Council Mortgages and Money Rates as well as central—government capital
spending.
funds would not object to being directed—up to,
Er RE ECONONV VNEE COIT say, £250 million a year—into the new financial
By NICHOLAS DAVENPORT
TT is always distressing to see poor innocents 'suffering from the mistakes of the great and I can imagine no sadder case than the young marrieds having to pay exorbitant money rates on a house mortgage—if they are lucky enough to secure one—because of the economic stress their elders and betters have engineered. In the general election of 1964 Mr George Brown with his heart of gold led them to expect a 3 per cent rate and before twelve months were out they were paying nearly 61 per cent. On January 1 they will now have to pay 78 per cent because the building societies have decided to raise their investment rate from 4 per cent to 41 per cent, which frees them from the Prices and Incomes Board restraint. In the general election of 1966 Mr Richard Crossman, then Minister of Hous- ing, promised cheaper rates—minimum 4 per cent —on a mortgage option scheme for those paying 6s. income tax or below, but we are now told that the scheme will not come into effect until April 1, 1968! All this because the great and powerful at home decided to protect the exchange value of the £—and fight an economic war against Rhodesia—with a 7 per cent Bank rate and a severe deflation of the economy.
Within the limitations of the money crisis the Government has done what it could to alleviate the distress of the mortgagors. In the new Housing Subsidies Bill tabled last week they are increasing the subsidies of local authorities borrowing for housing purposes as if they were borrowing at 4 per cent. And the cost is heavy. Next year the subsidies, now requiring about £83 million a year, will go up by £10 million, then by £12 million and so on. But one comes back to the question I have raised so often before—why on earth did the Government allow its social investment (housing in particular) to be caught up in the international money market? Why did it allow the high rates offered to foreign 'hot' money—for the purpose of enticing it into sterling for the defence of the £—to apply to the local authority mortgage market? Why did it not insulate the latter against the former?
This brings up the vexed question of the two- tier system of interest rates which was tenta- tively introduced by Mr Maudling when Chan- cellor and extended by his successor, Mr Cal- laghan, though it was never properly thought out. When Keynes first suggested a two-tier system of interest rates at the Macmillan inquiry in 1931— to the great alarm of Montagu Norman—he did not intend it to be operated without due control. He expected the Bank of England to dictate the spheres in which foreign 'hot' money would be allowed to operate. For example, I imagine he would have allowed `hot' money to go to the merchant banks for their various private pur- poses and to the hire-purchase finance companies but not to the local authority mortgage market. It would be an easy matter for the Bank to con- trol the distribution of 'hot' money and then to fix what rates it liked for the enticement of it into sterling when sterling was weak. But unfortun- ately no such sensible control has ever been put into operation.
As the Bank of England now reveals—in an article in its latest bulletin—the two-tier system of interest rates has been allowed to get into a mess, largely because the whole system of local government finance has got into a mess. Under the post-war Labour government the local authorities borrowed almost wholly from the Treasury through the Public Works Loan Board. In October 1955 Chancellor Butler reversed the procedure and required them to borrow every- thing in the market, permitting only the smaller councils which could not raise funds on their own credit to borrow from the PWLB. As a result, a market developed in local mortgage loans and bonds, deposit receipts and negotiable yearly bonds—much to the convenience of liquidity- Seeking investors. In March 1964 Chancellor Maudling allowed all authorities to obtain part of their long-term finance (beginning at 20 per cent or £50,000, whichever was the larger) from the PWLB at government rates. This gave a small benefit of about 1 per cent on five-ten year loans over market mortgages. Under Chancellor Cal- laghan, when Bank rate was raised to 7 per cent in November 1964, the PWLB rates for these `quota' loans remained unchanged—in spite of the rise in market rates—so that by March 1965 the 'two-tier' system had given the local authorities a subsidy of per cent.
Borrowing from the PWLB rose sharply. In 1965/66 no less than £535 million (net) was so drawn—against a budget estimate of £360 million—which was well over half the net total. Of the non-official loans the Bank discloses that at March 31, 1966, no less than £500 million was drawn from abroad, of which temporary loans accounted for £450 million. The total debt of the local authorities at that date was £10,337 million, of which the PWLB held 37 per cent and private sources 63 per cent. And 16 per cent of the total was in the form of temporary debt—under twelve months' call—because the authorities are reluc- tant to borrow 'long' at the prevailing exorbitant rates.
One can imagine that Chancellor Callaghan is not happy about the state of local authority finance. All the loans drawn from the PWLB have to appear 'below the line' in his budget accounts and are, therefore, looked upon with suspicion by our creditors—the foreign central banks— who are inclined to regard them as evidence of inflationary finance. The Bank of England may see some value in allowing the local authorities to develop new forms of finance on the grounds that 'the wider the choice of assets available the more easily people will be induced to save' but it can hardly deny that the present system is an expensive and haphazard way of financing social investment. It is about time that some order and control were introduced. First, the Chan- cellor should set up a financial agency, like the US Federal Home Loan Agency, to raise mortgage loans in the market (outside the budget). Next, foreign 'hot' money should be prohibited from entering home-loan finance and should re- ceive its special rates in special fields of finance. Next the Treasury should then set about reduc- ing the domestic long-term rats of interest in the open market—for all government capital pur- poses. This would not be difficult if the market were given a lead. Indeed, the life and pension
agency bonds if the managers were convinced
that the market was a rising one. This, of course, would be dependent on strict control of local_
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