interests of the financial system, which was not allowed to properly collapse in 2008. This sends a green light to banks and building societies to lend at sufficient volumes to maintain house prices at their current elevated level—or even drive them yet higher.

Apparently, the Liberal Democrats did not allow the Chancellor, George Osborne, to include a measure raising the limit for the purposes of inheritance tax on main residences from £325,000 to £1m. However, this has been well-flagged up as a policy measure likely to be introduced by a re-elected Conservative government. Main residences are already exempt from capital gains tax, and the intention seems to be that they should be exempt from inheritance tax too. Strangely, earnings from income and capital remain subject to both capital gains tax and inheritance tax, so determined is the government that the economic rent from natural resources (an economic rent that rightly belongs to society as whole) should be tax-free, while those who have nothing pay high impositions on the fruits of their labour.

Property prices in the UK are not, in fact, the natural result of demand for property. There are a raft of policy measures holding them up, including tax breaks for buy-to-let purchases that are not available to first-time buyers; housing benefit; the various incarnations of Help to Buy; rental laws designed to push people into purchasing property; the council tax that taxes residence and not freeholder ownership of land; overly detailed planning laws; and artificially low interest rates. The aim is to boost the wealth of the already asset-rich at the expense of those who have nothing.

There are a large number of people in this country who have paid off their mortgages—this segment of the population may offset the “priced out” generation in electoral calculations—but it seems clear that a rise in interest rates to normal levels would be savage to many who are buying houses now. There is a key problem with inflation figures that deliberately exclude property prices: if property were included we might have seen calls for large increases in interest rates in recent years (calls that would have been unheeded owing to the larger imperative of defending the weak banking sector). But as Sean Gabb has implied on a number of occasions, we may be in a situation where a hearing for a different set of policies can only come about if there is a major crash. Onto the deflationary crunch and then the hyperinflation! The worse, the better!