Growth or votes? A new version of boom and bust
If you manage a forest, it is difficult to measure the amount of growth each year, so instead you weigh how much timber you fell annually. And if that becomes your target, the temptation is to fell as much as you can, including the saplings, to inflate this year’s figure. But what will you do next year?
That is what the Chancellor has done in his budget. “Growth” is the elusive God particle that wins elections. He has squeezed as much as he can out of Ponzi schemes such as help to buy. Now pensioners are let loose with funds far earlier than would otherwise appear in GDP statistics. It won’t all be spent on Lamborghinis, as the average pension pot will scarcely stretch to a petrol filler cap for that brand. But there will be more fuel for the overheated housing market. And the further depletion of family silver will impose on future generations. In a recent figure in an ONS document, the captions indicated they didn’t know the difference between a bread bin and a toaster: neither it seems does the Chancellor.
George Osborne and his successors of either party will have to pick up the tab (which all of us will pay) in various ways. Higher benefit payouts for those who have blown their pensions, perhaps (in fairness, left-wing criticism of this image of fecklessness seems no less patronising than Grant Shapps’s beer-and-bingo advertisement). But there is a more subtle catastrophe of which only the first shoe has so far been revealed: the second is waiting to drop.
In destroying the business model for a whole industry (not to mention the hapless pensioners whose pots included supposedly safe insurance company shares), Osborne has ensured not that no one will have to, but simply that no one will want to, buy an annuity. Most now won’t do so. But for those that do want one (or already have one), they now have to contemplate a 35 year credit risk on companies that have just been crushed. The very differerent credit risks that emerge will diminish, not increase, competition from this shrinking market (the strongest companies will be able to take annuities at a far worse rate than the others). When the weaker go bust, the finger will point to Osborne’s recklessness and the claims for public bail-outs will be irresistible. That is the real price for the votes Osborne secured for the Tories last Wednesday.
As readers of this blog will know, I am no defender of the outrageous profiteering in the annuity market. I was recently quoted £358,000 to buy an indexed annuity of £10,000, but when (for highly technical reasons relating to the Byzantine lifetime allowance rules) I got a quote to commute the same stream, the offer was £185,000.
This was the one financial market with no liquidity or transparency, where large companies always knew what side customers were on, and survived with 50% bid–offer spreads. But it could have been cleaned up by the introduction of a secondary market and standardised, tradeable certificates.