Boris Johnson’s government, out of ideas and beyond its sell-by date, is stuck in a rut. With the economy heading south as inflation ravages household incomes, there is a sense among Tory MPs that the chancellor should have something more up his sleeve.
Yet all the Treasury can offer them is a looped tape of Rishi Sunak’s 2021 budget speech, when he laid out spending plans that were immediately submerged by the cutbacks and tax rises his fiscal conservatism demanded.
Sunak could point to the £15bn of extra funds he announced little more than a week ago as proof of his commitment to driving the economy forward. It certainly cheered most Tory MPs, who were relieved by the bulging package of discounts and subsidies.
But elation quickly turned to disappointment when it dawned on backbenchers that the £15bn was just a sticking plaster, albeit a very large one, and not a policy to trigger growth and offer hope.
Usually, when the Treasury is confronted by a deteriorating economy, it returns to its tried and trusted playbook, which consists almost entirely of handing the housing market a large tax break in the expectation that huge amounts of consumer spending will begin to flow, and that private sector companies will then regain their confidence and make investment decisions.
Sunak used to be able to rely on the Bank of England to play its part by doing what it has always done since 2008: making borrowing cheaper. On many occasions Threadneedle Street has argued that cutting interest rates and printing banknotes aids businesses and boosts investment. But this is the UK we are talking about, so most people will know, and Treasury officials most certainly do, the vast bulk of borrowed money created in the last decade has not been spent by corporates on new machinery. Instead, consumers and businesses have extended their mortgages to buy property, most of it residential.
It raises the question why, when confronted by another downturn, stamp duty rates remain at their pre-crisis levels. Surely it is time to cut property taxes to get the housing market going again?
The latest Nationwide house price survey appears to show this is unnecessary. House prices grew in May at the same stellar pace seen in 2020 and 2021 when a stamp duty cut was in place. However, the survey also revealed that price growth was beginning to wane. In May, prices grew by 11.2% on a year earlier, down from 12.1% in April. And price growth is expected to fall further by autumn. Some analysts believe the cost of a home may even start to decline at the end of the year and into 2023.
More disturbingly for a chancellor who needs people to move home as a spur to spending, the number of transactions has slumped. The latest Bank of England figures show that in April, house sales fell well below last year’s totals and even below their average, between 2015 and 2019, of 66,500. In the 12 months to April last year, the number of home purchases was almost double that, at 117,000.
From a sustainable economic perspective, cutting taxes to pump up property asset prices always proves to be no more than a sugar rush of spending and arguably its repeated use by the Treasury over many decades is among the root causes of Britain’s economic weakness.
That won’t stop Tory backbenchers salivating over another tax cut dressed up as a mission to save the first-time buyer. It might seem like a journey back to the future, but if it paid dividends in past elections, why not the next?
Some say Sunak is reluctant to give away his intentions for the autumn budget if it means shoring up Boris Johnson’s ailing administration. It is more likely that the chancellor has run out of road now that Brexit has robbed the economy of 500,000 or more workers and Covid another 500,000. The labour force has shrunk and the Bank believes it must confront the remaining workers, who might use their newfound industrial muscle to make inflationary wage demands.
That means that, however blinkered a view of the labour market this might be, interest rates are going up. Even worse for the chancellor, a stamp duty cut would only infuriate the Bank of England and force the monetary policy committee to drive rates up further, nullifying the benefit to homebuyers.
Johnson has hinted that he might call an early general election as a form of political escapology. He could, having ditched Sunak as chancellor, put a stamp duty cut at the heart of his new programme. Backbench Tories might cheer him on, if no one else does.