OPINION: AS THE wheels come off the Government’s Budget, the lack of a coherent economic policy at its base has become plain for all to see, writes John McManus
The numerous unpopular measures in the Budget are hard to defend because none of them seems to be
grounded in any sort of long-term economic planning which could be used to justify them.
They are turning out to be exactly what they seem: a wildly disparate series of savings aimed at balancing the books.
The overriding factor in the decisions as to where the cuts were made seems to have
been political judgments as to whether or not the electorate would wear them.
Where that judgment has been found wanting, the cuts have proved impossible to defend.
It’s not a great surprise, then, that the spending measures in the Budget should also lack coherence or a basis in sound policy.
The shining example of this is the Home Choice Loan scheme,
through which the local authorities will provide mortgages to people whom the banks have rejected.
The whole premise of the scheme seems more than a bit nuts given
that we are in the grips of the worst economic crisis for 80 years, which was triggered by subprime mortgage lending.
But the Government’s rationale for the scheme - for which no figure seems to have been given -
is that it is to help people who would in the normal way get mortgages if it were not
for the current credit crunch, which has made it difficult for the banks themselves to get money.
This ignores the fact that the Government has comprehensively addressed
this issue through the €460 billion State guarantee for the banks -
and its implicit acknowledgment that it will recapitalise the banks if necessary.
This has already started credit flowing again.
However, the Government has pressed on with the scheme and is offering
a product to first-time buyers that is pretty much identical to the first-time buyers’ packages on offer from the main banks.
They will lend up to 92 per cent of the value of the property and up to five times your salary.
But in order to qualify for the Government’s loan you have to have been
knocked back for a similar loan by two commercial banks.
Given the improvement in the credit markets there really can be only two reasons why
the banks would reject a first-time buyer in this environment.
The first is that they don’t think you are going to be able to meet your repayments,
most likely because of the nature of your job and the current economic environment.
The other reason is that they do not think the property its worth what you are prepared to pay for it,
which is a pretty good call in a market where prices are falling by 1 per cent a month.
It seems like utter madness for the State to then step in and provide mortgages to these individuals.
It is about as close to subprime lending as you could want to come.
But that is only the start of the problem. The home choice scheme has in effect
put a limit on how far the Financial Regulator can roll back the lending practices of the banks -
assuming that it is of a mind to do so.
What on earth is the regulator supposed to do when the banks come along and
say - quite rightly - that they should still be allowed offer mortgages on the basis
of five times salary and 92 per cent loan to value because the Government is doing the same?
It also makes it difficult for any bank - should it have a rush of blood to the head -
to act more responsibly because it will find itself losing business to the State.
**But by far the biggest flaw of this hare-brained scheme is the potential impact it will have on prices.
And as with previous interventions the only beneficiaries will be developers and
anyone who has a vested interest in their survival.
By making itself a lender of last resort for borrowers considered too toxic for even the Irish banks,
the Government risks putting a false floor in the market at around €300,000 in urban areas.
(The maximum that can be borrowed under the scheme is €285,000 and
according to the Permanent TSB/ESRI house price index the average price
paid by a first-time buyer was just under €240,000 last month.)
This can only prolong and disrupt the necessary and inevitable readjustment of property prices.
And until that happens there is little hope of a stabilisation of the national finances -
the stated objective of the Budget.**
**The Home Choice Loan scheme is another incredibly stupid State intervention in the
property market in a long list of incredibly stupid interventions.
© 2008 The Irish Times