Help to Buy ISA bad idea

UK gets its tax incentives in a muddle

George Osborne has served up another helping of muddled tax incentives. Outside observers of the UK might assume that the Chancellor of the Exchequer would want to arrange his system of levies and duties to ease two big policy problems - house-price affordability and the lack of bank lending. Measures announced on March 18 will do the opposite.

If the government really wanted to deal with spiralling property prices, it would build a lot more houses. Osborne's "Help to Buy" scheme has always taken the opposite, more dubious approach: giving first-time buyers the wherewithal to borrow more by guaranteeing mortgages backed by a sliver of equity. Now he is going one step further: the state will allow first-time buyers to receive £3,000 from the state if they save up a deposit of £12,000.
 
Against the UK's £1.7-trillion economy, the £835 million this is projected to cost by 2020 isn't much. Nor is it certain to have a huge effect: potential buyers can save only £200 a month, so it would take them over four years to attain the maximum entitlement. Still, it constitutes a transfer of value from taxpayers in general to homebuyers in particular, who may in turn only bid up prices to the benefit of existing property owners. This is money that would have been much better spent on new housing supply.

Meanwhile, banks have cause to feel aggrieved. When the UK bank levy was introduced in the wake of the financial crisis, charging a fee based on the size of lenders' balance sheets incentivised much-needed deleveraging. The levy's higher rate on riskier short-term wholesale funding made the system safer. But Osborne has now hiked the rate for an eighth time. The rate is now being set to raise a sum, rather than encourage prudent behaviour. Such a policy now just eats into banks' already meagre returns, and hence their ability to bolster capital and lend more.

Not all Osborne's tax tinkering is bad - slashing rates for the hobbled oil and gas sector is logical help for an industry going through a difficult phase. Reducing tax on savings interest sends out the right message when the UK needs to boost its savings rate. But a distortion of the housing market and bank balance sheets suggest a win for politics over prudence.