Monthly Archives: March 2013

Homeownership and the 2013 Budget

Paul Hunter, Head of Research, The Smith Institute

The chancellor dedicated his budget to those who want to work hard but his headline grabbing announcements were less to do with work and more with homeownership. Property owning democracy has been a popular Conservative tune since it was coined by Noel Skelton and if the front of the Telegraph and Times are to go by it continues to be so. However, whether it will help boost the housing market, whether it will help ease the undersupply, and whether it is sustainable are all questionable.

The first of the announcements – previewed in the all knowing Evening Standard… – was the government’s continued push to reinvigorate the populist right to buy scheme. Take up over the last year (since the cap was increased to £75k) was minuscule compared with 1980s levels. This is a result of difficulties getting a mortgage (house prices have been unstable and falling in many place outside the south), the fact that many of the most desirable homes have already been sold, prices to earnings have widened and those in council housing mainly do not work (they are retired, carers, ill or unemployed). So will increasing the cap in London to 100k make a difference? Given the average right to buy price was £142k (with market value of £162k – so not many are bumping up against the £75k limit) in London the problem for many tenants who wish to buy is ability to meet the repayments, something which increasing the cap rather than percentage discount fails to address. On a 25 year mortgage the average tenant would be looking £900 a month in repayment bill – something which most tenants would struggle to meet. And the buyer would have to meet the often expensive costs of maintenance and  of course find the deposit.

This leads neatly on to the second announcement. Osborne’s homage to Thatcher came also in his Help to Buy scheme – a clever way of grabbing a headline whilst not hitting the government’s borrowing targets. The first part of the scheme for new build properties has boosted Barratt’s share price but it remains to be seen how many additional homes it will provide (is it providing discounts for people who could already buy?) and may take some time to deliver. As studies have shown on share ownership it is fast becoming a long term tenure with problems  due to the complexity of the schemes selling on the secondary market and not to mention negative equity. Too little, too late comes to mind.

The second part of the scheme (the mortgage guarantee) essentially reduces the amount someone needs to put down as a deposit in the secondary market and not just for first time buyers. In theory this could enable many potential buyers to step onto the housing ladder. However, again the problem like RTB may well be affordability of repayments and willingness of mortgage lenders to lend. If it is a success it could well inflate the housing market which many still feel should be going in the opposite direction – whilst doing little for low demand areas. And if the property market does deflate (or worse crash) we could well see homeowners losing their, albeit smaller, deposit and it would end up being a very expensive initiative for government with nothing to show for it. It is also worth remembering that it was the sub-prime lending in the US that led to our prolonged economic downturn, something which both policies seem to encourage.

These policies cost the government little now but (barring the first buy scheme which sees increased capital spend) don’t do much to enable house building something which is needed to make housing affordable for younger people and those on low to middle incomes. Whilst the budget may have been a paean to property owning democracy, it will do little to reverse the trend away from homeownership, which is lower now than it was under Labour. To achieve the goal of mass house building and bucking the trend towards the PRS would require a return to large scale grant. And that is something which the chancellor seems unwilling to consider with his eyes firmly fixed on deficit reduction through cuts rather than stimulus.


A new deal for the North

Michael Ward, Research Fellow, The Smith Institute

Public services in the north of England are being stretched to breaking point and another round of efficiency savings won’t improve the situation. We need a new approach and a new way of thinking.

The Coalition’s Office for Budget Responsibility has now established that the 2008/9 recession was deeper and more damaging than had at first been thought. And since the start of the austerity programme in 2010 the economy has flatlined.

This lack of growth is serious for the public sector. With the economy grinding along at a far lower level of activity than had been anticipated, tax revenues are not there to fund existing levels of public services – let alone to cope with increased demand or demographic change.

The coalition originally expected five years of squeeze, followed by a period of recovery. But this time, unlike past recessions, the economy has not bounced back. Austerity is now forecast to continue at least until 2018. As a report from the Smith institute (Public service north: time for a new deal?) pointed out this week, happy days are certainly not here again and particularly so in the North.

Now some services, notably the NHS, have been ‘protected’. The trouble is, logically, if you propose overall cuts, and then protect some services, other policy areas are hit even harder. Thus, the cumulative cuts to the DCLG’s Communities budget – covering, among other things, much of the social housing budget – are forecast to reach 70% by 2018.

In addition, the national tax base is declining. As North Sea Oil production passes its peak, so tax revenues from oil production begin to fall sharply. As environmental taxes begin to change behaviour (for example, as fuel duty encourages manufacturers to develop more fuel-efficient engines), so the yield from these taxes goes down.

Corporation tax rates are increasingly set with reference to tax rates in other jurisdictions, as countries jostle to attract footloose investment.

On top of all this, the local government finance system does not serve the needs of the north well. The tax base – for council tax and business rates alike – is now heavily concentrated in London and the South East. Since 2010, the grant system has become less redistributive.

Grants that used to be targeted on the areas with the highest needs have been ‘rolled in’ to the general grant – and, in turn, some of that general grant has been taken out of the formula to fund the government’s New Homes Bonus – which favours more affluent areas and the South.

All this amounts to a car crash for public services in the North. As Julie Dore, leader of Sheffield City Council’s Leader, said last year: ‘To have another three years of cuts will cause the whole social infrastructure to collapse and services will go.’

So what needs to happen?

  • First, the key redistributive elements of central government support to local government need to be restored, giving poorer communities a fairer share;
  • Second, councils and trade unions need to work together to drive up service productivity. There are no quick fixes – but without this, both jobs and services will go; and
  • Third, service providers and civil society across the North need to work out what the deal is for the future – an alliance for change under the umbrella of ‘Public Services North’.

It is time to face the big questions:

  • As a society, what will we provide through the state, what through the market?
  • What services will be provided by local government, what by central?
  • How will we pay for public services, through taxation or user charges?

These choices will not simply go away after the next general election. Any incoming government will face serious constraints on what it can promise. Neither is there any easy way out for service providers.

This article first appeared in Public Finance