Confused by Government Spending, Indirectly…
I’ve been doodling around local spending data again recently, noticing as ever that one of the obvious things to do is pull out payments to a particular company (notwithstanding the very many issues associated with actually identifying a particular company or entities within the same corporate group), and I started wondering about certain classes of public payment that may or may not get classed as spend but that do get spent with particular companies.
One example might be winter fuel payments. I don’t know if these are granted in such a way that they have to be used to cover energy bills (for example, by virtue of being delivered in the form of vouchers that can be redeemed against energy bills), or whether the money is just cash that the recipient can choose to spend howsoever; but if they are so restricted in terms of how they can be used they represent a way for government to make a payment to an energy company using a level of indirection that means we can’t at first glance see how government makes that payment to the energy company. The “choice” of who receives the payment is up to the consumer, presumably, but it seems to me to be that it is the government that is essentially making the payment to the energy company as a subsidy for a particular class of customer (as defined by criteria for determining winter fuel payment eligibility).
By not regulating profits made by energy companies more harshly, government presumably supports pricing that requires government to subsidise a significant number of customers. By not regulating prices more harshly, government seems keen to keep giving the energy companies a bung by proxy? I guess the rationale for making the payments this way is that the government can argue that it is acting progressively. If government just gave the energy companies a bung directly, people would get upset: either that the energy companies were being given a chunk of cash for free, or that they were being given a chunk of cash to subsidise the prices they set which would mean that people who could afford the higher price were also benefiting from the deal. How would we feel if, rather than government giving winter payments to those eligible, it just gave the cash straight to the utilities in a transparent way we could track, and required them to identify eligible customers and give them a reduced tariff? Of course, if the winter fuel payments are actually hypothecated, doing it this way would mean that folk currently in receipt of the payments wouldn’t be able to use the money in other ways?
Another area of “spend” that confuses me is the new “Share to buy” home equity loan scheme, in which the government “provides an equity loan (also known as shared equity) of up to 20% of the value of the home you are buying. … the buyer needs only a 5% deposit, and a 75% mortgage to make up the rest.”
The Help to Buy Equity Loan is interest-free for 5 years. After that, the purchaser pays an annual fee of 1.75% on the amount of the outstanding loan. The fee will increase each year by inflation (Retail Price Index (RPI) + 1%.
The purchaser can start repaying the equity loan after they’ve owned the home for a year, but they’ll need to be able to pay a minimum of 10% of the property value at the time of repayment.
When they want to sell their home, they’ll need to repay the percentage equity loan that is still outstanding. So, for example, if they originally bought 80% of the property and they hadn’t repaid any of the equity loan, their repayment on selling would be 20% of the market value at the time when they sell.
One reading of this might be that folk spend as much as they can afford on a house (and maybe even a little bit more), now some of them may be tempted to spend that much and up to 20% more…? That is, might they see the deal as if they were getting a 20% discount on the house (conveniently forgetting that interest payments will kick in in a 5 years?) allowing them to offer more and hence inflate prices more?
What I also wonder about this is: is this the government trying to kickstart a more fluid market in shared ownership on the equity side? I’m guessing that at some point the plan is for the government to flog off the loan book (and presumably then allow interest payments on the loans to float a little more…)? But might there also be an intention to allow individual investors to buy the title to individual equity loans? So rather than investing in a buy to let, individuals would be encouraged to invest in shared ownership schemes from the equity, rather than resident partial owner, side, as an investment?
PS I don’t know about regulatory capture, but policy capture seems like even more of a win for the utilities?! Gas industry employee seconded to draft UK’s energy policy