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A case of integrity

Last week, Gordon Brown announced that the current economic cycle did not start in 1999-2000, as he had originally told us, but in 1997-98.

This suggests either he is incredibly slow at maths or he is a prop-onent of Enron-style accounting. He claimed that the reason for rewriting history was that the ONG (Office for Nat-ional Guesswork, occasionally also known as the ONS – Office for National Statistics) had revised some historical GDP figures.

The date the Chancellor uses for the start of the current economic cycle is important because in view of the spendthrift ways of some of his predecessors, he announced he would adopt a golden rule to help pers-uade the City that he would be a respon-sible Chancellor. The golden rule was in theory very simple – over the economic cycle, the Budget would be balanced. How-ever, last week’s change of the rules was not the first, or even the second, piece of gerry-mandering of the rules for the golden rule.

In December 2003, the way some figures were calculated was helpfully “clarified” and at the beginning of this year, further changes to the rules were made. Naturally, it was a complete coincidence that each time the rules were “clarified” or changed, the golden rule was in danger of being broken and each change just happened to give the Chancellor more leeway, with last week’s change giving him an extra 12bn.

One of the key points to take out of these changes, particularly the latest one, as it was made only six months after the previous change and generated the biggest amount of extra leeway, is that Brown thinks the economy is heading for a rocky patch. As a result, tax revenues will rise less quickly than he budgeted and expenditure on things like social security benefits will increase.

It will be a major shock if the Bank of England’s monetary policy committee does not cut bank base rate by 0.25 per cent next week and the City has already priced in a further 0.25 per cent cut before the end of the year. If the economic downturn is as bad as the Chancellor appears to be expecting, although, of course, we won’t hear him talking in such terms, the ques-tion to consider is how far will interest rates fall and how quickly?

Since we escaped from the ERM in September 1992, interest rate cycles have progressively peaked and bottomed at lower levels than the previous cycle. On that basis, we should not be surprised if base rate falls some way below 4 per cent. However, even the first 0.25 per cent is likely to have a marked impact on confid-ence in the housing market. Confidence is a crucial factor in the housing market and interest rate expectations are the most important influence on confidence.

Over the last year, house prices nation-ally fell on average by 5 per cent (Land Registry figures) and average earnings are up by 4 per cent. The cost of variable-rate mortgages will be unchanged after next week’s expected base rate cut and the cost of fixed-rate mortgages has fallen by about 1 per cent. As nearly half of new mortgages are on a fixed rate, this means that the average mortgage interest rate paid by new borrowers will be 0.25 per cent lower than a year ago.

Put these three factors together and affordability is already significantly better than a year ago although, of course, it is still a problem for many borrowers. With confidence improving on the back of lower interest rates, I do not expect the current buyers’ market to remain for much longer.


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