With the Pre-Budget Report just a week away advice is becoming prevalent! I will try to collect some of the more interesting.
First up - Ernst & Young - interesting calculations
Then a rogue one from Adam Posen, a member of the Bank of England's Monetary Policy Committee. “Rogue” in many senses - for a start members of the BoE’s MPC normally keep well away from fiscal matters. Then the idea has been floated without the slightest nod in the direction of political fall-out! One can see what he’s getting at and can see the logic in purely theoretical terms. There is a shortage of housing already and builders are not even meeting replacement needs in the tail end of the recession. Therefore house prices will rise and the owners make gains which are “unmerited”. For the last decade many owners have gleefully remortgaged and gone on a spending spree with the “profit” proceeds thus producing an asset bubble which contributed greatly to the recession..
I won’t go on as you can work it out for yourselves. I would just add that this is - as it stands - a non-starter if ever I heard one.
Christina
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TELEGRAPH 2.12.09
1. Chancellor needs an extra £15bn, ITEM says
The Chancellor needs to find an additional £15bn over the medium term if he is to meet government borrowing targets set out in the Budget, a respected group of economists has warned.
By Angela Monaghan
The Ernst & Young ITEM Club urged Alistair Darling to take the opportunity presented by next week's pre-Budget Report to set out a clear strategy for putting the nation's finances "back on a more sustainable footing".
It said that a combination of spending cuts and tax increases would be required and that fiscal tightening of an extra £15bn on top of that implied in the Budget would be required to meet the Chancellor's projections for just below £100bn of borrowing by 2013-14. The additional requirement reflected ITEM's weaker growth forecasts – compared with the Treasury's – and its more cautious view on how quickly tax receipts will bounce back, the report said. The Treasury is forecasting £175bn of borrowing this year.
"The UK's fiscal reputation is on notice – given the size of the deficit, action is needed," said Peter Spencer, chief economic advisor to the ITEM Club. "A key issue, however, in designing the post-election fiscal strategy is the impact that the sizeable policy tightening needed will have on the strength of the economic recovery."
Last month Fitch, the ratings agency, said that of all the major economies, Britain was at greatest risk of losing its top-tier credit rating. Mr Spencer said that ideally, monetary policy would be loosened to offset the negative effects of fiscal tightening on spending.
However, with interest rates at just 0.5pc and likely to remain low for the foreseeable future, the scope was very limited, he said.
2. Posen calls for 'bubble tax' on homes
Homeowners must be charged penalty taxes on their properties if the UK is to avoid a future housing crash, according to one of the Bank of England's policymakers.
By Edmund Conway and Angela Monaghan
Adam Posen, a member of the Bank's Monetary Policy Committee, said that the Government should consider slapping extra taxes on British properties, suggesting that in future homeowners should have to pay an extra charge if prices rise too fast. In comments which will cause extreme disquiet in the Treasury, he even indicated that this may mean imposing capital gains taxes on first homes and raising stamp duty.
The comments, in a speech at a conference in London on Tuesday, are highly unusual since MPC members generally steer well clear of comments on fiscal policy. But Mr Posen, the newest member of the nine-person committee, said that while he was "speaking solely for myself alone as an economist looking at the boom-bust problem", he felt some kind of tax penalty on house prices was an important solution to Britain's repeated housing crashes.
He said: "if we can contemplate a Tobin tax on financial transactions, we should be able to set up something in a similar spirit for real estate transactions which are already taxed and regulated... it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly."
The Bank is currently investigating what extra "macro-prudential" tools it can create alongside interest rates to help it control the ebb and flow of the credit cycle. Mr Posen said policymakers should also "go after some of the problem directly, beyond the banking system itself", adding that the ideal solution was "an automatic stabilizer for housing prices".
Britons' first homes are currently excluded from capital gains tax, but Mr Posen appeared to indicate that he may favour imposing capital gains on existing homeowners, saying: "One would have to be careful not to bias the system against new or existing housing, so stamp-type duties would have to be equalized in some sense versus transfers or capital gains."
Philip Shaw, economist at Investec, said: "Effectively what he is saying is that strong periods of house price rises can be dangerous. You can't use interest rates to deal with asset prices, therefore different instruments are needed to make sure the bubble doesn't inflate.
"One of the problems it has relates to how politically feasible it is. It is difficult because with any tax-based system there is a political reality to be considered."
The proposal will cause consternation in the Treasury, in the run-up to the pre-Budget report.
Mr Posen's comments came as Nationwide said that average house prices in Britain rose by 0.5pc in November to £162,764, a similar level to where prices were in early 2006. It was the seventh consecutive monthly rise following a 0.5pc rise in October, and pushed annual house price inflation up to 2.7pc, from 2pc.
However, over a three-month period the rate of increase dropped to 2.8pc from 3.5pc in October and 3.8pc in September, as prices rose more moderately compared with the spring and summer months when they rebounded from the lows of early 2009.
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