Help to Buy

 The Chancellor is happy to increase debt, so long as it's not counted 

Last week was a bad one for George Osborne, Chancellor of the Exchequer.  The IMF called for him to reconsider the pace of his austerity programme. A numerical error emerged in an academic paper widely cited as part of the case for his economic policy.  Fitch became the second ratings agency to downgrade Britain's debt from AAA. And the Treasury Select Committee criticised the 'Help to Buy' scheme outlined in the budget.

Help to Buy involves the government lending money to people to buy houses. Banks typically ask for a deposit equal to about 25 percent of house value, which many struggle to provide. If you are buying a newly built home, the government will now step in and lend you 20 percent of the value, so that you only need a 5 percent deposit. This additional loan from the government will be interest free for five years.

Osborne continually insists that there is no room for debt funded fiscal stimulus on infrastructure investment, as some have called for. Yet, as Simon Wren-Lewis points out, Help to Buy is just this.  It is funded by more borrowing today, so the government can provide its twenty percent. Unfortunately, the corresponding investment is in very risky housing equity, which the state could easily make a loss on. The risks are increased by the fact that the lending will only be to people otherwise considered to have too little security.

Why has Osborne tolerated this? Because it is off balance sheet: the investment in the housing equity will not be counted in deficit figures. These statistics are what Osborne really cares about, as they affect his political narrative. But the policy undermines his argument: it is difficult to believe that investors in Britain's debt also care more about ONS press releases than about underlying fiscal obligations and risks.  According to Osborne, these investors won't tolerate more British debt - unless we don't count it.