the times | Wednesday May 25 2022 39

CommentBusiness

Rishi Sunak is caught

between No 10 and

the Tory party faithful

A windfall tax is no quick fix for a

deepening crisis in the cost of living

T

alk of falling house prices is

in the air, most notably

from Nationwide Building

Society, which last week

warned that pressure on

household budgets had created “a

risk of a downward movement in

house prices”. That, along with four

consecutive interest rate rises from

the Bank of England, has also

generated concern about a rise in

home repossessions.

These have been suffered during

previous housing corrections, most

notably during the crash of 1990-95,

when 345,000 homes were

repossessed. During the worst year,

1991, repossessions were running at

nearly 1,500 homes a week, which, in

turn, fuelled further house price falls

as lenders sought to recoup losses by

selling repossessed homes.

The Centre for Economics and

Business Research warned last

month that repossessions could rise

by between 40 per cent and 50 per

cent this summer, equating to almost

4,000 borrowers losing their homes

every three months, and that, if the

Bank Rate was to hit 2 per cent by

the end of the year, repossessions

could double.

Latest figures from UK Finance

suggest that repossessions are

already creeping up. The industry

body reported last week that during

the first three months of the year 580

homeowner mortgaged properties

and 370 buy-to-let mortgaged

properties were repossessed by

lenders. That was 240 more in total

than during the final quarter of 2021.

Yet there are reasons to hope that

the experience of the early 1990s will

not be repeated. The first is that the

recent rise in repossessions has

nothing to do with squeezed

household budgets and everything to

do with courts ploughing through a

backlog of cases built up during the

pandemic. Repossessions are also

rising from a very low base because

of the possession moratorium put in

place by the government at the start

of the pandemic in March 2020,

which lasted until April last year.

The second is that households are

not, in general, borrowing on the

high loan-to-value ratios they did

before the early 1990s’ housing

crash. Nationwide, the country’s

second largest mortgage lender, said

last week that its typical home loan

was now worth 52 per cent of the

property on which it is secured,

down from 56 per cent last year,

while Santander, the third largest

player, recorded an average loan-to-

value ratio of 40 per cent last month.

Third, mortgage rates remain

undemanding. HSBC, for example, is

charging 2.54 per cent for a three-

year fixed-rate deal with a loan-to-

value ratio of 60 per cent. By

contrast, the typical mortgage rate in

1991 was north of 11 per cent.

Comparatively low mortgage costs

are the main reason why

repossessions did not rocket during

the global financial crisis. The speed

with which the Bank of England cut

its policy rate to close to zero

prevented many people from losing

their homes, despite a rise in

unemployment. Thus the proportion

of households in mortgage arrears

remains low and actually fell, for a

fourth consecutive quarter, during

the first three months of this year.

That reflects another critical

difference between now and the

early 1990s. The attitude of lenders

has changed. They learnt not only

from the repossessions moratorium

during the pandemic but also, more

importantly, the payment deferrals

introduced at that time. Lenders

provided nearly three million

mortgage deferrals, helping many

borrowers from falling into arrears,

while they have been pleasantly

surprised by how many customers

who took deferrals have since

returned to making payments.

The behaviour of both borrowers

and lenders has changed for the

better, with both sides now far more

likely to be proactive in contacting

the other at the first sign that

payments may be about to be missed.

Yes, house price falls this year are

perfectly possible. But there is no

reason to fear repossessions on the

scale seen in the early 1990s.

David Smith

Ian King

In the many years I

have been following

governments as they

make economic

policy, it is hard to

recall anything quite like the disarray

we are seeing over how to respond to

the cost-of-living crisis. Maybe all

those parties left a legacy of brain fog.

Half the cabinet is against an energy

windfall tax and say so publicly, as are

some of Boris Johnson’s key advisers.

The Treasury, plainly, is working on

such a tax, though presumably it will

have to be called something else,

perhaps a “special revenue-raising

operation”. Then there is the disarray

about what a tax should be used for,

with the prime minister apparently

in favour of channelling it into long-

term projects, which rather defeats

the object.

There is a reason for all this, which

goes beyond the normal chaos

associated with this government. It is

that there are no good options for

dealing comprehensively with the

soaring cost of living.

A windfall tax would be temporary

and would raise relatively little

revenue, even on a one-off basis,

though the chancellor is reported to

be trying to get it up to more than

£10 billion. It would add to the

impression, highlighted by the Centre

for Policy Studies this week, that

Britain has become a less attractive

place to do business. Politically, it

would be a U-turn, forced on the

government by opposition parties and

dragged kicking and screaming

through the cabinet. Tying a windfall

tax to energy companies’ investment

plans would create a dog’s breakfast

and would be a bonanza for lawyers

and accountants.

If a windfall tax did raise £10 billion,

the help this would provide has to be

set against a hit of £40 billion,

perhaps more, to real

incomes this year and

an economy that,

according to the

latest “flash”

purchasing

managers’ survey,

is slowing sharply.

The windfall

tax debate arises

because, for Rishi

Sunak, this was

meant to be a time of repair for the

public finances, after the £450 billion

of extra government debt built

because of the pandemic. He reached

the limit of permanent tax rises with

increases in corporation tax, national

insurance and income tax (by freezing

tax allowances and thresholds)

announced last year. Hence the search

for a temporary solution.

Instead of raising a few billion from

a windfall tax, the government simply

could borrow more instead. The latest

official figures showed a downward

revision of £7 billion in borrowing for

the 2021-22 fiscal year and were below

expectations last month.

The chancellor may want to keep

his powder dry for pre-election tax

cuts and in March gave us the

curiosity of a pre-announcement of a

penny off the basic rate of income tax

(to 19p) in 2024. He is also worried

about the impact of soaring inflation

and rising interest rates on the

government’s debt interest bill.

That concern is fair enough.

Holding back now to leave room for

further pre-election tax cuts is not.

People will carry memories of this

cost-of-living squeeze to the next

election. It is sometimes forgotten

that Kenneth Clarke cut income tax

twice in the run-up to the 1997 general

election, but this did not prevent the

Tories tumbling to a landslide defeat.

The economics of a response to the

cost-of-living crisis are plain enough.

The government should help those for

whom the squeeze is most painful.

The Resolution Foundation estimates

that the inflation gap between the

richest and poorest households has

never been higher, because the latter

spend a higher proportion of their

income on fast-rising food and fuel. It

recommends increasing universal

credit, together with legacy benefits

such as the employment and

support allowance. It also

calls for an increase in

the state pension or, if

that is logistically

too difficult, bigger

winter fuel

payments next

winter, as well as

a more generous

warm homes

discount.

For a Tory

chancellor under

pressure from a

Downing Street that

regards a windfall tax as

“unconservative” and party faithful

screaming out for immediate tax cuts,

this creates a dilemma. Not only do

measures such as those outlined

above not send Tory pulses racing,

they may not do the Tories much

good. Apart from being “too little, too

late”, they are not directed at the

party’s natural constituency, except

possibly pensioners. They probably

would not change the perception,

which polls show, that Labour would

have acted sooner and more

effectively.

Politically, the “squeezed middle”,

Theresa May’s “just about managing”

families, think they are as deserving

of help as anybody and may no longer

be just about managing. This is a

variant of the Tories’ “red wall”

problem. While the government has

not done much for red wall voters so

far, the perception that this is its focus

is already creating a backlash among

“blue wall” Tories.

There is no good way of easing the

cost-of-living crisis through tax cuts.

Some want a big temporary cut in

VAT, as Labour did in the financial

crisis. Would it not reduce inflation at

a stroke? A five percentage-point cut

in VAT, for a year, would cost

£37.5 billion. It would cut inflation, but

by no more than two percentage

points, because most consumer

spending is not subject to VAT (one

Downing Street source was quoted at

the weekend as urging a cut in VAT

on food, which is zero-rated). It would

pose a “re-entry” problem, too, raising

inflation when VAT returned to

normal levels. Importantly, it would

disproportionately benefit the better-

off, in common with all tax cuts.

There is always a case for tax cuts, but

as a way of delivering targeted help for

those most affected by a cost-of-living

crisis they are useless.

The dilemma will not go away.

Rishi Sunak, having steered the

economy through the pandemic,

finds it impossible to respond

adequately to its aftermath and the

consequences of the war in Ukraine.

The governor of the Bank of England

admitted a few days ago that he felt

helpless in the face

of the surge in

inflation. On this at

least, he is at one

with the chancellor.

‘‘

’’

David Smith is Economics

Editor of The Sunday Times

[email protected]

Ian King is business presenter of Sky

News. Ian King Live is broadcast from

10-11am on Sky News Monday to Friday

There can be grounds for

optimism amid fears over

rising home repossessions

Average house price

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