Will Rachel Reeves' mortgage bombshell do more harm than good?

Independent

11 hours ago

There's a great deal riding on Rachel Reeves' Mansion House speech tonight – more so than usual.
Between the government's welfare reform plans being torn to shreds, the economy hitting a wall and public finances being mired in a sea of red ink, things haven't been great for the chancellor lately.
Then there was her tearful appearance in the House of Commons a few weeks ago, blamed on a personal issue, and the lukewarm endorsement she received from Keir Starmer – which was swiftly reversed because the fiscally hawkish Reeves is seen in the City as greatly preferable to any of her possible replacements, and the markets reacted very badly when speculation about her future was at its height.
Of course, she is not solely responsible for all of the above, but she does need to get back on the front foot – and her audience with City grandees is key to her success.
As is typically the case with the annual event, large parts of its contents have been pushed out in advance – most notably the so-called 'Leeds reforms' which will tear up some of the post-financial crisis regulations that the City has been chafing against.
At the centre of this are plans to make it easier for people to obtain bigger mortgages. The government is also launching a state-backed mortgage guarantor.
The risks are obvious: do this and you could easily end up with more bad debt and more defaults when economic conditions turn against borrowers.
Interest rates are on a downward path, and mortgage deals have been improving, which helps. But it won't always be that way, and unemployment is rising (thanks in part to Reeves increasing taxes on jobs). The new guarantor will also inevitably shift the burden of risk on to the taxpayer. Am I alone in having a problem with privatised profits and socialised losses?
The City will always applaud deregulation, and quietly welcomed Labour's prodding the Financial Conduct Authority (FCA) to cool its regulatory jets and get with the programme. The Leeds reforms promise more of the same – including reform of the Financial Ombudsman, which has in recent years been functioning as a quasi-regulator. That, we are told, will end.
An easing of the much hated senior managers and certification regime, another post-crisis measure, is promised. Ditto the FCA's consumer duty rules.
So, too, are there are plans to boost fintech – and to ensure the Basel capital rules on banks are implemented in a way that 'supports UK competitiveness'. I suspect this means we'll find a way of cheating.
A review of the ring-fencing regime – designed to protect retail banking assets (so yours and mine) from the City casino – is promised. My bet is that this will end up getting scrapped. Cross your fingers. If things go wrong again, it could get very messy. And there will be another crisis. It's in the nature of banking.
City trade body UK Finance was positively gushing in response. 'We submitted a range of ideas to government to help support growth and the UK's position as a global financial centre. Across many of these key areas the chancellor has listened and delivered significant positive change,' said its CEO, David Postings. Of course he did.
But here's the thing: if you take a look at the Treasury's press release, you will see that there is one very big omission. It is the one thing everyone attending tonight's shindig will want to hear about. It trumps even the most radical parts of the 'Leeds Reforms' and will ultimately be what Reeves is judged on. By now you've doubtless guessed that I'm talking about tax.
Reeves has already soaked businesses by taxing jobs, with predictable results when it comes to unemployment. The City's view is that it already pays enough, contributing nearly £1 in every £10 the chancellor raises. Reeves is hoping that her reforms will spur growth, which she desperately needs. The City will tell her that it won't happen if she hits it again.
That doesn't just apply to her increasing the burden on businesses. She will also be told not to hammer Britain's millionaires. With little headroom left over, her self-imposed fiscal rules and a tax-raising budget expected, Reeves has said the burden of balancing the books will fall on those whose shoulders are 'the broadest'.
Most would agree that this is only fair. Many understandably find it offensive that Britain's poorest are being kicked via what remains of welfare reform while the richest employ clever accountants to cut their bills.
But if she hits the uber rich too hard it turns into a zero sum game, because while some will stick around and grouse about their bills, others will just leave altogether. The result is that you don't end up raising more money – and you may, in fact, end up with less.
So, how does Reeves plan to solve this problem ? I'm not sure the City will get an answer. Not yet.
Reeves has made a start at re-establishing some credibility and authority, but the likely response to Mansion House will be this: 'Good start. But our verdict – and our business decisions – are on hold until the budget is in.'