30 April 2015

Financial Times: Bribes and evasions on housing and the deficit

The author Martin Wolf notes that "the fundamental domestic challenge confronting the UK is that of creating a dynamic and stable market economy whose benefits are also widely shared."

The UK is not well-governed. That is hardly going to change after this depressing election campaign. But, unless the polls turn out to be sensationally wrong, one thing seems clear: the electorate will not be giving either the Conservatives or the Labour party a majority. The electorate is right.

To my mind, the fundamental domestic challenge confronting the UK is that of creating a dynamic and stable market economy whose benefits are also widely shared. Experience under the past two governments fell short of this ideal: the country has experienced a huge financial crisis followed by a weak recovery and stagnant productivity. Given this, the complacency of the campaigns of the two main parties is striking.

Under Ed Miliband, the Labour party has also, alas, shifted from the embrace of choice and competition that characterised New Labour. This is an error. Yes, markets, particularly financial markets, may go badly wrong. But it is impossible to do without them. This is true for health and education, just as it is for the supply of food or clothing. It is only more difficult to do in these cases.

The Conservatives, however, fail to recognise the significance of rising inequality. An election brief from the LSE’s Centre for Economic Performance notes that “inequality in pre-and post-tax income has risen remarkably in the UK since the late 1970s”. It adds that tax and benefit changes since 2010 have been largely regressive. That is worrying.

Consider also what the main parties offer in just two policy areas — housing and the public finances. The market is most completely lacking in housing or, more precisely, in land. As another CEP paper notes: “In 2014, UK house prices per square metre were the second highest in the world (topped only by Monaco).” New houses are 40 per cent smaller than in European countries that have a similarly dense population.

The rising price of housing makes it expensive for young people to form and bring up families. It hinders job mobility. It makes bequests of housing wealth larger and their role in reproducing inequality more significant. It also distorts the financial system: 70 per cent of bank loans outstanding (after netting out lending within the financial sector) are to individuals secured on property. The financial system is now totally addicted to high house prices.

Neither of the main parties intends to do anything much to change all this. Instead, they offer a series of bribes. Labour promises a risky return to rent controls. But the Conservatives propose to defend green belts, reduce the stock of subsidised rental accommodation by imposing a right to buy on housing associations, and introduce a new £175,000 per person transferable allowance in inheritance tax for main residences. All this would make today’s inefficiency and inequity even worse.

On public finances, a real difference is on offer. As the Institute for Fiscal Studies notes, the Conservatives are planning a reduction in borrowing over the next parliament of 5.2 per cent of national income, which would result in a surplus by 2018- 19. Labour have been less clear about their plans for borrowing, but their aim of balancing the current budget would be consistent with a smaller reduction in borrowing of just 3.6 per cent of national income.

The remarkable feature is how close to each other the main parties are. They share the consensus that an overriding priority for fiscal policy is further tightening. What makes this surprising is that it ignores the extraordinarily low cost of borrowing: real interest rates on long-term borrowing are even negative. Moreover, with fiscal policy continuing to tighten, everything depends on monetary policy. That carries its own risks.

Never, moreover, has there been a better time to upgrade the public infrastructure. At the very least, the Labour party’s plan to balance the current budget leaves this option open. Meanwhile, the peculiarity of the Conservatives’ offerings is that they propose a far greater fiscal tightening than the other parties, refuse to specify the spending cuts and have offered a number of expensive promises, too. One has to ask whether they believe in their own goal.

The UK faces a host of challenges, beyond these. They include pensions and productivity, health and education, the future of welfare and the country’s place in Europe and the world. In all these aspects, too, what is on offer seems at best half-baked. More important, neither of the main parties offers a broad view of the future that seems relevant to these many challenges. [...]

Full article on Financial Times (subscription required).

 

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