Jethro Elsden: Failing to extend the stamp duty holiday would be a big mistake

23 Feb

Jethro Elsden is a Data Analyst and Researcher at the Centre for Policy Studies.

Reports that the Chancellor is going to try and use the budget to claw in a bit more revenue to try and pay for the cost of the pandemic are worrying. Even if the costs of the pandemic are eye watering, we are only just on the cusp of emerging from the pandemic, now is the time to go for growth not wallop the economy with tax rises.

Even more worrying is the fact that among measures being discussed is allowing the stamp duty holiday to end and the system to revert back to how it operated prior to the introduction of the holiday in July last year.

As the new paper we at the CPS have published lays out, failing to extend the stamp duty holiday would be a serious mistake. It would deliver a sledgehammer blow not only to the housing market but also the construction industry and act as a major drag on growth, just as we are trying to kick on and recover from the economic carnage the pandemic has caused.

After the pandemic hit and we entered the first lockdown back in March last year housing transactions plummeted, falling by over 100,000 in Q2 compared to the same period the year before. To try and reverse this collapse and help to stabilise the construction industry, Rishi Sunak introduced a Stamp Duty holiday in early July, raising the threshold from £125,000 up to £500,000, thus slashing the burden of the tax.

The impact of the measure was immediate and the housing market has not only recovered but positively boomed. Provisional data for the last quarter of 2020 shows transaction numbers at 316,300. To put that figure in context that’s up almost 50,000 on the same period the year before and is the highest number for quarterly transactions since the end of 2007, before the housing market slumped in the wake of the global financial crisis.

Because of this the construction industry has been stabilised. High transaction numbers have ensured that housebuilders have had the confidence to continue building new houses and haven’t cut back supply. In fact, despite the dire economic situation the number of new builds completed was actually 0.5 per cent higher in Q3 2020 than the same period the year before.

However, with the holiday set to stop at the end of March the Government risks delivering a sledgehammer blow to the housing market and the construction industry which they will take many years to recover from, just as occurred after the global financial crisis. This will weigh on the economy just as we try to recover from the pandemic. Transactions will fall significantly, and this will cause the number of new builds to move in the same direction. And while government revenues might rise slightly the economic damage that ending the holiday will do will be very significant.

To avoid this the Government must at the very least extend the holiday, by making the £500,000 threshold permanent on primary homes. Alternatively, the government could be more ambitious and opt for broader reforms which the CPS have previously proposed , either by keeping the threshold at £500,000 and lowering the rates above this back to their 2005 level for primary homes, or simply abolishing the tax altogether.

The economic distortions that stamp duty inflicts are widely acknowledged and it has a strong claim to be Britain’s worst tax, it is certainly far more damaging than either Income tax or VAT. Probably the worst impact it has is that by discouraging transactions it leads to a poor allocation of housing, and in the UK where housing supply is far from elastic this causes a large loss in welfare.

For example, by disincentivising downsizing it causes elderly people to remain in housing unsuitable for their needs, while preventing younger people having the opportunity to buy larger houses that the same elderly would otherwise be selling. Lower downsizing by the elderly means there’s less demand for housing specifically designed for their needs, which may explain why the UK has on an international comparative basis so little specialist retirement housing. And by making upsizing more difficult it can force young couples to delay starting a family. These are not trivial issues: the costs are real and significant.

The reforms we propose will help to minimise (or in the case of abolition, end) the damage and distortion that stamp duty causes. Furthermore, by increasing transaction numbers they will substantially increase the number of new builds each year. Because there is a well-established relationship of about one new build for every ten transactions that occur, we estimate that the increase in transactions that our reforms would cause would lead to an extra 20,000 new builds every year (or in the case of abolition, 23,000 extra new builds). This will not only be of significant economic benefit but will also go someway to helping the UK meet its target of 300,000 homes per year.

Because stamp duty is such a destructive tax the costs of these reforms, whether that’s just extending the holiday so that the £500,000 threshold is permanent or full-on abolition, are significantly lower than a superficial static analysis would suggest.

Of course, it is impossible to know the counterfactual where the holiday had never been introduced, but it seems likely given how weak the economy has been that transaction numbers and stamp duty revenue would have remained significantly below their 2019 levels. But let’s assume that in the second half of last year stamp duty revenue managed to climb back to 90 per cent of its 2019 level, that would mean the holiday cost about £1bn in lost stamp duty revenue. However, if the housing market had bounced back less strongly and revenues had only recovered to say 75 per cent, then the cost is only £300 million.

But on top of this the wider economic benefits of the holiday will have filtered through and helped support numerous other businesses, such as construction suppliers and estate agents, in staying afloat and not cutting back employment. Meaning less government spending on unemployment benefits and tax revenues such as VAT will have been boosted. This means that the true cost will be lower, perhaps substantially so.

Once you account for the increase in transactions, the extra tax money that will be raised from the complimentary spending which tends to occur when someone moves house, and the increase in new builds (and the extra revenue this will generate through section 106 etc), the cost of keeping the threshold at £500,000 and lowering rates is only about £500 million, while abolition on primary homes would cost only about £2bn.

No doubt in the coming months the Government will be looking at different policies to help boost growth and help the country recover from the pandemic. While it might involve a small cost in lost revenue, extending the stamp duty holiday by making it permanent on primary homes, or more broadly reforming the system by lowering rates or abolishing the tax, would be one of the best ways the Government could help to stimulate the economy.

If it fails to do so, the cost will be significant, and the housing market and construction industry will be dealt a body blow they may struggle to recover from for the next few years.

Jethro Elsden: Why, paradoxically, vaccine nationalism can help end the global pandemic early, not prolong it

22 Feb

Jethro Elsden is a Data Analyst and Researcher at the Centre for Policy Studies.

The early success of the UK in the vaccination rollout is obviously fantastic news, which will save many thousands of lives and bring with it a substantial economic dividend. However, there are growing calls for a fairer distribution of vaccines around the world and officials in the WHO have called for the UK to start sharing its vaccine supply.

Countries like the UK or US which have successfully secured early access to vaccine doses are accused of vaccine nationalism, supposedly hogging the supply of vaccines and preventing poorer nations getting access. But far from being a barrier to vaccinating the rest of the world and escaping the pandemic, vaccine nationalism has been key to developing and producing the jabs in record time, and the entire world will benefit because of it.

Of course, vaccine nationalism can be both good or bad depending on what we mean by it. For the purpose of simplicity here I suggest there are two types: one which is mostly good and will help to end the pandemic early. The other is mostly bad, which if pursued widely could prolong the crisis for many years.

The first involves competition between countries constrained by the rule of law – countries striking legal deals to pay and invest more, or offer data and help, to pharmaceutical firms in order to get doses early and be given dedicated supply. These countries benefit in the short term but the whole world benefits in the long term since development of vaccines gets expedited and supply ramps up more quickly. Countries such as the UK and the USA have, via the vaccine taskforce and Operation Warp Speed, practiced this first kind.

Via these schemes they have funded vaccine development to the tune of many billions of pounds and far more generously than the EU. While both the UK and USA have spent nearly £30 per capita on funding vaccine development, the EU has spent less than £5. The UK and USA’s funding has been instrumental in speeding up vaccine development and production, thus benefiting the whole world. At root of both schemes was a “selfish” desire to develop a vaccine and produce it at record speed in order to immunise the populations of the UK and US. The benefit for the rest of the world was of secondary importance.

Whereas the second sort involves countries competing by whatever means they can to get their hands-on vaccine doses, whether legal or not. These countries benefit in the short term but the whole world (including the countries which initially benefited) lose big time in the medium to long term. The EU has in recent weeks started to practice this second kind, with export controls and interference with private pharmaceutical firms, threatening to undermine global vaccine supply chains.

Luckily, they have pulled back from the brink but we almost ended up in the situation where the EU essentially stole some of the UK’s vaccine supply. This kind of vaccine nationalism is obviously disastrous; it undermines the private property rights and international supply chains which the pharmaceutical firms depend on to produce vaccines at scale. What firm would massively scale up production or rush to develop a new life-saving product if they could not be certain that their ability to sell the product will not be arbitrarily determined by bureaucrats.

While some have suggested that vaccine nationalism could cost up to $1.2 trillion per year, these estimates assume that in a world where access to the vaccine was equal and distribution was fair, the same progress in developing a vaccine, both in speed and scale, would have occurred.

This seems a rather pollyannaish assumption. It’s precisely because those countries “selfishly” invested in vaccines to cover their own populations that they were developed in record time and production is rapidly being scaled up. In time this will also ensure that poorer countries get access to vaccines in large numbers much earlier than in a realistic counterfactual where distribution was equal across the globe.

The key fact in the situation we are in is: It doesn’t matter very much whether we vaccinate fairly or unfairly. What really matters is how quickly we vaccinate everyone. This means maximising vaccine output as rapidly as possible. The pandemic won’t end until enough people around the world have gained immunity either via natural infection or vaccination in order to hit herd immunity – or at least have sufficient immunity so that severe disease will no longer overwhelm health services. The quickest way to get there is thus not to spread the vaccine supply out fairly, it is to increase supply as much as possible.

The spectre of variants emerging that evade immunity reinforce this point. We may need to vaccinate the world multiple times over the coming years and if we don’t have sufficient capacity to do so quickly then the pandemic could drag on for a long time. Countries like the UK and USA getting early access to tweaked versions of vaccines will undoubtedly be a good thing for the entire world if that means more money is invested in vaccine development and production, and the evidence from the first generation of vaccines which are now being distributed suggests this is exactly what will happen.

There are two main flaws with going for an internationally-coordinated fair distribution of vaccines. First, you end up with a big global free rider problem, with countries unwilling to invest if they can’t get early access to vaccines. The good sort of vaccine nationalism essentially solves this issue – countries like the UK and US invest more in development and production – or in the case of Israel pay far more than everyone else –  and thus gets early access to the vaccines, but in turn vaccines arrive earlier and production ramps up much more quickly which massively benefits the entire world.

Second, and not for the first time during the pandemic, the dynamic nature of markets is being underappreciated. Supply is not static – given an increase in effective demand markets will adjust and increase supply. We saw this in the spring in the initial stages of the crisis; when PPE was in serious short supply, much higher demand led to firms increasing production – and new firms entering the market. Very rapidly shortages disappeared and have not returned since. The same is true of the market for vaccines, there’s a big global shortage of supply at the moment, what we need is an increase in production not fair rationing of existing supply.

Of course, vaccine nationalism doesn’t mean you then can’t help poorer nations get access to vaccines further down the line once supply ramps up. The UK is already playing a key role in this regard, mobilising over $1 billion of funding for COVAX the international scheme to ensure poorer countries get access to vaccines, making it one of the most generous funders of the scheme.

It will be far more effective going down this route and giving poorer nations the money in which to join the global vaccine market, which will increase effective demand and in time feed through into increased supply. Rather than trying to ration vaccines even more than they already are in richer nations like the UK and USA and redistribute them around the world. All the latter will accomplish is to spread what little supply the world does have even more thinly without doing anything to increase supply.

Jethro Elsden: By how much will we gain by choosing our own vaccination programme, not the EU’s? Let’s start at £100 billion.

2 Feb

 is a Data Analyst and Researcher at the Centre for Policy Studies.

The most important thing about the success of the UK’s vaccination rollout is that it will save lives. Not only will the vaccines cut the numbers dying of this horrible disease, but they will mean that – as the pandemic eases – the NHS can go back to dealing with other health issues properly, and be more than just a National Coronavirus Service.

But it will also bring enormous economic benefits. If all goes well, we can go back to normal, or at least something fairly close to it, by the summer if not before. This will not only make all of our lives a great deal more pleasant, but enable the economy to launch its longed-for recovery.

I’ve been looking at the Office for Budget Responsibility’s data, and comparing the vaccination trajectories of the UK and EU. And it is possible that our decision to go it alone will be one of the most economically beneficial decisions any government has ever made – with the £12 billion the UK is reportedly spending on vaccines delivering a potential return by the end of 2021 in the hundreds of billions of pounds.

As we saw last year, with the post-lockdown recovery, each stage along the path back to normality will bring a substantial economic boon. As we move gradually out of lockdown, more and more economic activity will become possible again. If tiers are maintained, even moving from lockdown and Tier Four into Tier Three woud provide a significant stimulus, as non-essential shops are allowed to open again.

So the faster our return to normality, the greater the dividend – not just in terms of relaxed restrictions, but the increased confidence that will come as fear of the virus fades and businesses can reopen and refocus on meeting consumer demands. Not to mention the wider benefits, such as getting children back into the classroom, easing the toll on people’s mental health, and so on.

Speeding up the vaccine rollout is, as one commentator put it, “the world’s easiest cost-benefit test”, with costs in the billions and an upside in the trillions. And yet while the UK, USA, and especially Israel are passing this test, the EU – which prioritised trying to get superficially better prices and terms from pharmaceutical companies – has manifestly failed.

While the UK will soon have vaccinated 15 per cent of its population, across the EU the same figure is just three per cent. And this gap will likely grow, since the UK rollout is still accelerating: over one per cent of UK adults were vaccinated on Saturday alone, a figure most countries in the EU would struggle to achieve in a week.

If the Government had opted in to the EU vaccine scheme, we would now be stuck in the slow lane. This would undoubtedly have meant many more lives lost in the coming months.

But it would also have meant paying a substantial economic cost. With the more transmissible variant of the virus widespread, it would surely have meant a longer lockdown, and continued heavy suppression of the virus for much of 2021. Normality would probably not have been possible until near the end of the year, perhaps later.

So how much better off economically might the UK end up being, compared with the counterfactual in which we moved at the speed of the EU

Putting an exact number on it is not an easy task. There are too many moving parts and far too much uncertainty. We don’t know exactly how good the vaccines will be in stopping transmission, or if a new mutant strain will dash our hopes. Perhaps the supply of vaccines will improve to such an extent in a few months that the EU can rapidly catch up.

But having said that, we can come up with a rough estimate – not least by looking at the Office for Budget Responsibility’s economic and fiscal outlook, published late last year. It offered multiple scenarios for economic growth, depending on the course of the pandemic and results of the Brexit talks.

On the pandemic, the upside scenario assumed that the second wave would be relatively easily contained; that vaccines would arrive in the spring and be rapidly rolled out; and that economic activity returned to its pre-virus level by the end of 2021.

The central forecast assumed a slower rollout and restrictions in place until the spring, with the economy not recovering until late 2022.

he downside scenario assumed the vaccines wouldn’t fully control the virus, the rollout would be slow and restrictions would remain in place for much of the year, with the economy only recovering to pre-crisis levels in late 2024.

While the second wave was much more severe than was predicted, cases are now falling remarkably rapidly, and hospitalisations and deaths are starting to follow. There are signs that the vaccine may already be eating into the virus’ ability to spread.

So while it is likely that we ended 2020 doing worse than the OBR’s central forecast for growth, the faster vaccine rollout means that, by late spring or summer, we should have moved from the downside scenario closer to the upside scenario. Vaccinating at the pace of the EU could have kept us trapped in the OBR’s most pessimistic forecast, perhaps for the entirety of 2021.

Using the OBR forecasts for quarterly nominal GDP shows us the significance of this kind of shift. Assuming the faster vaccine rollout shifted the economy from the downside to the upside scenario for the whole of 2021 would mean nominal GDP was about £235 billion bigger by the end of the year – in other words, roughly ten per cent bigger. It’s more than our cumulative real-terms contributions to the EU during our entire membership, and more than the most pessimistic assumptions about the economic damage of Brexit.

It is probably more realistic, however, to assume that the economy doesn’t suddenly spring back into shape. But even if you assume that we will be closer to the central forecast for the first half of the year, and then transition into the upside scenario in the second half as all restrictions are lifted, you still end up with an estimate for nominal GDP that’s about £170 billion higher than if slower vaccine rollout kept us trapped with low growth for the rest of the year.

Even if we’re less optimistic and assume the current lockdown weighs heavily on the economy, and we only shift up to the central scenario from the summer, it still leaves nominal GDP over £100 billion larger.

The point of this exercise isn’t to find an exact figure for the economic benefits of our vaccination programme: as I said, there are far too many imponderables for that. But they certainly show the order of magnitude involved. Even if our vaccination programme brings forward the return to normality by matter of weeks or months, compared to the EU situation, going it alone will have been worth it – and, in fact, one of the best economic bargains in decades.

Most Government decisions that get remembered stick in the mind because of how disastrous they end up being: returning the pound to the Gold Standard after the First World War, the Suez Canal conflict, or in more recent times the invasion of Iraq.

The grim death toll from the pandemic, alongside the economic costs, certainly made the last year a bad one for Britain. But the vaccine rollout is as effective as we hope, opting out of the EU vaccine scheme will deserve to linger in the memory as one of the best policy decisions a British Government has ever made.