Homes ruse will not rebuild the economy The British Budget is political theatre. Unlike in the US, what the UK's chancellor of the exchequer decrees will also become law. But government proposes; the economy disposes. The past six years have made this brutally clear. My column on the Budget showed how far outcomes for both the economy and the public finances have slipped from the plans enunciated by George Osborne, the chancellor, in his emergency Budget of June 2010. In this, he is very much in the position of his Labour predecessors. Back in the halcyon days of March 2008, Alistair Darling, then chancellor, thought public sector net debt would be 39.3 per cent of gross domestic product in 2012-13. In June 2010, the Office for Budget Responsibility declared that it would be 69.8 per cent of GDP, before peaking at 70.3 per cent this year. The OBR now declares that it was 75.9 per cent of GDP last year and is on its way to peak at 85.6 per cent in 2016-17. The principal reason for this fiscal disaster is the economic collapse: GDP in the fourth quarter of last year was 12 per cent below the 1955-2007 trend, let alone the trend since the early 1990s. Both governments failed to foresee the economic weakness they would confront and both have responded by allowing fiscal outcomes to become far worse than they intended. The difference between them is that the Labour government's failure to foresee the crisis was a bigger error than this government's over-optimism about the pace of recovery. What happens now? In the medium term, the problem can be stated in a simple way. The counterpart of the UK's huge structural fiscal deficit is structural financial surpluses in the foreign, corporate and household sectors. If the structural fiscal deficit is to be eliminated, without steep falls in demand output, the structural surpluses elsewhere must disappear. This is what has not happened, to the desired extent: net trade and investment have so far been particularly disappointing. So what is there in the Budget to improve these counterpart financial surpluses? Very little. But one can identify two interesting elements, both designed to get the moribund credit system moving again. The first is the change in the mandate of the Bank of England. While not strictly speaking a shift to the US "dual mandate," it clearly encourages the bank to look at unemployment and ignore lengthy inflation overshoots. The second is to relaunch that hoary feel-good policy: a housing boom. As my colleague John McDermott noted: "First there was the right to buy, now there is the right to default." One area in which the UK has a more market-oriented economy than the US is housing. This may soon no longer be true. Under the new "Help to Buy" mortgage guarantee programme the government will aim to increase the availability of mortgages. It will provide up to £12bn in guarantees, sufficient to cover £130bn in mortgages. Under the deal, lenders will receive a partial guarantee on mortgages offered to people who buy homes worth up to £600,000 with a deposit of between five and 20 per cent of the property value. The aim of the intervention is to help those people who are now rationed out of the property market by high prices and cautious lenders. This is good politics and horrendous economics. Since the peak of the boom, UK house prices have fallen by only 16 per cent in real terms, against some 40 per cent in the US. The ratio of median earnings to median house prices has fallen only 7 per cent from its peak. The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so. This is irresponsible enough. But worse, the government will probably now find itself permanently using its balance sheet to support risky housing finance, as the US has done. The market cannot sensibly finance such high loan-to-value ratios. But this fundamental lesson from the crisis is now being thrown away. Yet all is not lost. The government has, apparently, steeled itself to use its balance sheet more imaginatively, to support demand in the economy. This may be far from the best way to do so. But the principle is a good one, in such difficult times. It is also possible to use it in support of investment in infrastructure. Yet the biggest concern has to be not the weakness of demand, bad though that is. In a post-crisis economy, that is at least predictable. The biggest concern is the collapse in productivity and the consequent pessimism about potential supply, in the longer term. As the OBR notes, "output per hour and output per worker were 12 per cent and 13 per cent below their pre-crisis levels in the fourth quarter of 2012." This is far and away the worst part of a truly dismal picture. What does this mean and what can be done about it? That is the subject I will turn to in subsequent analyses.