Duncan’s Economic Blog

Lessons in Budgeting for George Osborne

Posted in Uncategorized by duncanseconomicblog on October 4, 2010

Today George Osborne once again compared the government to a household

And we have £109bn of it. It’s like with a credit card. The longer you leave it, the worse it gets. You pay more interest. You pay interest on the interest. You pay interest on the interest on the interest. And we are already pay £120m of interest every single day.

Left Foot Forward has already outlined why this analogy is not only wrong but dangerous.  But if George genuinely does believe that the government is like a household, he really should understand that the best way to deal with debt is to grow.

Because it was the subject of a House of Commons’ inquiry, we know a great deal about Mr Osborne’s mortgage and his own household finances.

In 2003, he took out a mortgage for £450,000 on his home in Chesire.

In 2005 he, quite rightly, extended that mortgage to £480,000 to “pay for necessary repairs”. The Chancellor clearly understands, in his personal life, that smetimes one should borrow in order to invest for he future, or to cover necessary expenses (such as, maybe, preventing a second great depression).

In 2005, when he took out the £470,000 mortgages (which it is worth noting is interest only, he’s not trying to pay back the capital just yet, of no), Mr Osborne’s salary (as an MP) was just £59,095.  

His debt to income (GDP) ratio was a scary 812%, much more than the UK’s projected 80%.

This year, assuming no capital payments on that interest only mortgage, that ratio has fallen to 357%, still way higher than that of the UK government, but less than half it’s level of 5 years ago.

How was Mr Osborne acieved this phenomenal reduction in his debt to income ratio without paying down a penny of debt?  By increasing his salary to £134,565, on becoming a cabinet member.

The lessons of Mr Osborne’s household then are as follows – sometimes it makes sense to borrow and the easiest way to deal with debt is to grow your income. Maybe he should apply these insights to his handling of the Treasury.

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4 Responses

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  1. Syzygy said, on October 4, 2010 at 2:26 pm

    Brilliant – So George is hoist with his own petard!… the conclusion can only be, that this about Tory ideology and nothing to do with economics.

  2. Marjorie Smith said, on October 4, 2010 at 2:41 pm

    It’s worse than you say Duncan. Both osbporne and Cameron took out mortgages to buy their second homes , when they became tory MPs. It didn’t really make sense for either to borrow (except from familly) as they both come from hugely wealthy families.

    However, if they borrowed the money from Commercial sources they could claim the interest repayments against their Parliamentary expenses (so having a mortgage almost wholly subsidised by the taxpayer, whilst enjoying the massive increase in property prices that occurred between 2003 and 2008.

    The claims for their mortgages (both Camaron’s and Osborne’s) took up nearly all of their Parliamentary expenses claims (except for day to day claims, ioffuce exoenses etc.
    Their hypocricy over the Parliamentary expenses sca

  3. Marjorie Smith said, on October 4, 2010 at 2:48 pm

    On Osborne
    Don’t forget, during the current furore over MPs expenses, George Gideon Oliver Osborne, now the Chancellor, still has a lot of questions to answer about his sharp practice in 2009 when he received strong criticism for the way he had handled his expenses.
    This after he was found to have ‘flipped’ his second home, changing which property he designated as his second home in order to pay less capital gains tax. The Lib Dems estimated he owes £55,000 to the public purse. Has Osborne offered to pay (as Hazel Blears did, and paid her liability in full)? The short answer is No.
    Remember, Osborne, who is worth in excess of 4 million pounds, yes, 4,000,000 organised a totally spurious mortgage so he could get his snout in the parliamentary expenses second home trough for the sum of about £20,000 per annum. You would have to earn about £35,000 before tax to be able to devote your entire salary to the mortgage payment.
    This the guy who will be lecturing public sector workers to show pay restraint, many of whom earn less than £30,000.

    On Cameron
    David Cameron’s pontificating about cutting ministers’ pay and MPs’ perks demonstrates a blatant and contemptuous hypocrisy that seems to know no bounds. It also reveals a shallowness of thought that does not bode well if the Tories win the next election.

    Cameron has the gall to accuse others of abusing the parliamentary expenses system, when it can be convincingly argued that he and Shadow Chancellor George Osborne have acted with the most mendacious avarice.

    Both are independently hugely wealthy. Cameron has in excess of £30 million. Osborne is worth £4 million and will inherit a great deal more. Yet they structured their personal affairs so that British taxpayers financed mortgages on their second homes of approximately £300,000.

    Neither needed to have mortgages on their second properties. Neither needed to claim the lucrative second home allowance from the public purse, yet both did so. And Cameron still seeks to occupy the moral high ground over the expenses furore and lectures other MPs of all parties about how they must mend their ways.

    He is increasingly resorting to gesture politics. His proposal to reduce ministers’ pay by 5 per cent is reminiscent of the calls Margaret Thatcher and Tony Blair used to make for pay restraint from others. This was while they were anticipating the millions they were going to make once they quit British politics.

    A 5 per cent reduction in the Prime Minister’s salary is nothing to a rich man such as Cameron. However, he will use the gesture to cut public service pay and jobs and impose worse jobs. It’s going to be very bad news for thousands of low-paid workers in public services.

    The Tory leader’s idea of introducing a big hike in the price of subsidised food and drink at Westminster is typical of this calculating chancer who fails to think things through as he chases the cheap headlines Britain’s pliant and lazy popular press are increasingly happy to provide. The more upmarket media then follow suit, as they do not wish to be seen as out of step on a hot political topic.

    Cameron and Osborne are penny-pinching political parvenus. They have only been in Parliament for eight years and neither has any ministerial experience. They combine social ignorance with an astounding duplicity.

    The Tory leader has been extremely sanctimonious over the MPs’ expenses scandal. He was lauded in his local newspaper, the Oxford Mail for having expenses records that took up only 20 pages, while some of his colleagues needed 90 to itemise everything. What the Oxford Mail neglected to point out was that Cameron had claimed very close to the maximum amount, so he had no need to pad out his expenses any further. Cameron claimed a total of £141,820 over a five-year period on his second home allowance.

    Cameron and Osborne are happy to advocate cuts in living standards for the many while they are featherbedded by family wealth and the taxpayer-subsidised purchase of lavish second homes. Osborne was also able to avoid paying significant amounts of capital gains tax.

    Cameron asked why MPs should be able to buy a pint of Fosters for £2.10 in a House of Commons bar when it can be nearly double that in a pub. For his information, Wetherspoons is currently selling Fosters for £2.89 in its Whitehall pub – that’s just 200 yards from the House of Commons. Cameron may pretend otherwise, but is out of touch with ordinary people and the everyday costs they face.

    He claimed £5.8 million could be saved if subsidies for food and drink in the House of Commons were scrapped. He is not so much in tune with public anger as pandering to crude populism.

    The people who would mainly suffer if Cameron’s proposal were implemented are low-paid parliamentary support staff and MPs’ frequently under-paid employees. As the recent report from House of Commons Administration Select Committee states: “The refreshment department serves drinks, snacks and meals to several thousand customers a day. The vast majority of these customers are not Members.”

    One reason why the Commons subsidises its refreshment department is the unsocial hours which its employees have to put in because of Westminster’s variable working day. With sittings often ending late in the evening and with no consistent finishing time, it is no wonder that the cost of doing business in politics does not correspond to the financial demands of the tuck shop at Eton.

    And the main reason why the Commons has traditionally kept unsocial working hours is so that MPs could pursue their primary and more lucrative income source (often in the City or the law courts) and pop into Westminster later in the day. The main beneficiaries of these arrangements have invariably been Conservative MPs.

    Incidentally, the approximate size of the unnecessary mortgage on Cameron’s second home, which enabled him to chisel in excess of £20,000 a year in parliamentary expenses (more than £140,000 over five years) is nearly matched by his wife’s annual salary of £300,000 in 2006 alone.

  4. Left Outside said, on October 5, 2010 at 12:05 am

    Thief! :-P

    http://leftoutside.wordpress.com/2010/09/24/nick-clegg-david-cameron-and-margaret-thatcher-all-think-the-national-debt-is-too-small/

    Good post by the way, I’m sure you can see I agree entirely.


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