Plan A’s Green Shoots of Economic Recovery

The Tory party finally has reason to cheer. After years of vitriol on all aspects of coalition economic policy from the left, Mark Carney this week declared ‘recovery had taken hold’. His proclamation is well justified: there are more people in work than ever before in the UK, unemployment is down 0.2% on the last quarter, annual growth is predicted to exceed forecasts at 2.8%, and inflation has fallen from 2.7% to 2.2%. So, where next for the British economy?

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George Osborne’s ‘Plan A’ seems to be working

Well, the initial signs are good. Key sectors such as financial services and construction, which can be used as a barometer as to the overall performance of the economy, are improving, and the growth forecast suggests this growth will continue to increase. As such, after spending five years seemingly mortally wounded, the British economy is slowly waking up. The biggest danger to the economy as growth increases is inflation stifling the benefits to the cost of living, hence why Mark Carney said he would raise interest rates before 2015 ‘if [I] had to’.

The government must intervene less in the economy, especially with wasteful levies and taxes that drive up prices and kill off competition, intervening in order to encourage economic growth, not stifle it. State schemes have a role to play in kick starting markets which stagnated after the 2008 crash, but this role must be a sustainable one, else we risk state-funding another dangerous bubble.

The government’s Help to Buy scheme is one such way, but has proven very controversial right across the political spectrum. Surely the lesson of the 2008 sub-prime mortgage crisis was not that we need more sub-prime mortgages? New home buyers seem to disagree. Royal Bank of Scotland and Halifax say they had received a total of 2,384 applications, potentially worth £365m in mortgages.

However, whilst Help to Buy appears to have been an initial success, the real danger it presents is that it will drive up house prices by increasing demand for but not supply of housing and so overall access to the market will not improve. Britain already has artificially high house prices as a result of a lack of supply, even after prices fell in the wake of the financial crisis. If there’s one thing we must take away from the housing market crash, it is that driving up house prices by encouraging unsustainable demand will lead to disaster, and Help to Buy makes this a real possibility. To their credit, banks are applying more rigorous credit checks than they did pre-2008, with up to half of all Help to Buy applications likely to be rejected on the basis of risk, according to The Telegraph.

As such, the economy seems to be in safer, more responsible hands now than it was in the early 2000s, where banks were betting against their own investments and sub-prime mortgages reached up to 125% of the value of the house being bought. However, many people will not feel the benefit of any economic growth if cost of living remains so high, which, as I mentioned in a previous article, is to be solved by cutting taxes. The state therefore has plenty of work to do in the markets, but much of it must be setting them free. Let the invisible hand do its work, and everyone will benefit.

Elliot Burns

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