Tuesday, 25 February 2020

"My advice for Rishi Sunak: superforecasters won’t make your Budget better"

Stephen King, HSBC's Senior Economic Adviser gloriously misses the point in yesterday's Evening Standard:

Rishi Sunak, the Chancellor of the Exchequer, is presenting his first Budget on March 11.  To do so, he'll need some vaguely credible economic forecasts. Without them, the fiscal arithmetic is no more than guesswork. In the bad old days, chancellors simply looked at themselves in the mirror and came up with numbers that best suited their political purposes.  

Gordon Brown kept changing his forecasts to prove there could be "no more boom and bust", singularly failing to spot the looming global financial crisis.

In the late Eighties, Nigel Lawson persuaded himself that Britain was about to embark on a prolonged period of faster growth and lower inflation, conveniently ignoring the housing boom that led to the early-Nineties recession.

He goes on to dismiss the whole idea of forecasts - either they are wrong; politically unpalatable; or they are self-fulfilling prophecies.

And that's ultimately the problem with economic forecasting, particularly in the public realm. Some things just aren't forecast for the simple reason that, until they actually happen, it's easier to pretend otherwise.

In May 2008, midway between the failures of Northern Rock and Lehman Brothers, the Bank of England apparently regarded the risk of recession as very low — in hindsight a seemingly ridiculous conclusion.

Does he not even bother to read what he has written and look for the most basic patterns - to wit house price bubble and credit bubble => house price crash and credit crunch => recession? he gives two recent examples of exactly that. That's all you have to look out for.

To make matters even easier, these crashes happen every 18 years or so (he mentions 1990 and 2008, next one due 2025 or 2026).

The Chancellor has a choice - press on with Home-Owner-Ism and worry about the mess later, or take active steps to dampen leveraged land price speculation.

He can re-adopt 20th Century Georgism Lite (mortgage caps, rent caps etc) or he could do the decent thing and replace as many taxes as possible with Land Value Tax.


Staffordshire man said...

Mark, what happens when a piece of farmland gets planning permission? Say a farmer gets the ok to build 25 houses, sells the land with its change of use , to a builder who then incorporate the land cost in his house price.
OK the new residential property gets a new tax level but does the farmer get to trouser half a million quid?

Or is that totally outside LVT

ThomasBHall said...

@ staff man- LVT means there is very little capital value in land. The change in use permission means the annual goetax costs up alongside the use value. No windfall for a farmer at all, as with a change in permission, the farmer needs to get rid asap or suffer large bills, and will naturally offload to a builder.

Mark Wadsworth said...

SM, as TBH says, farmer would make a much smaller gain. There is no need to tax that gain. The uplift is taxed via future LVT.

Instead of farmer getting £500,000 and paying 20% capital gains tax, farmer gets £50,000 or something tax free.

Staffordshire man said...

Thanks Thomas and Mark.

I was only looking at the tax and forgetting the land value.

Physiocrat said...

@Staffordshire Farmer
Under an LVT system, following planning consent, the assessment increases from agricultural to residential value. The higher assessment should come into force after allowing a reasonable construction period - not more than a couple of years. The liability to pay tax reduces the selling price, by around 20 times the annual tax payable, because that amount has to be deducted from the mortgage repayments that purchasers can afford, which in turn means that they cannot borrow as much. So there is not much of an increase for the previous owner (quite possibly not the farmer, who might be a tenant) to trouser.

Andrew Carey said...

I wish use of the word 'farmer' could be dialled back a bit. There are people who own farm land and people who work on farms, and they are less and less likely to be the same people which is the meaning of 'farmer' I think people often refer to, but it's never really clear.
There's enough land in the UK for another 300 million homes - knock out the SSSIs, NNRs, Lake District, Pembroke coast, those sorts of places, and there's still space for 200 million. Give them all planning permits and the uplift to the farm land owner selling to a developer will be nice, but it's not worth fretting about CGT. Imv, of course.

Bayard said...

AC, a more accurate term to use is "landowner".

With 100% LVT there should be no increase in value.

Lola said...

He could. But he won't.

Mark Wadsworth said...

Ph, agreed.

AC, "farmer" is shorthand for landowner. If planning restrictions were completely removed,bit would have little impact on prices.

B, I'm happy with 80% - 90% LVT.

L, sadly not.

Bayard said...

Mark, all the farmland around the market town where I grew up was farmed by tenant farmers. It was owned by speculators, sorry, developers (actually, at least one of them made no pretence at being a developer and admitted that they had bought the land back in the '50s simply as a speculation).

Robin Smith said...

You're asking him to do what the majority of people clearly do not want. Rightly or wrongly. Why not get off the dogma, and start asking why The People do not want it? Would be mental healthily better for you.

BTW the late Dr. Adrian Wrigley went into all this with historic evidence(granted it's diff to rely on science these days (corrupt))

The RENTenmark and how to use mortgages to resolve hyperinflation and tamp down recessions. (Obvs location value covenants are the ideal policy proposal)


Robin Smith said...

@Staffordshire Farmer

Are you familiar with Location Value Covenants? It's a policy proposal which answers your question more adequately and broadly than LVT?

Tim Almond said...

I remember having conversations with a mate of mine a few years before the housing crash (around 2005) saying that this was mad, this was a bubble, and how is it not already starting to crash? What we hadn't included in our forecast, and only realised by watching a documentary a year later, is just how far the banks pushed lending criteria to the limits: zero income verification, 100% mortgages, lending hugely on both partners incomes, long mortgage terms, cheap introductory fixed rates.

Forecasting is about really, seriously looking at data, all sorts of sources of data. The Big Short (the movie) is a great introduction to it. Clear your mind. Don't believe reassurances from senior people. Look at data. Look for previous patterns. Verify data by checking it in the real world.

Most forecasters are crap, quite frankly. They either forecast beyond what can be reasonably forecast, or are written by people who are incurious about data that runs counter to the prevailing wind. No-one in official circles seems to be bothered by the fall in season ticket sales, season ticket journeys and peak crowding and what that might tell you about peak time demand for travel and whether we need this extra rail capacity.

Mark Wadsworth said...

TS: What we hadn't included in our forecast, and only realised by watching a documentary a year later, is just how far the banks pushed lending criteria to the limits: zero income verification, 100% mortgages, lending hugely on both partners incomes, long mortgage terms, cheap introductory fixed rates."

There are lots of things we only realise after the event. But you learn to spot them 'next time'.

Everything you mention is creeping in again, lower deposits, higher multiples, longer terms and super-low interest rates.

Physiocrat said...

What happens when Quantitative Easing eventually comes to an end?

Mark Wadsworth said...

Ph, then they'll do some more, and then some more.

Robin Smith said...

On how much more QE, as Mr Peter Schiff points out, more and more. There's nothing wrong with fiat money, unless you believe money equals wealth.

Big Q: would the people in general, continue to accept fiat money in exchange for goods, if it were redeemable only by direct taxation(rents), as opposed to indirect?

Imagining, government is a huge creditor to the extent of taxation, and it can make loans against that credit in the form of money created out of nothing(mortgages largely). In a virtuous circle.

This is why Dr. Wrigley created Location Value Covenants. Understanding that for social organisation to be sustainable, the people MUST 'volunteer' the rents.

This is a bit of a Chartalist question but don't get hung up on that doctrine too. Avoid 'religion', even the godless kind, if you really want to know.

Bayard said...

"Big Q: would the people in general, continue to accept fiat money in exchange for goods, if it were redeemable only by direct taxation(rents), as opposed to indirect?"

The people will continue to accept IOUs (which is what fiat money is) just so long as other people continue to accept them off them. It doesn't matter what form the IOUs take: where there is no official money available, other things work just as well.