Are the Treasury showing a fondness for back of the envelope calculations? While the Tories are wild about tax cuts that pay for themselves, Alistair Darling seems to prefer tax cuts that are cheaper than forecast.
Remember the great fuss over the stamp duty holiday? When Darling unveiled the tax cut in September he said “it would cost a total of £615m”. But take a look at the fine print of the pre-Budget report: the estimate is now down to £280m.
October was a dreadful month for the world economy. But officials were surely aware that the property market was in trouble? Jim Pickard was suspicious of the estimate at the time. Perhaps they wrongly assumed the tax break would revive sales. Cynics may think the real reason is that a “cautious” estimate had the advantage of making the measure sound a bit more substantial.
Some bankers now wonder whether the estimated cost of the “mortgage holiday” underwritten by the taxpayer will be just as inaccurate. Officials say the plan to let homeowners facing repossessions defer interest payments will cost about £100m, with a £1bn contingent liability appearing on the government books.
But what is this estimate based on? The scheme was cooked up with little to no consultation with lenders. So far the criteria for eligibility has been loosely defined. And on Wednesday the Treasury changed the terms, extending the potential length of the holiday to beyond two years and reneging on a pledge to fully reimburse banks (they will now share the risks).
Given how much the assumptions have changed from last week, surely the cost estimate has changed too? Indeed, Some bankers suspect that like the stamp duty holiday, this plan could be significantly cheaper than billed.
Jim Pickard
Kiran Stacey