UK Economy Needs More Than Quantitative Easing To Recover

Britain's cycle of rising debt and dependence on consumption to drive growth make it unlikely to bounce back any time soon.












Britain has just been through what is now officially the deepest slump since the Great Depression – pictured, the unemployed marching in London in 1930.

Britain has just been through what is now officially the deepest slump since the Great Depression. Economic data from the pre-war era is not 100% reliable, but the drop in output after the sub-prime mortgage crisis appears to have been almost on a par with the contraction following the Wall Street crash. What's more, the recovery – such as it is – has been even slower than in the 1930s.

Talk of a lost decade is not misplaced. The economy is likely to grow by barely 1% this year and will struggle to do much better than that in 2012. At this rate of progress, it will be 2016 before output returns to its level when the recession started in early 2008.

This performance looks all the more miserable when you consider the amount of stimulus that has been thrown at the economy. Interest rates were cut to 0.5% in early 2009 and have remained there. The government has borrowed £390bn in total in the last three fiscal years. After printing £200bn of electronic money, the Bank has decided that is not enough and has announced plans to do a further £75bn of quantitative easing. The image that springs to mind is of John Cleese's response when Michael Palin's pet shop owner insists that were the Norwegian Blue not nailed to its perch "it would nuzzle up to those bars and 'voom'".

"Voom?! Listen mate, this bird wouldn't voom if you put 4 million volts through it. 'E's bleedin' demised."

This is not the view of George Osborne or Sir Mervyn King, although both admit it is taking a while for the dead parrot to awake. King said last week that the UK was in the grip of a financial crisis at least as severe as that in the 1930s and perhaps the worst ever. The chancellor has repeatedly warned that it will take a long time to recover from the debt binge of the last decade. Most post-war recessions were caused by a tightening of economic policy in response to inflation, but that of 2008-09 was the result of individuals and banks borrowing too much.

Still, the mainstream view is that sooner or later things will get back to normal. Over the past two centuries, western economies have always bounced back from economic traumas, no matter how severe. It is taken as read that industrial capitalism is inherently robust and adaptable. It is perhaps time to challenge this assumption.

The first piece of evidence comes from the Office for Budget Responsibility, the independent fiscal watchdog created by Osborne when he became chancellor. Forec asting has been outsourced to the OBR, which expects growth to be quite perky in the years ahead, leading to a fall in the UK's budget deficit. Crucially, though, this is only because the OBR expects household debt to rise in the years ahead, from £1.6tn in 2011 to £2.1tn in 2015.

Alert readers will spot the circular argument here. Britain has a personal debt bubble that goes pop. Government steps in to clear up the mess and ends up with record peacetime debts itself. The cure for this is to get individuals borrowing again. Well, maybe. All the signs are that this will prove harder than the OBR imagines, resulting in weaker growth and a higher budget deficit.

This leads on to a second point, which is whether the UK variant of modern industrial capitalism is really as robust and adaptable as our policymakers would have us believe. The story of the past 25 years and more has not been of a new model of sustainable growth emerging from the old. Not since the mid 1990s has there been a period where the motor of growth has been production rather than consumption. For the rest of the time it has been the tale of asset-price booms, the withering of the productive base and the onward march of big finance. Following the bubble to end all bubbles, the taxpayer had to dig deep to bail out the banks and prevent an even deeper recession, pauperising the state in the process. A model that relies on excessive personal indebtedness and ends with the innocent suffering from extreme austerity seems neither robust nor adaptable, just bankrupt.

Britain has not been alone in its long march down this dreary road, but it has travelled further down it than any other developed western country. King and Osborne agree something has to change. The upbeat vision of the future goes something like this: Britain, despite everything, has a sizeable manufacturing base and can enjoy the benefits of a 25% drop in sterling since 2007. The UK has top-notch scientists who will deliver a new wave of innovation. It has an independent central bank that knows what it is doing and a Treasury determined to keep interest rates low. The banking system is being repaired. Credit will eventually start to flow again, taxes will at some point come down, consumers will pay off their debts and firms will start investing.

The dystopian vision of the future sees Britain displaying many of the traits of a developing country. Here's what a typical developing country looks like. It is governed by an elite and there is a gulf between rich and poor. The elite extracts economic rents from the rest of the population, then salts them away in tax havens. Developing economies often rely heavily on one commodity, which crowds out activity in other sectors. To the extent that they have an industrial base, it is as an assembly plant for foreign-owned transnational corporations. The country tends to be deficient in physical infrastructure and human capital. All too often the best brains leave the country.Now consider Britain. The country is dominated by the City, which exerts an extraordinary amount of political power. There is a widening gap between rich and poor. The rich find ingenious ways to avoid paying taxes. Large parts of the country are dependent on the public sector, while the private sector is increasingly dominated by financial services. Industry makes up a smaller and smaller part of the economy and not one world-class manufacturing firm has been developed from scratch since the second world war. Firms complain they can't find skilled labour. The infrastructure is a joke – witness the lack of snowploughs to keep Heathrow open during last winter's snow. This is not an economy that is going places: it is going south.

Homelessness Up As Cuts Take Effect

Homelessness is on the rise in the wake of the recession and government cuts to housing benefit, official figures show.












In the three months to June there was a 17 per cent rise to 11,820 in the number of households accepted by local authorities as in priority need of rehousing, compared to the same quarter last year.

The figures show that on almost all measures homelessness is now rising, reversing a trend that has seen more or less continuous declines since 2003, according to Crisis, the homelessness charity.

A report commissioned by Crisis and carried out by academics at York and Heriot-Watt universities to coincide with the figures warned the “worst is yet to come” after the combined effect of the economic downturn and significant cuts to housing benefit takes hold.

“Government reforms, in combination with the pressures of the economic downturn seem certain to increase all forms of homelessness, from rough sleepers on our streets to homeless people hidden out of sight,” said Professor Suzanne Fitzpatrick of Heriot-Watt’s institute for housing.

The latest figures are the first since cuts to the local housing allowance for new claimants – an allowance that determines housing benefit levels – were introduced in April. There has been a big percentage rise, although small numerical increase, from 1,460 to 2,130 in the number of households accepted as homeless because a private rented tenancy has come to an end.

The report for Crisis notes that during the last big housing recession in the early 1990s, homelessness fell as lower house prices eased access for first time buyers, releasing homes for rent.

That is unlikely to happen this time, the report says, as available lettings in the social rented sector are down and first time buyers still face difficulty in getting mortgages.

On top of big housing benefit cuts, the government is moving towards more “flexible” tenancies in social housing while pushing up rents for new homes to 80 per cent of market levels. Both moves will weaken the safety net function of the social rented sector, the report says.

Leslie Morphy, chief executive of Crisis, called on the government to reverse the housing benefit cuts and withdraw its plans to no longer pay benefit on actual housing costs, instead providing an allowance. “We need the government to change course now or risk returning us to the days of countless lives facing the debilitating effect of homelessness,” she said.

Grant Shapps, housing minister, urged those threatened with homelessness to seek help as early as possible, arguing that a wide range of support remained available to people struggling to stay in their homes.

Parents Paying £77,000 'Premium' For Homes Near Top State Schools

Parents are paying ‘premiums’ of on average £77,000 to buy homes near leading state schools, research out today suggests.
















Pricey: Catchment area of the Henrietta Barnett school (pictured) has homes with an average price of £655,429.

Property prices within sought-after catchment areas are 35 per cent higher than in the rest of the UK, with an average asking price of £298,378.

The most expensive catchment area of a state school in Britain’s top ten surrounds all-girls grammar Henrietta Barnett, in Barnet, north-west London, where the average house price is £655,429.

The premiums have soared from an average of £20,000 in just four years.

And rent in the catchment areas of the top 50 state schools – at an average of £944 a month – is 7.8 per cent higher than in the rest of the country. For the catchment areas of six of them, rental prices are as high as £1,500 a month.

But the premiums are still cheaper than most private school fees, which can top £30,000 a year.

The research is likely to reignite the bitter row over school ‘selection by mortgage’ rather than ability.

The phenomenon has prompted some councils to adopt controversial lotteries – effectively picking names from a hat – to give children from poorer homes an equal chance of getting a place at a top school.











The research, from property website PrimeLocation.com, is based on average asking prices in July this year and GCSE results taken from 2010.

It shows a handful of the top schools are in areas with typical house prices more than twice the national average of £221,110.

These include St Olave’s and St Saviour’s Grammar in Orpington, Kent, ranked second in the UK, where house prices average £592,471. Notably, house prices in the area around the top-rated Bishop Wordsworth’s Grammar, in Salisbury, are just below the average for leading schools at £286,112.

Nigel Lewis, property analyst at PrimeLocation.com, says: ‘For many years now the challenges of the catchment area-based lottery for state schools have vexed millions of parents across the UK – and our research highlights how much it can cost to get your child into the ideal school.’

n The first 24 ‘free schools’ are to receive £130million between them from the Government to cover their start-up costs this year.

Among those getting state backing is the Maharishi School, in Ormskirk, Lancashire, where children as young as four will be given meditation classes.

David Cameron's Shadow Cabinet Drawn Into Expenses Scandal

Senior members of David Cameron’s shadow cabinet have been implicated in the parliamentary expenses scandal.













Michael Gove and Andrew Lansley “flipped” properties designated as their second homes to claim allowances for multiple properties at taxpayers’ expense.

The tactic has been criticised by another member of the shadow cabinet.

Other senior Conservatives who made questionable claims included Alan Duncan, the shadow leader of the House of Commons, who oversees the party’s expenses policy. He was officially warned over his gardening bills after attempting to claim more than £7,000 in two years.

David Willetts, the shadow universities secretary, claimed more than £100 for workmen to replace 25 light bulbs at his home. Oliver Letwin, the chairman of the Conservatives’ policy team, claimed more than £2,000 to replace a leaking pipe under a tennis court.

Two members of the Conservative front bench, Mr Gove and Cheryl Gillan, have agreed to repay some expense claims.

Mr Cameron this morning called on Tory MPs to explain any dubious claims and publicly apologise for any "mistakes", saying it was "not good enough" to claim they had just been following the rules.

"What I want is for Conservative MPs, as with other MPs, to come out and explain why they claimed what they claimed, to admit to any mistakes, if there have been mistakes, and collectively to say 'Look, this system was wrong, we took part in it, we operated it'," he said.

"It's not good enough to say we obeyed the rules. We need a big acknowledgement that we are sorry that this happened and it needs to change."

Liam Fox, the shadow defence secretary, said that the public had the right to be angry at MPs of all parties over the expenses scandal.

"I think voters can differentiate between what they think are legitimate expenses for those who have to have a second home to represent them in Parliament and what the public would regard as frivolous or luxury expenses," he told the BBC Radio 4 Today programme.

"There is an element of common sense in that and I think voters can see that even when MPs may not have been able to see it."

Mr Duncan, one of the leading Tories whose claims have been thrust into the spotlight by the latest revelations, called on all MPs to apologise. "The House of Commons is in such a mess, these allowances have got to stop," he said.

Lord Carey, the former Archbishop of Canterbury, said that a “culture of abuse” had developed among MPs claiming expenses. Lord Naseby, a Conservative peer and former deputy speaker, said that the standing of Parliament had been brought “right down into the pits” and there may be a need for an immediate general election.

The Daily Telegraph has obtained details of expenses claims made by MPs from all political parties over the past five years.

The expenses scandal detailed over the past three days has hit the Cabinet, extended to the entire Government and is now shown to stretch to the highest levels of the Conservative party.

The Telegraph Expenses Files on the shadow Cabinet disclose that:

* Michael Gove, the shadow education secretary, spent more than £7,000 in five months furnishing a London property in 2006 before “flipping” his second home designation to a new property he bought in Surrey. He then claimed more than £13,000 in stamp duty and other fees from his Parliamentary expenses for this property. Mr Gove’s behaviour surprised colleagues because the former journalist was only elected in 2005 and is close to Mr Cameron.

* Andrew Lansley, the shadow health secretary, spent thousands of pounds renovating a thatched Tudor country cottage shortly before selling it. He redecorated inside and out with premium paint at a cost of £2,000 and re-shingled the driveway. He then “flipped” his expenses to a Georgian flat in London where he claimed for thousands of pounds in furnishings including a Laura Ashley sofa.

* Francis Maude, the shadow minister for the cabinet office, attempted to claim the mortgage interest on his family home in Sussex. This arrangement was rejected by the Fees Office. Two years later, Mr Maude bought a flat in London a few minutes walk from a house he already owned. He then rented out the other property and began claiming on the new flat: the taxpayer has since covered nearly £35,000 in mortgage interest payments.

* Chris Grayling, the shadow home secretary, claimed thousands of pounds to renovate a London flat 17 miles from his family home. Mr Grayling already owned three properties within the M25 but still bought the flat with loans subsidised by the taxpayer. He then claimed for work on the property for up to a year after it was carried out. This enabled him to claim close to the maximum amount allowable under the expenses system during different years.

* Cheryl Gillan, the shadow Welsh secretary, claimed for dog food on her expenses. Last night, she said that she would repay the money.

The disclosures underline the cross-party nature of the parliamentary expenses scandal. Over the past few days, the Telegraph has exposed the exploitation of the allowances by senior Labour figures including members of the Cabinet. Liam Fox, the shadow defence secretary, has condemned the “flipping” of the designation of second homes by ministers.

“The idea was always that ministers were deemed to have their primary residence in London when they were members of the government,” he said. He called for a “hard and fast rule” about what constitutes an MP’s primary home.

Mr Cameron said last week that claims by Conservative MPs that were outside the rules would be “looked at”. “They just have to explain themselves,” he said. “That’s what all my MPs are going to have to do, that’s what I will have to do and I think that’s what the public deserve – they are angry about it and they want it sorted out.”

Not all members of the shadow Cabinet were implicated. Mr Cameron and William Hague, his deputy and shadow foreign secretary, both had relatively straightforward claims. George Osborne, the shadow chancellor, claimed for a chauffeur using his office allowance.

David Cameron Took Out Maximum Taxpayer-Funded Mortgage - Then Paid Off Own £75k Loan Four Months Later

David Cameron was dragged personally into the expenses row last night after it was revealed that he paid off a loan on his London home shortly after taking out a £350,000 taxpayer-funded mortgage on his constituency house.

The disclosure followed a powerful call by the Tory leader yesterday for the ‘full force of the law’ to be deployed against MPs who have abused allowances.

Following a Mail on Sunday investigation Mr Cameron could now face searching questions about his own expense claims.
















He took out the £350,000 mortgage – close to the maximum amount that can be claimed for – to buy a large house in Oxfordshire in August 2001, two months after winning his Witney seat in the General Election. By nominating it as his second home, he was able to claim for the mortgage interest payments under the now-infamous Commons’ Additional Costs Allowance (ACA).

Just four months after securing the £350,000 mortgage, Mr Cameron paid off the £75,000 loan on his London home, taken out only six years earlier.

There is no suggestion that he broke any rules. But mortgage experts say that if he had kept the loan on his London home and borrowed £75,000 less on the Oxfordshire property, taxpayers could have been saved more than £22,000 between 2002 and 2007

The revelations came as Gordon Brown was warned that he faces a new threat to his leadership if Labour is beaten by the UK Independence Party in Thursday’s European elections.

And in today’s Mail on Sunday, Liberal Democrat Treasury spokesman Vince Cable calls for ‘immoral’ Chancellor Alistair Darling to resign for ‘being caught with his fingers in the till’ by abusing his expenses.

Last night, Mr Cameron insisted that his mortgage claims had been ‘perfectly reasonable’ and denied that reducing his Oxfordshire loan would have helped the taxpayer.

A statement said: ‘David Cameron paid off his London mortgage with his own money which came from the sale of shares and money built up while working at Carlton TV. He bought a home in his constituency and claimed for mortgage interest payments, which is perfectly reasonable and the intended use of the second-home allowance.

He later paid down a part of this mortgage and claimed for some basic utility bills.

‘He made it very clear several weeks ago that he would not claim for a second home if he became Prime Minister and lived in No10.
































‘We are pleased that Gordon Brown and other members of the Cabinet have now adopted this policy and will no longer be able to claim for their second homes while living in grace-and-favour apartments.’

A later statement said: ‘If he had paid £75,000 toward Oxfordshire it would not have been cheaper for the taxpayer, as that mortgage is far higher than the amount he was able to claim for – particularly in 2001, when the amount you were able to claim for was much lower.’

Ten days ago, at a meeting with his Witney constituents to answer their questions on expenses, Mr Cameron candidly admitted claiming ‘close to the maximum’.

But he failed to mention that he had paid off his London loan shortly after he had secured it.

‘From 2001 to 2007, the only thing I really claimed for in respect of my second home was the interest on a mortgage – not the repayments, but the interest,’ he told the meeting.

‘It was a very large mortgage. It was £350,000 worth of mortgage. It was about £1,700 a month that I was claiming. That was quite close to the maximum you could claim at the time but I did not at that stage claim for anything else.

‘In 2007, I was able to pay down the mortgage a little bit [by £100,000], so it was a £250,000 mortgage, paying about £1,000 in mortgage interest every month, and so I also claimed for what I would call some pretty straightforward household bills – council tax, oil, gas and other utility type bills and insurance on the property.

‘I now claim less than the maximum. I don’t claim all of those utility bills. I claim a percentage of them, because I think that’s right and fair.’

Today’s disclosures may spark fresh criticism among some Conservatives about Mr Cameron’s forceful handling of the expenses row. They believe he is using the scandal as an excuse to clear out traditionalists who stand in the way of his modernising project, while largely protecting members of his inner circle.

Until now, Mr Cameron has made only one concession on his expenses – admitting that he was wrong to claim £680 to have wisteria removed from the chimney of his Oxfordshire home. He has repaid the money.

Now The Mail on Sunday can provide a more detailed account of his property dealings and how they relate to his expenses.

According to Land Registry documents, in 1995 Mr Cameron paid £215,000 for a house in Kensington, West London, which was part-funded with a £75,000 mortgage from Alliance & Leicester.

In August 2001, just a month after the second-home allowance went up by a staggering £5,840 per annum – from £13,628 to £19,468 – and two months after he entered the Commons, he paid £650,000 for the constituency house in Chipping Norton, Oxfordshire, and used the property as security for a £350,000 loan from HSBC.

Mr Cameron’s spokesman said last night that his offer on the house had been accepted three months earlier in May 2001.

Then, in December of that year, the Land Registry removed the Alliance & Leicester charge from its records for the Kensington home after the loan was ‘discharged by electronic means.’

Mr Cameron sold the Kensington property in 2005 for £1,150,000 – a profit of £935,000 – and bought another house nearby. His Oxfordshire home
is estimated to be worth just under £1million, a paper profit of more than £300,000.

His mortgage claim is potentially contentious because, coincidentally or not, experts say that it corresponds approximately to the upper limit of the ACA, which covers the costs of running an MP’s second home. In the financial year 2002-03, the first full year Mr Cameron claimed under the ACA, he received the maximum £19,722.

In 2003-04, he claimed £20,328, just £5 less than the maximum, and in 2004-05 he took the maximum of £20,902.

In total, between 2002 and 2007 he claimed £102,874. If he had paid off £75,000 of the Oxfordshire loan, rather than clearing the mortgage on his London home, the bill would have been about £22,500 lower.

In an interview yesterday, Mr Cameron said: ‘When I was first elected, I was renting rather than owning a home and I couldn’t find my rent bill. The fees office said, “Don’t worry, just claim for food.” I said, “I haven’t had any food,” and I went and found my rent bill.’

In the interview, Mr Cameron maintained his hardline stance by calling for any MPs who have used taxpayers’ money to pay for ‘phantom’ mortgages to be investigated by the police.

He said he was outraged by Sir Peter Viggers, who claimed for a floating duck house, Douglas Hogg, who claimed for his moat to be cleared, and Anthony Steen, who recouped the cost of tree surgery and guarding his shrubs against rabbits.

All three – regarded by modernising Tories as anti-reform ‘bed-blockers’ – have announced that they will stand down at the next Election.

Only one Cameron ally, his adviser Andrew MacKay, has been forced to leave the Commons following revelations that he and his MP wife Julie Kirkbride had claimed more than £250,000 in second-home allowances by ‘double dipping’.

On Friday, Mr Cameron said that Bill Cash, a veteran Eurosceptic regarded as a troublemaker by the party leadership, had ‘serious questions’ to answer about claiming for rent payments to his daughter.

One Tory MP last night attacked Mr Cameron’s alleged ‘double standards’ crackdown on some MPs and soft handling of others. ‘It’s like living through one of Stalin’s purges,’ said the MP.

‘It’s all deeply divisive. Some people are being asked simply to apologise while others are being told they have questions to answer. That’s code for: let’s get all the lunatics in a local constituency to stage a public execution.

‘Although MPs have simply been obeying the rules as they were, Cameron is saying that’s not enough. He seems to want to make burnt offerings of other MPs. Fine, but on that basis, why doesn’t he repay years of mortgage interest claims above £1,250 a month that he’s claimed for?’

In his defence, it could be argued that what Mr Cameron has done with Commons expenses pales into insignificance next to Tony Blair. He used the ACA to help pay for a £296,000 mortgage on a house that he had bought for £30,000 in 1983. He claimed just under a third of the interest back from the taxpayer.

He remortgaged the constituency home in Trimdon, County Durham, in 2003 – shortly before he paid £3.65 million for a London townhouse which became his post-Downing Street home.

Gordon Brown has also been at the centre of controversy after claiming for payments of £6,577 to his brother Andrew over a 26-month period for a cleaner shared by the pair.

Moreover, Mr Cameron has said that if he enters Downing Street, and has use of the official country residence of Chequers, he will give up his second-home allowance completely, a ban that would extend to other Ministers who are entitled to use grace-and-favour apartments.