The pluses and minuses of working from home

24 Jan

With Plan B restrictions due to be phased out this week, including the guidance for people to work-from-home (WFH), much of the nation is thinking about the return to the office and what this means for them. Already there have been signs that some workers are dragging their feet, with civil service unions criticising the plans. 

Overall, WFH has been something of a divisive issue. While the majority (43 per cent of Britons) believe that it was right for the Government to end guidance here, a hefty 38 per cent disagreed. Conservatives were more likely to back the idea than Labour supporters.

So, almost two years after the UK went into lockdown, what can we take away from the working from home revolution? Was it a success?

Perhaps the most obvious advantage of working is that it has allowed people to re-locate to completely new destinations. Huge numbers moved out of London and other cities during the initial stages of the pandemic, in pursuit of more space. It lowered rents in built-up areas (albeit temporarily) and created something of a natural “levelling up” effect as economic activity in Britain was completely redistributed.

Moreover, many people have enjoyed the ability to spend more time with their loved ones. Maybe – without sounding too gender stereotypical – this explains why women have been bigger proponents of WFH than men, according to research by YouGov, more able to juggle childcare responsibilities with their career. Its survey found, in addition to this difference, that 50 per cent of women want to WFH again in the future compared to 25 per cent before the pandemic. Without the commute or having to get ready in the morning, it’s easy to see how this creates a better work/life balance.

Worldwide, WfH has produced numerous other benefits for people. Some of these have been outlined by YouGov in a survey of Americans. It found that people liked the following:

  • No commute (68 per cent)
  • Flexible hours (63 per cent)
  • Ability to dress casually (55 per cent)
  • Ability to do small household tasks while working (52 per cent)
  • Ability to socially distance (51 per cent)
  • Spending more time with family/household members (39 per cent)
  • More autonomy with work (36 per cent); and 
  • increased productivity (32 per cent).

So what could possibly go wrong with this format? Well, one criticism of WFH is that, far from ensuring family time, it has increased many people’s workloads. On a survey by Hays, 52 per cent of workers said that they had been working longer hours than they had before Covid. Around 40 per cent of the respondents even said that they had worked during their annual leave.

Another, less anticipated, downside of the WFH revolution is that it led to an increase in fraud. One paper today reports that eight in 10 mid-sized businesses in the UK experienced this criminal activity in 2021, up from 60 per cent in 2020. They lost an average of £233,000.

WfH has caused economic issues elsewhere. With more people staying in, that means less commuters/ workers frequenting businesses across Britain. New analyses show that some of the worst affected have been hairdressers (which saw a 50 per cent increase in customers cancelling over Christmas) and the hotel and restaurant sector (45 per cent). 

Maybe the worst part of the WfH revolution, however, is that – as with all elements of the Coronavirus lockdowns – it can exacerbate social inequalities. It’s fairly obvious that anyone who enjoys their home situation, for whatever reason – be it, a nice family life or comfortable/ large living space – is going to be a bigger advocate of more time there.

Moreover, far from alleviating the housing crisis, as a lot of people (including myself) predicted in the initial stages of the pandemic, WFH actually seems to have made things worse in another sense. Property prices have risen around the country, helped along by the Stamp Duty holiday. 

Research by Hamptons, the estate agent, shows that Londoners bought over 112,000 homes outside the capital last year (an increase of 62 per cent compared to 2020). That is a total of £55 billion spent on homes outside London. In short, it means that getting on the property ladder is even harder for Generation Rent (many of whom bank on the fact they’ll be able to buy outside major cities).

Was WFH a good model? Looking at the pros and cons, it’s pretty difficult to make a judgement either way, and easy to see why the polls are so split. It clearly has transformed many people’s lives and there are definitely elements that should stay (giving people flexibility to spend more time with their families), but decision makers can look out of touch when they fail to understand the downsides. Without fully taking these into consideration, they can easily find themselves with an all-together different set of issues to “level up”. Either way, the last two years have given us plenty to think about, in regards to the future of work.

Anthony Browne: Increasing supply won’t fix the housing crisis. First time buyers need more power in the market.

19 Oct

Anthony Browne, the MP for South Cambridgeshire, is on the Treasury Select Committee and a co-founder of the HomeOwners Alliance.

The decline in homeownership rates, particularly amongst the young, is one of our most urgent national challenges: there are few issues that more directly affect people’s quality of life and aspirations. There is a simple political solution: build more homes. It is such an appealing thought – it has to be true.

But does building more homes actually lead to higher home ownership rates? The truthful answer is “not much”. We went on a massive national bonanza from 2005 to 2015, and homeownership rates still fell. All that rose were the numbers of properties that were privately rented “buy to lets”. As the report Resentful Renters by the Centre for Policy Study shows, the number of homes built in that period almost exactly matches the increase in private rented properties.

Clearly, building houses that are then sold as holiday homes or buy-to-lets does nothing to increase homeownership. Whole blocks of flats in London are sold off-plan to international investors, doing nothing at all to relieve the homeownership crisis.

The argument is often made that building more homes leads to a decline in house prices, putting them in reach of first time buyers. Supply and demand.

But there is an increasing economic consensus that the impact is marginal – the price is more determined by the vast secondary market in homes that have already been lived in, which makes up 99 per cent of homes, not the one per cent of new build.

And the prices in that secondary market are largely driven by the cost and availability of credit (aka mortgages) that finances the purchases. The restriction in access to first time buyer mortgages since the financial crisis roughly equals the drop in the number of first time buyers, and on its own could account for much of the drop in homeownership.

Again, look at the big picture: in the last few years housebuilding has been at record rates, but rather than falling, house prices have risen to record levels. That rather proves that housebuilding is not the driving force behind price changes.

So, if building more homes does not push up homeownership rates, what will? There are roughly a million residential property transactions a year, overwhelmingly of homes that have already been lived in rather than new builds.

The key to increasing homeownership rates is to make sure more of those million transactions (both of new build and already lived in) go to first time buyers. Identify the barriers that first time buyers face, and work out measures to remove them.

The Help to Buy scheme, where the Government guarantees deposits to overcome the deposit barrier, is one such scheme, and although beneficial, it can only ever be small scale. To move the needle, we need solutions that are sector-wide, for the new and secondary market.

In 2011, I co-founded the HomeOwners Alliance, to help aspiring homebuyers onto the property ladder. About a decade ago I led a campaign to push for a higher rate of stamp duty for people buying second homes or investment properties, to tilt the market in favour of those buying a home to live in.

Subsequently, the Treasury introduced the three per cent additional property stamp duty surcharge, and cut stamp duty for first time buyers, and the rate of homeownership has started rising again in the last few years.

That rise in homeownership in the last few years is nothing to do with housebuilding, since that housebuilding did not reduce prices, which is the supposed transmission mechanism between housebuilding and homeownership.

The rise in homeownership happened despite record house prices, because a greater proportion of the roughly million transactions a year have been first time buyers. Other things that the Government could consider to help first time buyers include:

  • Getting the Bank of England to allow lenders to offer higher loan to income ratios on long term (over 10 years) mortgages, as a new Centre for Policy Studies report proposes. That will not increase prudential risk to lenders, but would put homeownership within reach of many more first times buyers, by enabling them to take out long term fixed rate mortgages that are up to seven times income.
  • Increase the additional property stamp duty surcharge so that foreign buyers who do not intend to live in a property pay far more – there are even arguments to increase it to the same rate as VAT, or 20 per cent. The Government should also reduce the tax breaks given to buying properties through a company, and to those buying more than six properties in a single transaction. It is difficult to see any societal benefit in allowing so much of our residential property to be bought as investments for people who don’t even live in the country. It is also difficult to see why overseas buyers should pay a lower rate of tax buying a flat in the UK (which are limited in supply) than if they bought a car or computer here (which have no supply limitiations).
  • Give private landlords an incentive to sell their property to long-term tenants, for example by reducing the capital gains tax charge if they sell to a tenant who has lived in the property for more than 10 years.
  • Encourage building of more comfortable downsizing properties, for couples to move on from their family home after their children have fled the nest. The cost of moving, and the lack of available suitable properties, means there is massive so-called “property hoarding” where elderly people live in houses far bigger than they need.
  • Change stamp duty regulations to enable private shared equity, so that a company can buy a share of a property to enable the first time buyer to overcome the deposit barrier and buy the rest of the property. This must be done under a controlled regime so the first time buyer can staircase up to buy the rest of the property when they can afford to. At present, stamp duty is punitive if you buy a property using shared equity but not when using debt (mortgages), with the only very limited exemption being for shared ownership of social new build. [declaration of interest: I used to be on the board of a company that offers this].

Greg Smith and Dehenna Davison: Introducing ’30 Ideas for 2030′, a free-market blueprint for levelling up

17 Sep

Greg Smith is the MP for Buckingham. Dehenna Davison is MP for Bishop Auckland. They are co-chairs of the Free Market Forum.

Of Boris Johnson many successes, his ability to sell the Conservative message to members of the public who had hitherto never considered voting for our party is among the most impressive.

During the 2019 general election, Conservative candidates who were “doing their time” by standing in unwinnable seats quickly came to realise voters were developing a healthy appetite for low taxes and Conservative economics – for the sunlit uplands of opportunity that could come from ‘taking back control’ – both of our national policies and of their own lives.

Since the election the Government has, of course, devoted most of its time towards the two overriding issues of Brexit and Covid. These have prevented it from undertaking the type of free market policies that many of we newer MPs might have wished for.

It was of course right for the state to step in and protect lives and livelihoods during Covid, and it may have been necessary for the government to simply replicate large tracts of EU rules initially in order to give businesses some certainty during the immediate transition from EU membership to full independence. But with a Brexit deal done and Covid believed to be endemic, it is time to consider what comes next.

The Free Market Forum aims to promote ideas and stimulate discussion over how we make Britain economically and socially freer, boosting the economic opportunities and growth across the nation, encouraging innovation and creating jobs. We want to lead the conversation within the Conservative Party on the importance of retaining the traditions of fiscal prudence, low-taxes, and limited regulation – key pillars to support growth and opportunity.

For many in left behind parts of the country, the reality is that the private sector is stifled by a bloated public sector that is almost Soviet-sized in some areas of the North. Thirteen years of Labour – whose ambition seemed to amount to little more than throwing money at those left behind and hope for the best – was followed by little change from by well-meaning Conservative governments since 2010.

This has meant that for decades, many of our communities could not even begin to imagine a world where they could succeed through entrepreneurism or seizing opportunities for themselves, rather than just waiting for the state to do it for them.

Innovate UK polling indicates that the confidence to start a new business, for example, is far lower in left behind Britain than in the more affluent parts. In the North East, a shocking 44 per cent of those with an idea and desire to start a new business lack the confidence to take the plunge and go for it (compared to less than 30 per cent nationwide). Clearly, restoring a culture of risk is needed if we are going to help these places succeed.

Our new paper, 30 Ideas for 2030, is our first effort to dip our toes in the water. The 30 ideas – from MPs, peers and respected academics – cover a broad swathe of policy areas, from reducing occupational regulation to reforming the BBC, from using technology to enhance teaching in our classrooms to removing the barriers to self-employment and alternative business models. While not a policy prospectus, we are hopeful that these options for cutting the state and instead empowering the individual will provide some food for thought in government.

As you might expect, considering the almost historic levels of taxation as a proportion of GDP and a state that seems to be growing ever larger, many of the ideas revolve around tax reform.

The former Chancellor, George Osborne, dubbed our tax code “one of the most complex and opaque tax codes in the world” on assuming office in 2010. Yet a decade later we still have, at over 10 million words, the longest tax code in the world, 48 times the length that of Hong Kong – which is considered to be the gold standard by most tax accountants. This tax complexity results in dozens of loopholes and offsets which reduce government income and also distort the economic activity of both businesses and individuals.

Taxes should be as low as possible, but it is equally important that they should be simple and universal.

With our economy still weak from the Covid lockdowns, and considering the additional tax burden the government is now choosing to add on to National Insurance, we should be scrapping the planned increase in Corporation Tax and looking to simplify the tax system more broadly. Other tax reforms which should be under consideration include the wholesale abolition of Stamp Duty Land Tax, which, alongside prudent free market reforms to planning regulations, could do much to alleviate the worst of our housing crisis and get more young people onto the property ladder.

There is much to do over the next ten years as we build back better following Covid. But it is only by embracing freedom and economic liberalism, and continuing to make the case for it instead of becoming an increasingly paternalistic, state-controlled nation by default, that we will make a real difference to those left behind, and make Britain a richer, stronger country.

Paula Higgins: British homeowners are vital to reaching net zero. But we must ensure climate targets are achievable for them.

2 Jul

Paula Higgins is the CEO and founder of HomeOwners Alliance.

As focus moves from setting to delivering the UK’s world-beating climate targets, our homes have moved to the centre of the debate.

Insulating millions of houses and replacing polluting gas boilers with cleaner alternatives is essential to reaching net zero and will require the buy in of the vast majority of the British homeowners. As such, it is essential that there is a practical, consumer-friendly, and affordable means of cutting carbon from domestic life.

It has been suggested that homeowners should be required to upgrade the energy efficiency of their home before putting it on the market. This is a complete non-starter for a number of reasons. For many sellers, they will not have the cash, time or energy to upgrade their home before moving on. This is especially true for downsizers.

But this doesn’t mean that there isn’t a route to net zero for our homes.

Instead of punitive regulations, which will more than likely lead to shoddy work and disgruntled homeowners, there are dozens of policies, tax changes and other levers that government can pull to climate proof our homes.

First place to look is the recent Green Homes Grant, which despite many flaws, showed that there is huge public appetite for upgrading homes. At HomeOwners Alliance we were overwhelmed with questions and requests for more information about the scheme. It’s nonsense for the Government to use the excuse as a lack of take up to axe the scheme.

Hopefully this should give ministers confidence to deliver a big and improved demand-led scheme, allowing Brits to make upgrades to their homes at a time that suits, instead of being forced into it when looking to move. A drop-in replacement for this popular scheme is a no-brainer.

The tax regime is also weighed against home improvements that will decarbonise our homes. Home improvements are expensive. Add on VAT at 20 per cent and you can see why our research reveals one third of homeowners are deterred from doing home improvements at all, or forced to pay cash to afford the work. The zero VAT rate for new homes should be extended to homeowners undertaking major refurbishment works and efficiency upgrades.

Changing council tax and stamp duty to free up cash for greening our homes, either through rebates, reduced rates or cashback schemes could also be a vital step towards net zero.

There is precedent to changing stamp duty to achieve wider goals, as seen in the pandemic recovery. With net zero as one of the government’s core tenets, there is surely scope for doing it again, especially with such enthusiasm from Brits about cutting carbon footprints.

Another option is interest free loans, comparable to those issued more than two million times in Germany and on offer in Scotland, are yet to be made available across the UK.

For it to be worth its salt, the Government’s upcoming strategy to decarbonise our homes need to utilise every option on the table.

Replacing a broken-down boiler with a heat pump currently costs more, but the Government can get involved here too. Energy supplier Octopus is aiming to slash costs for heat pumps by half by the end of next year, but a targeted innovation scheme to cut costs would spur it on with some competition.

We already have a “buildings mission” which aims to halve the cost of efficiency retrofits, why not the same for heat pumps? By setting a challenging goal, not only will costs for homeowners fall, but we can be sure that the UK’s clean heat industry will flourish.

Until prices plummet, following trajectories set by renewable energy sources and electric cars, boiler scrappage schemes can also help with up-front costs, as can schemes such as the £4,000 Clean Heat Grant which should make clean heating more affordable.

Virgin Money and Nationwide are starting to offer green mortgages, offering lower rates for more climate-friendly homes yet crucially not increasing APR for those yet to be upgraded. Greener homes are cheaper to run, so green mortgages can also be flexed to offer additional funds for efficiency upgrades when loans are taken out.

There also will be, as the Climate Change Committee warned this month, a growing number of homes that overheat as our climate warms. Heatwaves this year and last stress the need for new policies and action from government to protect families living in the quarter of English homes that are at risk of becoming too hot in years to come.

Ensuring that Britain’s homes are upgraded for summer warmth, winter cold and clean heat at the same time is vital for keeping homeowners on board. Carrying out upgrades once and ensuring they are done well, ensuring that the numerous benefits are clearly explained and making sure that government support is accessible, easy to understand and effective are all vital for the impending strategy to decarbonise heat and buildings.

There is no doubt that Brits want to take part in the net zero transition, with public enthusiasm for climate action higher than ever. What is needed now is the policies and pledges that make upgrading our homes easy and effective.

Sam Robinson: It’s time to deliver a progressive alternative to Council Tax and Stamp Duty

21 May

Sam Robinson is a Senior Researcher at Bright Blue. Bright Blue’s new report, ‘Home truths: options for reforming residential property taxes in England’, is available here.

As the economy gradually reopens, jobs return to the labour market, and the vaccine programme roars ahead, it looks as though – after being blown wildly off course by the Covid-19 pandemic – the Government can soon return to its central mission of ‘levelling up’.

So far, the Government has prioritised spending and investment as the key levers to levelling up. But this approach is far from new. There have been countless regeneration initiatives since the 1960s, and governments of all stripes have pledged to improve life for deprived areas of the UK.

To truly address regional disparities and deliver on its levelling up agenda, this Government will need to be broader and more radical in its approach. That means reforming tax too.

The Government could start with our regressive and arcane system of property taxation. Council Tax, which still operates on property valuations from 1991, is laughably disconnected from today’s house prices. A house in Camden that cost £320,000 in 1991, for example, could now be worth £3,650,000, and still be in the same Council Tax band.

Property taxes in their current form also punish those in low-value properties, who pay proportionately more in Council Tax than higher-value properties. A property worth £25,000 in 1991, in a local authority charging the English average Band D rate, pays Council Tax at 4.7 per cent of its 1991 value. Conversely, a property worth £500,000 in 1991 pays Council Tax at just 0.7 per cent of its 1991 value.

Geographical variation in house price increases has exacerbated this trend further. While median house prices in many areas of London have risen eightfold between 1995 and 2020, prices in towns such as Blackpool have only increased by 2.7 times. The essential point is that those in the ‘Red Wall’ and so-called ‘left-behind’ areas are therefore paying more than their fair share in terms of Council Tax.

Meanwhile, Stamp Duty acts as a tax on aspiration, slowing the housing market and making it harder for people to find the right house for them. As witnessed during the pandemic, sudden changes to the Stamp Duty regime, such as the Stamp Duty holiday, can lead to significant fluctuations and spikes in the housing market.

It is little wonder, then, that figures from across the political spectrum – Conservative, Labour and Liberal Democrat alike, as well as economists, think tanks and campaigners – are united in calling for a fundamental reappraisal of the way we tax property.

There is now widespread, cross-party agreement that our property taxes are in urgent need of reform. The key challenge now is agreeing upon a way forward.

Bright Blue’s new report, Home truths: options for reforming residential property taxes in England, comprehensively assesses and ranks alternatives to our current system on a number of economic and political criteria. The report recommends replacing Council Tax and Stamp Duty with an Annual Proportional Property Tax (APPT) levied at a flat rate on the value of houses.

The APPT would have a £50,000 exemption threshold and a 25 per cent surcharge for second home owners. The tax would be charged on owners, rather than occupiers. Revenues would be split between national and local government. The fixed national component would be set at 0.11 per cent (0.14 per cent for second homes) of property value in order to replace Stamp Duty revenues, with English Local Authorities (LAs) free to set their local tax rates independently.

To explore the possible distributional implications of a move to this APPT, the report devises five plausible scenarios for the local APPT rates different LAs might choose to set post-reform.

The impact of a move to APPT is shown in two ways. First, by illustrating the proportion of LAs where a typical resident would pay less overall in expected property tax, in a scenario where LAs each charged the same local rate, designed to yield the same revenue as Council Tax does at present. With this, 78 per cent of all English LAs would see the typical resident face a lower expected property tax liability post reform.

Comparatively, those who face a higher expected property tax payment would be a typical resident in Greater London and the South East of the country.

Second, we simulate the impact on expected property tax payments before and after the proposed reform, using different scenarios for the local APPT rates charged, on a range of houses in ten representative LAs across England. The results show a pattern of reduced expected tax liabilities for those in poorer LAs such as Newcastle, and those in less expensive housing. In the lowest-priced housing market in England, Burnley, the cheapest houses are winners in all scenarios, and houses with a price at the market median also gain in all but two scenarios.

Combining the results of all the different scenarios, 76 per cent of the lowest-priced houses in the ten LAs pay less tax from moving to APPT, and 48 per cent of median priced houses and 24 per cent of the most expensive houses would also see reduced expected property tax liabilities. It is worth bearing in mind here that house prices are not normally distributed; there are relatively few expensive properties, and many more cheaper properties.

In other words, while the current system is regressive and distortive, an APPT would change this by rebalancing expected property tax liabilities and putting money in the pockets of those from modest backgrounds and areas.

Of course, such an ambitious overhaul of the property tax system will bring with it substantial challenges, including accurate valuation. But that is not a good enough reason to continue ducking this issue. To truly address the inequities and inefficiencies of Council Tax, the Government will have to face revaluation at some point. And to avoid a gradual return to the unfair discrepancies we see today, revaluations will have to be done on a regular basis.

The challenge of regular revaluations is also surmountable in a way that it wasn’t in decades past. Price data, house characteristics, and locations are now readily available, enabling house prices to be modelled. This modelling-based approach is a practical and comparatively cheap method for calculating property taxes; indeed, at least 15 countries have already implemented statistical mass appraisal systems for use in property valuations.

The flaws of Council Tax and Stamp Duty can no longer be ignored. Moving to an APPT makes both economic and political sense. If the Government is serious about levelling up in the long term, it needs to be bold now.

James Olney: Underwriting mortgage risk and a stamp duty holiday won’t deliver the home ownership we need

29 Mar

James Olney works in public affairs for Interel. This article is written in a personal capacity.

As a country, we face a housing crisis of generational proportions; as a Party, we face one with wide-reaching electoral implications.

Access to and ownership of decent housing is the fundamental basis for much of any individuals stake in society, and is a crucial driver of Conservative voting intention – and, far more importantly, it also underwrites the quality and security of life for so many of us across the UK.

For many young people, it’s a goal that is increasingly out of reach, and I see limited sign of the Government grasping just how profound a catastrophe we are accelerating towards.

That’s why it’s no surprise that the Chancellor’s recent announcements on housing were, at best, anaemic. Underwriting the risk of five per cent deposit mortgages does nothing to tackle the very real supply issues within the housing market.  And – if anything – extending the Stamp Duty holiday only helps to spur the vastly overinflated value of properties long since out of the reach of any reasonable young person seeking to get on the housing ladder.

The latter measure is a clearly intended injection of stimulus into the housing market to keep it ticking over. Stamp Duty forbearance cannot last forever: the Government simply cannot afford it. The only good thing about the housing bubble is the immense tax receipts it returns to the Treasury, and the sooner they return, the better.

The former initiative – underwriting the risk of five per cent mortgages – is far more problematic, and paints a difficult picture of the Government’s understanding and commitment to tackling the crisis at the bottom of the housing market.

For many young people facing a long climb up the housing ladder, it’s impossible to ignore that the housing market, as currently constituted, has hit a huge, problematic brick wall – with over-regulation (both in the planning and financial systems) choking housebuilding and access to mortgages, while under-regulation has simultaneously destroyed the integrity of much of the affordable housing stock, further compounding the supply issue.

You cannot fix these very real structural issues by just propping up unsustainable levels of credit. If people cannot afford any more than five per cent of the cost of the average home – and if the risk of lending in such circumstances is so prohibitively high that banks will not do it unless Government guarantees the funds – then that says something far more damning about the state of the current market.

It is a fundamental principle of conservatism that markets should be allowed to survive and thrive on their merits.  It would be a reasonable criticism to suggest that the housing market is too valuable and too strategically important to be allowed to fail, but that does not discharge the Government of its fundamental obligation to make sure that it works.

Ministers cannot simply continue to perpetuate a broken system because of the painfully obvious but so often unspoken political risk implicit in reforming the market: Conservative support (in a gross but functional simplification) rests with the landlords and not with those at the mercy of the leasehold and rental markets. The short-term pain clearly clouds the urgent requirement for a long-term fix.

Much worse than doing nothing, though, is encouraging the unsustainable growth of house prices. A vital element of a property-owning democracy – a principle that every government since Thatcher has supported – is that owning property must be achievable. Doing so gives homeowners a stake in society, a capital investment in the prosperity of their area and ultimately of their country. It’s not for nothing that there exists a strong correlation between home ownership and Conservative voting – with a material benefit and risk from macro-economic decisions, people suddenly become much more risk-averse.

But on the ground, quality and quantity are depreciating to the point where decent home ownership is out of reach for a generation. Without that stake in society, the Conservatives risk stifling their vote potential in the age groups that – before you know it – will be deciding elections.

This is exactly the crisis that the Stamp Duty holiday exacerbated in the midst of the pandemic – it’s an indictment of the lack of any strategic direction that the measure spurred house prices to their highest level ever. The rationale – or moral justification – is that by encouraging upwards mobility in the housing stock, by making it cheaper to upsize, greater capacity is created at the bottom of the supply.

Such an approach might work if the wider financial circumstances were reasonable – but in this case, all the economic activity did was to continue to inflate average prices while doing nothing to alleviate the demand pressures at the bottom. Solutions must come from supply side resolutions.

Instead of fiddling around with marginal financial measures, or actively detrimental fiscal forbearances, the Government must embrace that the Covid crisis will, out of necessity, reset much of our public and economic policy. There is a vital opportunity for the Government to articulate a real, bold plan for housing as part of the recovery.

For its faults, our system has considerable potential. But it will take meaningful strategic guidance and financial assurance from Government to harness the muscle of the huge private housebuilding sector to guide the development of housing on a scale that unlocks and services a level of demand that is only going to grow.

Unless Ministers confront this difficult reality, acknowledge it and take the tough macro-decisions on the future of our housing system now, the path ahead consists of forced capitulation, one thing at a time. The Government should look to Macmillan – the last Minister to meet his public housebuilding target. Anything less leaves a political, policy and social sore that is not going away.

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.

Tom Spencer: A one-off wealth tax is not the way forward – but a proportional property tax might do the job

20 Feb

Tom Spencer is a Young Voices UK contributor. He is also the lead organiser for the London Neoliberals and sits on its Steering Committee as Vice-Chair of International Chapters. 

Mel Stride, Tory MP and chair of the Treasury select committee, has just proposed a one-off wealth tax as a way of addressing the increasing national debt.

Why is Stride concerned about national debt at the moment? In theory, higher levels of debt should cause a rise in the real interest rate as investors demand a higher return in response to the greater risk of their loan. If this were to happen, then it could risk what is known as a debt-interest spiral – a state where governments accrue debt faster than they can afford to pay it back.

However, this is only problematic when the economy is not growing. Like anyone else, a Government should only view debt in regards to its ability to pay it back. If your profits are rising faster than your debt, then you’ve got nothing to worry about. The same logic applies to the Government – where nominal growth rate is greater than the rate of interest on that debt, then the debts value as a percentage of total wealth (or GDP) is actually decreasing.

Since the 1950s, the UK’s growth has almost always been greater than its interest rate. Indeed, the only exception was in the 1980s, when interest rates were increased instrumentally as a tool for fighting inflation under the Thatcher Government. Given we’re currently exiting one of the worst economic disasters in a century and interest rates are extremely low, it’s safe to say that we’re not at risk of entering the feared debt-interest spiral.

But even if we were, a wealth tax is a rather poor way of addressing this problem. Although some variants of the wealth tax are said to raise as much as £260bn, this is a very inefficient and distortionary way of taxing individuals. In recent history over a dozen countries in the OECD have implemented wealth taxes. Today, only three still have them in place. If these taxes were so effective, why would almost everyone abandon them?

The reason is they simply don’t raise enough revenue normally to justify the administrative and political costs. Looking at wealth taxes in Switzerland, a 2016 NBER working paper found that for every 0.1 per cent rise in the tax, the value of reported wealth falls by 3.5 per cent. This creates a system whereby those more savvy with their creative accountancy end up avoiding the tax en-masse, to the detriment of honest wealthy people.

Indeed, Britain is no stranger to this phenomenon. Denis Healey, former Chancellor of the Exchequer, famously explained his experience with the policy as follows: We had committed ourselves to a wealth tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.” This is a Labour chancellor admitting that wealth taxes are not necessarily the way to go; so, why does Conservative Mel Stride disagree?

Of course, the plan proposed by Stride aims to get around these perennial problems with wealth taxes; rather than aiming to tax future wealth year on year, his plan is for a one-off tax applying retroactively. But this abandons one of the most basic principles of good tax policy given by Adam Smith in his Wealth of Nations: certainty. Regardless of the economics, from an ethical perspective it’s paramount that the individual should know their tax obligations at any one point, for this is the only way to ensure that the system is fair. To abandon this principle and retroactively seize wealth from someone gained before the tax existed is pernicious and unjust.

However, there is another tax that could help address wealth inequality and that is the proportional property tax (PPT). The Government are currently rumoured to be looking to replace stamp duty and council tax with an annual 0.48 per cent tax on property value. Given that the largest reason for rising wealth inequality is the housing market, taxing property values would help reduce inequality by reducing the incentive to take advantage of the housing crisis.

Excessively strict planning laws have gamed the housing market so house price inflation will always rise above earnings; this means those with the capital to get on the ladder are at a privileged position over less well-off individuals who cannot afford the initial investment. What a PPT would do is create an incentive for those holding multiple houses to sell off their excess, freeing up new homes for other individuals; therefore, spreading the housing wealth more equitably.

Whilst this plan may not raise the additional £60bn that Mel Stride hopes to get out of his one-time retroactive wealth tax, the country does not need £60bn at the moment. With debt as cheap as it is, we should instead focus on how we can generate the most growth possible. Taxing wealth in the way he suggests is baleful and will only act as a barrier to our economic recovery.

Instead, to help address wealth inequality the Government are better off pursuing a proportional property tax; this would reduce the incentive for wealth to be hoarded in housing, simultaneously reducing council tax bills for 76p per cent of households.

Ben Everitt MP: The Chancellor must not let a cliff-edge ending ruin the good work of the Stamp Duty holiday

17 Feb

Ben Everitt is the MP for Milton Keynes North.

Whatever the reason might be for a home move – a new job, downsizing, more room for a growing family – it’s a decision that no one takes lightly.

The home moving process is fraught and emotional at the best of times. Families calculate budgets minutely, and finances are often stretched and squeezed in what is undoubtedly an incredibly stressful time for all involved.

Never has this been more clear than now, with the deadline of the Stamp Duty holiday creating a cliff edge for movers, and the risk of further costs, delays, and chains collapsing.

Rishi Sunak’s decision to provide a Stamp Duty holiday during the peak of the pandemic was brilliant. It has helped countless families to be able to move home. It was the right measure brought in at the right time to get the housing market moving, and it worked. It’s significantly stimulated the economy, with an almost 33 per cent increase in the amount of home moves made possible in December 2020 than the previous year.

However, the end of the Stamp Duty holiday is fast-approaching, bringing with it a can of worms for the property market and home movers alike, and a difficult decision for the Chancellor as he once again prepares to reach down the back of the sofa at Number 11.

It’s always the case with successful policies that we can find a way of viewing them as a victim of their own success. This one’s no different. In setting a defined deadline, there’s now a cliff-edge that risks undermining the benefits for which the Stamp Duty holiday was created. The holiday has undoubtedly achieved its aim of stimulating the market, but it also created enormous bottlenecks in the system as capacity within the property industry was stretched to the limit.

This crisis will mean that 325,000 home-movers could be at risk of losing out on the Stamp Duty savings through no fault of their own, according to data from TwentyCi. For many hard-working families on low and middle incomes, an unexpected bill of up to £15,000 would render the much dreamed-for house move impossible. This will be devastating for buyers who put time, effort, and emotional investment into moving home.

For many, this additional cost and stress will prove too much, and their dream home just may not be possible. The latest figures show over a quarter of home buyers would pull out of purchases if they missed out on Stamp Duty savings. The effect of this will be widespread chaos and delays, as transaction chains collapse throughout the market. They say you can’t put a price on dreams, but the estimated loss of value from the housing market in dropped transactions is £3.4 billion.

There’s also the timing to consider. The Stamp Duty holiday is due to end along with a whole raft of other Covid-related support measures. On average, UK home-movers spend £4,000 in painting, decorating, and general renovations in the year they move home. These trades have been kept alive by the Stamp Duty holiday. Tens of thousands of redundancies and bankruptcies avoided. Small local businesses, the backbone of our economy, saved.

If we phase out business and job support at the same time as ending the Stamp Duty holiday we risk a double whammy for local tradespeople and SMEs. While the forgone receipts to the Exchequer for SDLT are indeed greater than the receipts from the additional trade, the real value of the policy has been in sustaining the jobs and businesses. We need to do everything we can to keep people in work and keep businesses going at this crucial point. Investment in jobs now will pay off in the medium and long term.

The Treasury has rightly made much of its commitment to get the economy moving again as we turn to a 2021 recovery. Ensuring the housing market is thriving is central to this. To continue to boost our economy, we need to help the housing market, not burden it with a dangerous cliff edge.

This is why I would ask the Chancellor to consider the merits of a short extension of the holiday until we are through the most acute phase of this crisis. This would allow the industry time to rebuild capacity, process the backlog of work smoothly, and realise the benefits of the demand this successful policy has generated.

The Stamp Duty holiday has succeeded in revitalising the home moving sector and as a key plank of the Government’s plan for jobs – it would be foolish to taint its legacy by hampering home movers when we should be helping them most.

Neil Record: Lessons from the recent past for the Chancellor as he seeks to salvage the economy

13 Oct

Neil Record is Chairman of the Institute of Economic Affairs board.

Like many people, I have become increasingly concerned about the long-term consequences of the UK government’s Covid-19-related extraordinary expenditure. Faced with the position the Government’s finances are now in, what would I do if I were Chancellor of the Exchequer?

My first priority, and indeed the core function of any Chancellor, would be to formulate a plan which on reasonable or even conservative estimates of future economic activity would yield enough tax revenue to stop the mountain of public debt growing any larger.

It may be fashionable to argue that with “modern monetary theory” there is a new normal level of fiscal debt which governments can comfortably accommodate that is far higher than, say, the old 60 per cent debt-to-GDP that the EU used to require a country to be under to qualify for membership of the Euro area.

But the UK’s public debt now stands at more than 100 per cent of GDP, and any student of economic history will understand that the higher the national debt level, the more vulnerable a country is to external shocks exactly like the one administered by Covid-19, and indeed to future unknowable shocks.

The consequences of fiscal recklessness can be seen littered not just across the developing world, with serial defaults and bankruptcies, but also in the sophisticated developed world, where the world’s third largest economy, Japan, has been mired in stagnation for 30 years, burdened by enormous public debt which saps confidence and dampens entrepreneurial spirits.

So if the current Chancellor accepts the idea that fiscal prudence is at the heart of his role, then what should he do to combine that constraint with creating the conditions for a vibrant, growing economy providing jobs and opportunities across the board?

Were I Chancellor, my objective would be to initiate policies which have a proven track-record of success on two measures: growth in real Government revenue, and growth in labour productivity. The latter is the heart of the complex modern economic system that delivers real rises in living standards. The former is the measure which, if successful, would minimise the extent to which balancing the fiscal books requires real cuts to public spending. The question of how large a role the State should play in the economy is a bigger question for another day.

Let’s start with government revenue. If we examine the past 40 years of the UK economy, we can search out the best decade for rising government revenue which, as it turns out, is 1993-2003. This decade achieved real growth (i.e. adjusted for inflation) in government revenues of 4.3 per cent per annum – an astonishingly high rate which delivered 51 per cent more real annual government revenue at the end of the period than at the beginning! If the current Chancellor could sow the policy seeds to create another period like that again, he would be rightly acclaimed a hero.

Why was this period so successful for government revenue? The answer is that it was launched on the back of more than a decade of deregulation and reduced marginal tax rates, and that the period itself was one of broad policy stability. This is the more remarkable since it straddled a Conservative government (until 1997), and a Labour one thereafter. It was also a period of strong growth in labour productivity, of which more below.

What were the key tax facts in the successful 1993-2003 period? A top rate of income tax of 40 per cent; corporation tax falling from 33 per cent to 19 per cent; stamp duty top rate of four per cent (after one per cent earlier in the period); VAT at 17.5 per cent; and capital gains tax same rate as income tax, but with taper relief (from 1998-99) reducing the rate on shares by up to 75 per cent (i.e. giving a top rate of 10 per cent).

So here we have a blueprint for a set of tax policies that have been proven to deliver strong rises in Government revenue.

It is always tempting to imagine that as Chancellor you can conjure up any amount of tax revenue by just adjusting tax rates accordingly. The evidence points strongly in the opposite direction. Marginal tax rates send very strong signals to key players in every modern economy, such that economic activity will inevitably shift away from heavily taxed activities or sectors to more lightly taxed (or even, worryingly, to subsided areas).

If you, as a government, want strong economic activity in both the labour market (jobs, productivity) and in the market for capital (infrastructure, homes, machinery, technological change), then each has to be taxed in a balanced way so neither is favoured and neither is avoided.

Which brings me to labour productivity – the engine of living standards. This is a fascinating area – one that, in my opinion, is much under-studied. We had been growing richer and richer in the Post-War period until 2008, when our improvements in living standards came to a juddering halt. There are two “whys” here – why did we grow so consistently for 40 years, and why did we stop growing so suddenly?

On the first question, we had been the beneficiaries of an absolutely remarkable transformation in our technological knowledge, which allowed each worker to enlist more and more power and control over his efforts with the help of increasing amounts of capital equipment. We think recently mainly of the digital revolution, but this comes at the end of a series of revolutions: agricultural, energy, trade and specialisation – all of which have contributed to this quite remarkable success story.

Why did this stop? In 2008, a key specialisation of the UK economy, the financial services sector, had a catastrophic failure. This sector had been an important engine of growth and source of much government revenue. The shorter-term policy response to this crisis protected jobs and the banks.

But the longer-term response to this was to set this sector in a straitjacket of regulation, which has killed its growth, its animal spirits and its tax generation. This enthusiasm for regulation has spread across all sectors, not just financial services, and has had an equivalently dampening effect on growth in those sectors too. Higher tax rates on top incomes have exacerbated this effect.

Governments have choices. This Government may not choose to adopt some or any of the successful policies from the past – and there will be good reasons for those decisions. In the round, however, if the government in general, and the Treasury in particular, is serious about pulling the UK out of the very serious financial and economic position it currently faces, then the arguments presented here should weigh heavily on its thinking.

This article is based on the author’s recent briefing paper, The Chancellor’s Post-Pandemic Choices.