In one sense, Andrew's right.The scheme (pdf) increases the government's contingent liabilities; it might have to pay several billions if those guarantees are exercised. In this sense, the government's off-balance sheet debt has risen; Osborne has learnt from the last Labour government, and not from US experience*.
So how can I say the scheme will reduce government borrowing? Let's assume the plan does what it is intended to do, and so someone takes out a £100k mortgage they would not otherwise have taken.
This mortgage, however, is someone else's asset; the person selling the house gets an increase in their bank deposit.
Now, if this is all that happens, Andrew is right. The aggregate financial balance of households has not changed, so there is no reason why any other sector's financial balance should change.
But is this all that happens? Not necessarily. If the seller spends some of the proceeds on consumer goods, then households' aggregate financial balance declines, because the seller's bank deposits don't rise one-for-one with the mortgage. Another sector's financial balance must therefore increase. And this would be at least partly the government's, to the extent that its gets tax revenues from the home-sellers purchase of goods.
The same thing would happen if the rise in house prices caused by the extra demand might cause other homeowners to borrow more to fund consumer spending, either because their collateral has increased or simply because they feel richer.
There's another possibility. Increase mortgage demand might encourage housebuilders to build more. This would mean they run down their cash balances as they buy materials and labour. This might reduce the corporate sector's aggregate financial surplus, depending on what materials' sellers do with the revenues. The counterpart to which would be an improved government financial balance - say, because of higher corporate taxes from materials' sellers.
These were the sort of mechanisms I had in mind. How might Andrew be right? One channel would be if the home-sellers, being currently highly geared, merely use the proceeds of their sale to pay off their mortgage and trade down. Another possibility would be if rising house prices cause people who'd like to buy a house to save more for a deposit; as Willem Buiter has said, housing isn't net wealth.
In theory, then, either Andrew or I might be right. My chart, however, suggests the odds favour me. It shows that there has historically been a correlation between house prices and households' financial balance. High prices, such as in 1988-98 and the mid-00s were associated with households' financial deficits, and low prices with surpluses. This makes me think that encouraging mortgage lending and raising house prices will increase households' aggregate financial deficit.
Now, accounting identities mean that if one sector has a higher deficit, another must have a higher surplus or lower deficit. There are only three possibilities here:
- Foreigners run a higher surplus, because the additional household borrowing is spent on imports. But the marginal propensity to import is less than one, so this isn't the whole story.
- The corporate sector's surplus rises. This would happen if housebuilders simply pocket the proceeds from additional house sales and don't reinvest them. If this happens then Osborne's hope of encouraging housebuilding will have failed.
- The government's deficit will fall, say because the extra spending associated with the declining household surplus brings in tax revenue. If Osborne's scheme works at all as he hopes, this must be at least part of the story.
* Fans of 1970s comedians might claim he's paid more attention to Balls than Fannie.