Spending Review – Labour’s response

By Paul Hunter, Research Fellow

It is well known that George Osborne is both Chancellor and the electoral strategist for the Conservatives, something which was particularly apparent in the 2015/16 spending review announcement. Despite all the rhetoric around cutting to invest Osborne stuck to the austerity script.  The fanfare around capital investment proved a chimera and there was no disguising the Conservative’s determination to roll-back the state and punish public sector workers.

Politically the spending review once again prioritised pensioners over the young and the South over the North. Populist measures on JSA claimants, immigrants and the ‘underserving poor’ will make little impact on the public debt but further re-enforce the dividing lines for the 2015 election. However, it is not clear whether the continued assault on welfare and public servants will be enough – even if it raises the spirits of the chancellor’s backbenches.

To recap, the headline measures included:

  • Continued reductions in public sector workers
  • Cuts to public sector pay with no automatic pay rises for time served
  • Those made unemployed would not receive benefits for a week
  • A cap on welfare spending (excluding pensions)
  • Immigrants will have to learn English to receive benefits

The message again was clear: the UK’s economic malaise was due to overspending (Downing Street under Labour) and not a banking crisis (Wall Street and the international financial community), and whilst there is a lot to do, the worst is over. The target for the new policies: Labour’s core vote.

This narrative may play well. As polls continue to show, cutting benefits for so called ‘scroungers’ is popular. Public servants are portrayed and seen as featherbedded. Immigrants are simultaneously blamed for both taking people’s jobs and for an increasing benefit bill. The nasty party are nastier than they were.

However, the return to type of divide and rule and blaming those with least is not necessarily a big enough vote winner beyond the Tories’ heartlands. Leaving aside the long term impact of cutting public sector jobs which might eventually change the voting intentions of those subsequently employed in the private sector, these measures impact large swathes of voters in places where the Tories need to win.

Attacks on welfare might go some way to doing this, but could make the Conservatives appear too divisive and self-serving. Labour can triangulate on welfare to some degree, but has to do better on the economy – polls still show more people blame Labour for the crisis and trust them less. A switch in attitudes on welfare (which could emerge sooner rather than later if Universal Credit fails in the way some expert predict) and a weak recovery could leave the Conservatives with a mountain to climb.

More importantly perhaps, and as I have blogged before, the policies guiding the spending review are all negative. Nothing in the spending review suggested how the Conservatives were to get the UK out of its wages crisis or tackle income inequality. Welfare bashing might afford those in favour a moment of schadenfreude but they do nothing to improve the living standards of the ‘squeezed middle’ in the key seats.

The dilemma for Labour is how to respond with a positive narrative that’s believable and sellable in 2015. Attack too simply and find yourself portrayed as the party of welfare dependency, bad government and public excess. Set out an alternative agenda around less spending cuts and you face accusations of economic incompetence and (for the leadership the most frightening of all) another ‘tax bombshell’. Ed Miliband knows he must win back the public’s trust, but it has – as he acknowledges – got to be on an agenda which goes beyond defending the NHS and  the welfare state. Labour must take on the mantle of work and fair pay, and start to carve out new policies to achieve responsible capitalism and sustainable growth in all regions.

Where next for LEPs?

Paul Hunter, Head of Research, The Smith Institute

This week saw the launch of a Smith Institute collection of essays, Where Next for LEPs. The report which includes a commentary on a new survey of LEPs, shows there is little appetite for a return of the Regional Development Agencies, despite recognition of their achievements. There now seems to be cross party support for LEPs and city regions. According to Labour’s shadow chief secretary, Rachel Reeves :

“We won’t waste time on a costly reorganisation, we will get on with delivering real improvements and change. The next Labour government will inherit a “patchwork quilt” of regional, sub-regional and local structures of economic governance – uneven and inconsistent, threadbare in some places and multi-layered in others. We are not interested in tearing it up, but in finding ways of strengthening and extending partnerships between businesses, communities, and elected leaders within and across areas.”

Consistency must surely be a good thing, with shifts in structures blamed for the loss  of institutional memory and organisational improvements which can only happen over time. But despite this consensus, if the UK is serious about spreading economic growth more evenly, how far can LEPs go to achieving this? The recent Ernst and Young assessment of investment into the UK highlighted the fall in foreign direct investment in the North and Midlands, in part due to the demise of the RDAs. In terms of jobs and growth all the regions continue to lag behind London and the South East.

The Institute’s report questions the capability of the LEPs to make much difference to the economic divide within and between the regions. LEPs are for the most part invisible to both the public and key stakeholders. The main concerns are:

  • Resources: do LEPs have adequate resources? At the moment LEPs receive relatively little funding and certainly not enough to help rebalance the UK economy.
  • Accountability: If greater resources are to be made available, do LEPs have the right accountability structures? Many are subject to no scrutiny or independent evaluation.
  • Capacity: Are LEPs the right size to fill the void between national and local decision making? And will they end up competing rather than collaborating?

For the time being Labour is content to sign up to a consensus (with a greater focus on city deals and regional banks). With no new money on the table, it remains questionable whether tackling the regional divide will be a priority for Labour, even though it has the most seats in under-performing places. Tensions also remain between consistency and finding a more appropriate geographic scope and scale of agencies (if we deem LEPs too small and too many). If they are to remain, a key question must be whether any government can really make the LEPs work where the Coalition has failed, and, if so, how?

The Future of Housing Associations

Denise Chevin, Research Fellow

The underlying message from my recent report for the Smith Institute, Social hearted, commercially minded: tomorrow’s housing associations, is that change in the housing association world is set to accelerate. The sector which houses two and half million people, has been diversifying for years, and building up a mixed portfolio of housing for different types of tenure. But the cuts to grant and reform of benefits on the one hand combined with less regulation on the other, are creating more freedoms and opportunities and driving change.

Combining a social heart with a commercial mind

One of the key themes, and it’s a tension point that is only going to get more pressing, is the conflicted position the sector is. How do HAs combine their traditional social ethos with a new harder commercial approach – which all agree is necessary?

But, what does the sector mean by commercial? What came across very clearly from my interviews with 50 housing association chief executives and experts is that the modern housing association would see itself running very much on private sector lines – being efficient, focussed and jettisoning activities that don’t bring a clear demonstrable benefit. The social hearted comes when the association ploughs profits back into social housing rather than taking a dividend like the private sector.

Alongside this, associations still see themselves as a force for community good – providing housing services for their tenants.

As the welfare reforms and cuts in housing subsidy begin to bite, there will be increasing conflict of interest between the two different obligations.

The social conscience in the housing association boardrooms is already being pricked by charging the full 80% of market rent and the prospect of more evictions because of increased rent and the bedroom tax. It’s a real conundrum which could damage their reputation.

Certainly, increasing eviction rates by housing associations is concerning councils – and we might see increased tensions there also.

We all know there are things housing associations do for their communities that landlords in the private sector would never contemplate – coffee mornings, after school clubs, training for work, translation services.

They might say, we’ll stop doing those things and donate to local charities – but then do they risk becoming just like any commercial business that just ticks the CSR box?

An overarching question is who they house and what now is their social purpose. The problem is that without social housing grant it becomes impossible to develop low cost homes. Incidentally, that’s a state of affairs that is still yet to dawn on some MPs and local politicians. As my report makes clear, some new tenants in London will see large rent hikes as housing associations increase levels in line with the affordable rent model or market rented housing.  So, unless grant returns to build genuinely affordable homes – and at the launch of the report, shadow housing minister Jack Dromey pledged that it would – many of those on low incomes will be priced out of new housing association accommodation.

And what about the bedroom tax and eviction? Edinburgh Council is pledging not to evict any tenant because they can’t pay it. Will housing associations happily submit to being (bedroom) tax collectors and bailiffs for the sake of £15 a week?

Do housing associations want to stay special? Or do they want to be so commercial they are a private company in anything but name? Tough choices really do lie ahead.

Skilling up the board

Allied to this commercial dimension is the question of just how business savvy are associations? That’s not an easy one to judge. Interestingly, Genesis are working  with others on a new index to measure how effective housing associations are at managing return on investment – which should provide more of an objective answer to that question.

There is certainly consensus amongst the interviewees that the new opportunities available bring with them greater risks, demanding different skills in the boardroom – skills that some fear housing associations do not always possess. So, whether they can they manage risk, in what is becoming a more complex financial arena, is one of the big questions facing the sector.

There’s a lot of interest in the private rented sector for example, but it’s questionable whether it will really provide the means of cross subsidy opportunities many associations seem to be banking on.

Good leadership and clarity of thought will be absolutely crucial – and getting the right people on boards vital.

One person I interviewed asked why do boards need to be so big.  Is it essential or compulsory that there are tenant representatives?

It’s controversial. But his argument is that retailers don’t have customers on their boards. That doesn’t mean you don’t take into consideration their views, but wouldn’t it be better to have a smaller focussed group who can’t hide behind the sheer weight of numbers?

Relationships with tenants

The drive to be more commercial is also manifesting itself in a more business-like approach to tenants. Yes, associations appreciate the need to be more professional in their approach to things like repairs and maintenance. But the sector is also taking a step back and asking what do they get in return?

And are they promising things that we can’t actually afford to deliver, such as weekend repairs or or simple fixes that tenants could do themselves? Has a whole industry been created to deal with anti-social behaviour?

So we are seeing a reappraisal of some services and the emergence of carrots and sticks to encourage tenants to pay their rent and take care of the property. I see this as real notable shift in the outlook of the sector.

It was also interesting to see Family Mosaic’s approach, which is to keep rent levels low for new tenants to encourage them to train and get into work if they don’t already have a job.

Creative thinking

There is undoubtedly a wealth of innovation and creative solutions in the sector.

In the face of fiscal austerity, associations are increasingly looking to deliver social value through new types of partnerships and community services, which can also provide new development opportunities, or additional income streams.

One really exciting partnership for example is the One Housing Group and the North London Health Trust. One Housing Group is joining forces with the North London Health Trust to provide accommodation and care for people with mental health problems who otherwise would need hospital care.  It’s a real win win situation.

One Housing Group told me that it would cost the health authority £3,000 a week to house a patient on a ward whilst for a housing association is would cost just £700.If housing associations were able to house a third people with these health conditions it could save the NHS £1 billion a year.

Conclusion

It is a unique time in recent history of housing associations. The sector is resilient – it is after all sitting on billions of pounds worth of assets and rental income is stable, at least for now.

Fiscal austerity is nevertheless forcing associations to scrutinise the way they work, make efficiencies and adapt to change quicker than many would like.

There is certainly huge regret that providing traditional low cost housing will be rare unless grant returns. That’s not to say they won’t be building sub-market rents – buts that’s more likely to be between 60 and 80% of market rents.

As organisations become more entrepreneurial, so do the risks they run increase. As a consequence the leadership and capacity and capabilities of housing staff and board members will come under ever more pressure and scrutiny. And they will inevitably need to confront the increasing tension between their commercial minds and social hearts.

The right’s lack of positive populist policies

Paul Hunter, Head of Research, The Smith Institute

In the week that Margaret Thatcher died it is instructive to observe how she won both the argument and power with populist policies and what this might tell us about the upcoming election – not least what the downturn means for conservatism.

All governments are inextricably linked to the environment and times in which they come to power. When Thatcher fought her first successful campaign as leader of the Tory party, Labour and the left were divided with the breakaway of the SDP; the 1979 election was fought against the backdrop of the ‘Winter of Discontent’; the Labour government received a loan from the IMF; much of industry was state owned and subsidised; and the cold war continued.

None of this is true today. However, parallels exist and issues are being exploited in a similar fashion to permanently roll back the state. The financial crash was not caused by trade unions – even the most imaginative of spin doctors couldn’t credibly pin it on them. Instead, the enemy within has been welfare scroungers. The argument goes, Labour featherbedded them and as a result government spending spiralled out of control and debt levels became unsustainable. In so doing, the Conservatives have managed to blame the big state (eg Labour) and not big banks. And from without Europe is blamed for both immigration (taking British jobs) and the profligacy of Eurozone countries, which like Labour, have got Britain into ‘this mess’.

This narrative has been incredibly effective for the Conservatives – most still blame Labour for our current economic ills two and an half years after Cameron came to power. However despite the strategy of blame and division (and related policies such as welfare reform), the Conservatives have yet to offer any truly populist policies, similar to what Thatcher did, which seek to materially improve, at least in the short term, the lives of some traditional Labour voters.

The most obvious example of such a policy in the 80s was promoting homeownership through right to buy – Thatcher wanted a home owning, share owning democracy. It was one of Thatcher’s most popular policies however it has run its course. Attempts to re-stimulate right to buy have ended in failure for several reasons most of which have their roots in Thatcherite polices. First, we saw a rapid growth in income and wage inequality in the 1980s (in part due to Thatcher’s attack on the institutions of predistribution) meaning that those who once could take advantage of cut price homes no longer can afford to pay for a mortgage or save for a deposit. Second, the best properties have largely gone. Third, the decision to stop building social housing alongside policy changes in the Wilson/Callaghan government means that new lets largely go to those most in need (or at least in high demand areas) who are least likely to be able to buy a home. Fifth, the lack of social house building has resulted in the under supply of housing which has increased house values, which has priced out social tenants from buying their home whilst in low demand areas the economy and wages remain depressed impacting affordability in a different way. Seventh, the big bang saw the expansion of easy credit (for those at bottom) which is no longer an option with banks fearful of lending and many households over indebted.

Of course this is just one policy but it touches on many other policy areas not least credit, employment and wages. The selling off of other state assets (including share give-a-ways of privatised utilities) can’t happen again because there is little left apart perhaps from hospitals and schools which the Conservatives have been doing by stealth are controversial and don’t benefit people materially.

The other problem for Cameron in a downturn is that the Tories seem tied to fiscal conservatism. Given the stated aim of cutting the deficit (in many respects their number one priority) there is little to offer by way of populist tax cuts – especially after cuts to business taxes. Moreover, as already mentioned, another big bang to encourage what Colin Crouch describes as ‘private Keynesianism’ is an very unlikely option.

So if tax cuts, more personal debt and asset sell offs aren’t an option and the negative propaganda war takes you only so far the only other strategy surely lies on returning to growth before 2015 which would help to reduce the deficit – ‘we have dealt with Labour’s mess and the pain is working’. However, growth could be too little, too late and what’s more it is abstract concept and might not feed into the pay and living standards of workers. After all, much of the growth in recent years has not trickled down into people’s pay packets.

So without a split on the left and few policy options open it remains unclear how the Conservatives can attract a majority of voters. Of course, Labour has its own difficulties. Large increases in public expenditure are also unlikely, not least because Labour are wary of being portrayed as profligate. All of which means that with low growth both parties have as yet struggled to find populist policies to improve the living standards of the electorate.

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

A place called home

Paul Hunter, Head of Research, The Smith Institute

The housing crisis continues to preoccupy the media and policymaking worlds. Whilst the focus has been on issues such as generation rent and chronic undersupply much of the analysis has been spatially blind. Analysis of the data, from a broad geographic perspective, shows that we are facing not so much one housing crisis but two.

The first is London based. The capital has seen house prices grossly inflated, making homeownership now beyond most people’s reach. Homeownership is almost certainly now a minority tenure in London. This is hardly surprising given the chronic shortage; in 2008 the latest figures showed that there were only 4,000 more homes than households in London. I doubt whether there is any surplus today. This (along with freely available mortgage finance prior to 2008 and high levels of foreign investment in housing as a asset class to be left empty for capital appreciation) has resulted in average house prices to earnings rising from 3 to 1 in 1997 to a staggering 9 to 1 today. This has knock-on effects for those who struggle to access social housing with the private rents eating up more and more of Londoner’s salaries. This chronic shortage has resulted in London’s house prices rising back to almost pre-crash levels.

Housing tenure, London (1991=100)

Social housing as one tenure

Source: DCLG, Live table 109

Meanwhile those outside London and the South East have seen house prices fall. A 1% fall nationally in 2012 disguises bigger drops in poorer regions. The economies in these areas have yet to pick up as they have in the South. The lack of growth added to and connected with less acute housing shortage means prices are lower and falling. This and lower wages to house prices does not in itself make homeownership difficult at the moment. With falling values banks are requiring higher deposits as collateral in these areas. For those who bought towards the end of the boom in (now) depressed regions today face negative equity which will constrain labour mobility and stifle life choices.

In short, what we have seen is housing shortages, rapidly falling homeownership, and rising prices in London. Outside the capital the picture is of struggling economies, falling prices and much higher levels of ownership. In a twenty year period London has seen a 7.5 point drop in homeownership while, barring the South East, other regions have only seen a 3 point drop.  Lower quartile house prices to lower quartile earnings in the North East are 4.5, 6 in the West Midlands and 9.5 in inner London – you would need a very redistributive (or predistributive) regime to make homeownership affordable through incomes alone in London.

What we are experiencing is not so much a housing crisis but housing crises. And, they will not be solved without accepting that the housing problem is as much about economic geography as it is about mortgage finance and ‘generation rent’.