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Time to heed the economic warning signals

FOR the UK economy, 2014 could well be the Year of Living Dangerously.

CHANGING TACK: George Osborne's strategy to stimulate the housing market is a departure from his 2011 Budget focus. Picture: Andrew Cowie
CHANGING TACK: George Osborne's strategy to stimulate the housing market is a departure from his 2011 Budget focus. Picture: Andrew Cowie

We would do well to heed swiftly the warnings being sounded about the scale of consumer debt, and the high-risk nature of the UK Government's short-term moves to re-inflate the housing market.

With the Coalition Government's vision of a recovery based on manufacturing sector exports having failed to materialise, it decided instead to boost the housing market ahead of the 2015 General Election.

The Coalition strategy looks like the economic equivalent of going on a drinking binge with a serious hangover, given the UK's still-high consumer debt and past experience that the public spends when house prices climb.

Chancellor George Osborne will surely be well aware of the degree to which the mood of the UK consumer swings with the perceived state of the housing market. It may well be this very link which makes the latest economic strategy so attractive to the Conservatives as they look ahead to the 2015 election.

Assuming the link has not escaped Mr Osborne, he should also be aware of the dangers of the path he is taking. It is a very different path to that set out in his March 2011 Budget. Britain, Mr Osborne assured us then, would be "carried aloft by the march of the makers".

Nearly three years later, the UK's performance in terms of overseas trade is truly woeful. And business investment has also fallen way short of Coalition expectations. Given the makers were struggling to march, it is perhaps understandable that the UK Government wanted something exciting to happen quickly on the economic front.

As it searched for a quick fix, the familiar housing market policy red button presumably came to mind, in an "in case of emergency, break glass" kind of way.

There is usually a penalty for ill-judged smashing of the glass in such emergency apparatus. In this case, any such penalty may well not be paid by those who have activated the button, through housing market policy measures including the Help to Buy scheme. Rather, it will be paid by UK households, already weighed down by the bill for the global financial crisis and subsequent Great Recession. And first-time buyers, taking advantage of state support to get a foot on the residential property "ladder", might bear a disproportionate cost.

It will be fascinating, in terms of the 2015 election, to see whether or not timing works to the advantage of Mr Osborne and his colleagues when it comes to their housing market moves.

Unfortunately, it may well be more hazardous than fascinating for many UK households.

While Mr Osborne and his colleagues might avoid any penalty, particularly if the risks of their strategy do not crystallise until after the 2015 election, they have prompted piercing warnings about the hazards of their policies by pressing that housing market button. The situation was summed up excellently last week by the Institute for Public Policy Research (IPPR), the centre-left think-tank.

The IPPR highlighted predictions by the Office for Budget Responsibility, set up by the chancellor to provide independent economic forecasts, that UK consumer debt would rise sharply in coming years from already-elevated levels.

In a briefing paper entitled "The Bittersweet Recovery", the IPPR declared: "Despite a recent spate of good news, there is still plenty of cause for alarm about the UK economy."

Tony Dolphin, IPPR senior economist, said of the Coalition's housing market move: "As a short-term measure to boost growth while it continues to cut public spending, it might be politically expedient for the Government to adopt this approach.

"However, it is not a sustainable strategy for the British economy. George Osborne was right when he said that we can no longer rely on ever-higher levels of debt for growth. It is an indictment of the failure of his attempts to boost business investment spending that, rather than encouraging a rebalancing of the economy, he now has to resort to policies that will increase its imbalances."

The danger posed by debt-fuelled consumer spending has also been highlighted recently by Professor Brian Ashcroft at Strathclyde University's Fraser of Allander Institute think-tank.

Bank of England Governor Mark Carney said last month: "Despite admirable progress by British households in recent years, aggregate debt levels remain high at 140% of incomes."

The IPPR cited the OBR's projection that this proportion would rise to about 160% by 2018.

Bank chief economist Spencer Dale cited the UK housing market's "tendency to turn from lukewarm to scalding hot in a...few economic seconds".

There has been growing talk in recent weeks that the first rise in UK base rates from their record low of 0.5% might not be that far away. A sharp fall in the UK unemployment rate to 7.4%, on the International Labour Organisation measure on which the Bank of England is focused, has fuelled this chatter.

Such talk is probably overdone.

But consumers, many of whom might have enjoyed a one-off boost to spending power from compensation for mis-sold payment protection insurance, should tread warily.

They should calculate monthly mortgage payments on the basis of much higher interest rates than those today. Households, which continue to endure falling incomes in inflation-adjusted terms, should also take a long, hard look at how they would cope with their overall debt burden if interest rates were higher.

For some first-time buyers in their late teens or early twenties, base rates will have been at 0.5% for all of their working lives. That is quite a thought.

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