This is with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.

The new Chancellor hasn’t rocked the boat and that, for many, will be a relief. The immediate response of the markets was calm. But as always, it takes a few days for the wider implications to become evident, when people have had time to crawl over the numbers and decide whether the longer-term projections really make sense.

There is, however, one issue that looks clear. This was not a Budget that will be good for the housing market. There’s one plus in the modest help for young buyers, but that is likely to be more than offset by three significant negative forces. The net result is that the present market will at best be stagnant in much of the country, while the weak elements will weaken further.

The positive first. 

There’s the Your First Home scheme, which is really a reworked version of the Help to Buy one, that dates back to the coalition government in 2013. The Government will chip in to the mortgage for first-time buyers, with up to 20 per cent of the property’s value interest-free for five years, and buyers will only need to put down a 2.5 per cent deposit. 

The other is the first-time buyer ISA, which is a re-worked version of the Lifetime ISA introduced by the Conservatives in 2017. The details are slightly different, but the amount you can save this way, £4,000 maximum a year, is the same. 

Crucially, there are no other new tax incentives for first-time buyers, so while any help for young people starting out and wanting to buy a home is absolutely welcome, it would be naive to think that this will result in any radical change from the situation at present where it’s tough for anyone who doesn’t have the Bank of Mum and Dad to back them.

The big thing that would really move the dial would be falling home prices. At the moment, the property market is flat overall, with rises in some areas and types of home offsetting loses elsewhere. Broadly, the North of England and Scotland are solid, and there’s demand for family homes. But, in much of London and the South East it’s stagnation or falling prices, while flats are particularly hard hit. The prospect now is that thanks to the Budget this weak market will weaken further for several reasons.

First, there is the additional tax on banks. Someone has to pay it and it won’t just be bank shareholders. Banks will take measures to protect their margins, and these will include some combination of paying lower interest rates to depositors, higher rates to borrowers (including anyone with a mortgage) and allocating their capital to other areas of business such as wealth management. The impact won’t be radical, but overall it will be a little more difficult to get a mortgage than it otherwise would, or a little more expensive to do so.

Added to this, there is the additional borrowing by the Government. The Chancellor said, quite correctly, that he had stayed within the guidelines of the Office for Budget Responsibility. But as the OBR stated in the first paragraph of its response: “Budget decisions further increase borrowing in the near term and reduce it in the medium term…. This would stabilise debt though at an elevated level. The fiscal mandate is met with a reduced margin which is small relative to risks around the forecast.”

If the Government increases its borrowing and pushes up the national debt, that makes long-term interest rates higher than they otherwise would have been. And that, in turn, is an upward force pushing up mortgage rates.

Next, we are going to get more rate increases by the Bank of England, with the overwhelming probability that there will be one at the next meeting of the Monetary Policy Committee in November. The measures to trim energy prices may help a bit but the OBR expects inflation to average 3.4 per cent next year, way above the target of two per cent, and the markets expect more rate increases from the MPC in 2027. 

Finally, the further squeeze on rental landlords will inevitably push more of them to put their properties on the market rather than continuing to let them. That is already adding to the glut of flats for sale and will depress prices even more seriously.

What is happening at the moment to UK homes is a gradual adjustment where prices are stable or falling slightly, while pay for those in work is climbing slowly. So relative to incomes, property is becoming more affordable. The danger is that this gradual movement will become a stampede, with prices plunging and people pushed into negative equity, where their mortgages are greater than the value of their homes. No one should want that, but this Budget has increased the chances of it happening.

Need to know

In the end, the Government’s financial future will in all probability not be determined by what the Chancellor did in his Budget, or indeed by its wider economic policies. The thing that will enable it to scramble through without some sort of financial crisis in the next couple of years will depend on what happens in the rest of the world. It’s a narrow window, with a lot of things that can go wrong and not many that are likely to go right. So, let’s just put the Budget into context by noting this range of things that might happen. I list here four of my biggest concerns, and one of my greatest hopes – you could say four funerals and a wedding. 

First, there’s the possibility of a global recession. They seem to come though at around 10-year intervals. There was the early 80s and early 90s. Then, we just missed one in 2001, though the US did dip into a technical recession, but then we all had the humdinger of 2009-10. Then, came the pandemic of 2020 and subsequent disruption, which led to a brief but devastating decline of 20 per cent in output. Of course, nothing is inevitable in economics, but it must be odds on that the next five years will see another big dip that will make the Government’s projections completely wrong.

Second, there’s the possibility of persistent inflation leading to even higher interest rates. I don’t buy the OBR’s expectation for inflation next year. I hope I am wrong but I could see the peak at well over 4 per cent and the average close to it.

Third, a financial crisis associated with the ending of the AI boom. There’s nothing sensible to say about that except that the present go-go mood won’t last forever.

Fourth, there’s the danger that the present conflicts around the world will erupt further and in some way or other involve the UK. Again, there’s nothing really to say about that, except that the projections for defence spending are almost surely too low.

And the wedding? It is that AI may enable a step change in the efficiency of government. The Chancellor hinted at that in his speech, so let’s see what emerges. On a long view, AI will indeed transform all the service industries. Governments are typically slow adopters of new technologies, but let’s see.

One final thought. You may have seen that the Government is projected to have £15bn headroom in cash terms for its 2030-31 fiscal year. So, what’s the total amount it is expected to spend? It’s £1,420bn. Having a buffer of £15bn doesn’t sound a lot to me.