With the spending review now only 60 days away, is there really no alternative to the huge cuts that are seen as inevitable across the political spectrum?
The coalition government wants cuts of at least 25% in all departmental budgets except health and overseas aid. Labour warns of the dangers of cutting too soon but had proposed cuts that were almost as big before the election. That consensus has left precious little room for debate when it comes to particular budgets – even though there must be doubt about whether any government can really follow through once the effects of the cuts start to be felt. For a preview, look at what happened in Canada when the government ended all federal support for new homes and devolved responsibility for the soaring homelessness that followed to provincial and local governments.
A spending review submission from the Building and Social Housing Foundation puts the case for a different approach, one that starts with taxation and not spending.
The BSHF argues the steps to neutralise the tax advantages of owner-occupation over private renting that are still worth £15.9bn a year with the housing market in the doldrums and were worth almost twice that during the boom years. These cannot be justified in the current economic circumstances, it argues.
However, it rejects the obvious approach of imposing capital gains tax on first homes as too blunt an instrument that would hamper social mobility. Instead, it says the old Schedule A tax on the value of imputed rents should be reintroduced.
The favourable tax treatment of owner-occupiers hurts tenants as well as landlords since they end up paying higher rents – and that in turn means a higher housing benefit bill, another area where the BSHF challenges the current orthodoxy.
Cuts on the current scale will only lead to problems elsewhere with financial consequences that will outweigh any savings, it argues. Most of the increased housing benefit bill has come from an increase in the number of claimants due to higher unemployment rather than from higher rents. Instead the government should adopt a more nuanced approach that phases in any changes and takes account of the effects in particular areas.
The prospects of the government listening to that advice would seem to rank somewhere between slim and zero, but perhaps it should for all our sakes.
I heard a lecture by the Nobel Prize-winning economist Joseph Stiglitz in Edinburgh this week in which he was asked what he would do in response to the austerity budgets being planned by European governments like ours. His response was one word: pray.
Stiglitz believes that there is a better than even chance of a double-dip recession and that governments have still not learned the lesson of the 1929, when they cut public spending in response to the stock market crash only to trigger the Great Depression.
He argues that governments have let the banks carry on with business as usual and done little to tackle the causes of the credit crisis – and that they are now set to cut spending at just the wrong time.
His alternative approach would start with progressive taxation to take money away from the rich (who save it) and redistribute it to the poor (who will spend it and increase demand in the economy).
And he would maintain spending on programmes that create jobs, tackle climate change and develop skills.All of which is in stark contrast to what we are set to do in October. Cuts in investment in new homes, funding for housing support and housing benefit for tenants seem inevitable.
But can we afford to continue to turn a blind eye to the tax advantages that force up land and house prices and make all of them cost more?
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Readers' comments (15)
Anonymous | 24/08/2010 5:38 pm
Pity, Mr Birch, you haven't explained to readers how the authors of the report come to the proposition that the tax advantages of owner-occupartion over private renting are worth over £15.9bn a year.
Our enterprisng boys and girls do this by assuming a notional capital gain on property (which they want to tax at 40% presumably).
Thus, for any politician reading the submission the authors have immediately situated themselves on the dark side of the Planet Zog.
It ain't a goer.
Mr Birch might have pointed out where Stiglitz sits in the pantheon of economists. He's charitably described as a neo-Keynsian whose advocacy for socalist solutions has come under fire from most of his colleagues principally for its support for a coercive state.
They refer to him as "Stig the Communist" which perhaps explains why he ends up at Edinburgh's annual luvvie fest touting his books.
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Len White | 25/08/2010 10:17 am
So here we have another brilliant mind stigmatised as a 'communist' by our anonymous friend.
Never mind the fact that being a 'neo-keynesian' and a communist are totally incompatible: Keynes was not only a Liberal but his theories were about how to make capitalist economies work better, not about replacing them with state control.
Joseph Stiglitz headed Clinton's council of economic advisers and was chief economist for the World Bank, neither renowned for being anti-capitalist. At the World bank, he was sharply critical of the IMF's approach to 'supporting' developing economies and the fact that they only ever have one solution - cutting public spending for the poor and privatising industries to benefit the rich - which has proved disatrous around the world over several decades (including the UK after 1976).
Not surprisingly, Stiglitz is attacked by the far right in America, people whose views of economics are as archaic as their denial of evolution and their view that the world was created only 8000 years ago.
Stiglitz's was not only one of the few to anticipate the global financial meltdown, he has also been critical of the weak global response and the failure to regulate banking more effectively, putting him on the same side as most of the general public.
So what has this got to do with housing in the UK? Rather a lot in fact. Cutting housing investment in the weak stage of a recovery after a recession, not only failing to meet social goals but increasing unemployment and depleting tax revenues at just the wrong time, is economic illiteracy.
Messrs Cameron, Osborne and Clegg are risking the worst possible outcome - a double dip recession and a return to business as usual for the banks.
So, everyone should read Stiglitz and other keynesians like David Blanchflower, and ignore the neo-con fundamentalists who trample across the Inside Housing website with their ignorant insults.
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Jules Birch | 25/08/2010 11:38 am
Stig the Communist? Someone should tell the anti-capitalist protestors who tried to storm his lecture in Edinburgh on Saturday...
Explaining the £15.9bn figure would have made this long blog even longer but it comes from the UK Housing Review if anyone wants to investigate further. It's the net total value of imputed rental return tax relief (£10.6bn) and gross capital gains tax relief (£5.3bn) in 2008/09.
A more accurate figure would probably be £12.7bn since the net CGT take would be £2.1bn once taper relief and roll-over relief are taken into account. But even the net total in the boom year of 2006/07 was £22.1bn.
As I said, the chances of the government doing anything are slim to zero but these are still huge sums of money. Can any spending review be truly comprehensive without considering their effects?
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Sidney Webb | 25/08/2010 11:45 am
Jules - suggestions that affluence should lose its tax advantages are obviously a sign that you are a heretic! We need heretics!
Thanks for providing the facts behind the 'hidden' benefits paid to those with wealth. It is true that it is unlikely these benefits will be capped or removed, unlike those required to support the basic living standards of the poorest in society.
Sort of makes you proud to be part of the British Society knowing that the poor will subsidise the better off even more than before.
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Anonymous | 25/08/2010 1:39 pm
"It's the net total value of imputed rental return tax relief (£10.6bn)".
Can we unpack this further since it is not apparent to me what is the suggestion here?
In particular, what does "imputed rental return tax relief" mean?
Are they suggesting that homeowners are receiving a benefit or tax relief from the rent they would have received if they had rented the property out?
Thus, I am a homeowner. I have not rented out my property. I have not received a benefit or tax relief from renting out my property.
Howevere, since I could have rented out my property I should have been taxed on the income I could have earned from renting it out.
Apologies for being pedantic but this appears to be what they are suggesting.
Alternatively, are they suggesting that homewners are receiving a tax benefit from being able to set the costs and expenses of home ownership from the income received in the form of rent?
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Anonymous | 25/08/2010 1:53 pm
"So what has this got to do with housing in the UK? Rather a lot in fact. Cutting housing investment in the weak stage of a recovery after a recession, not only failing to meet social goals but increasing unemployment and depleting tax revenues at just the wrong time, is economic illiteracy."
Another NuLab orthodoxy which we now know was only being supported for political convenience. Balls was ernestly urging more spending while Darling and the rest of the economic team sided with the current coalition for cuts.
Does it really need to be pointed out? Keynsian expansion classical lite suggests the punchbowl should be permanently on hand at any time when the alcohol looks like wearing off. The danger is if the punters are all congenital alcoholics like Gordy they're always going to be demanding extra snifters because they know they wont be around when the alcohol runs out and the music stops (they'll be hiding under a sofa in Kirkcaldy").
A roundabout way of saying perhaps it's time to call time on public spending when £1 in every 4 is going to pay the interest bill and even that arrangement looks rickety because the borrowers could jack the rates up even further or cease lending altogether.
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Anonymous | 25/08/2010 3:50 pm
Apologies. Fortunately, the Institute for Fiscal Studies define their terms before considering the evidence.
The verdict remains the same. It's a poll tax on super-steroids. Never ever going to pass the Daily Mail test.
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Anonymous | 25/08/2010 5:13 pm
Just a point of information in your thoughts regurgitated from Wikipedia and bowdlerised to strip out the reference on that site to Stiglitz's socialism.
Clinton repealed the Glass-Seagles act, a piece of legislation enacted in the 1930s which prevented banks having both casino - or investment - and utility operations under the same roof.
It was this bit of deregulation that enabled the roof to fal in nine years later.
Clinton said he didn't inhale/didn't have sex with that woman/and certainly had nothing to do with Glass Seagles but could he smoke it and what was her price.
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Sidney Webb | 25/08/2010 5:24 pm
Anonymous - a little rewriting of history there. The birth of Reaganomics with the mass deregulation of the financial industry, coinciding with the birth of Thatcherism with the mass deregulation of the financial industry, is clearly the source of the failing of the banks from deregulation. Therefore it was the Maggie-Ronald love child that grew up to be the financial equivalent of the anti-christ, not any particular Bill issue.
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Jim Vine | 25/08/2010 6:32 pm
@ Jules Birch
Thanks for covering the report, and for starting off this lively discussion! You are right that we rely on the data from the UK Housing Review. Roll-over relief is a factor that we count against the potential viability of CGT on main homes. If it were introduced there would almost certainly be roll-over relief, but if you did that you would quickly find that you are only charging CGT on households trading down - and if we want to make better use of the housing stock we have you want to put as few barriers as possible in the way of people trading down from big homes when the family flies the nest. As an alternative we suggest looking at applying an alternative to both the PRS and owner occupation, for example taxing capital values on an annual basis in some way. If you go down that route, the rate of the new tax (and hence the revenue raised from it) could be set at whatever level was deemed appropriate - if, say, you scrapped the existing capital taxes that are paid on a transactional basis (CGT in the PRS, and stamp duty across sectors) and replaced them with an annual capital tax, then you could decide whether to raise the same as the taxes you've scrapped, a bit more, or a bit less.
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@ Anonymous (1:39pm)
A tax on imputed rents is definitely very hard to get your head around, and that's one of the biggest problems with it. It makes sense from an economic and logical perspective, but that doesn't necessarily make it politically feasible if people don't understand it. Here's how we try to explain it in the report:
"A tax on imputed rents reflects the fact that in owner occupation the landlord and tenant are effectively conflated into one individual. This can be understood by way of an example: consider two people, A and B, who each own a property. If A lives in B’s property, and B lives in A’s, each would pay rent to the other (and that rent would be taxable income). But if A and B are both owner occupiers, no money changes hands; there are still two owners and two occupiers, but there are no actual transactions. The equivalent transactions are A paying rent to A and B paying rent to B. The amount that would have been paid had the owner and occupier been different people is the imputed rent."
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Of course in both of these areas there is more work to be done, around understanding what the best mechanisms would be and indeed around what measures are politically feasible (which includes their being comprehensible to the average taxpayer).
But even if change is some way off, it is at least helpful that more people are aware that owner occupation does get this beneficial treatment in taxation. It opens up a debate about whether it is desirable that owner occupiers should be favoured in this way, and perhaps takes some of the heat out of discussions about the other types of support with housing costs that the state provides more visibly.
If anyone is interested in reading further, our whole spending review submission is available for free download from our website: http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=8AF35100-15C5-F4C0-99BE979B7ACACA24
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Anonymous | 25/08/2010 6:47 pm
Religion is such an intoxicating opiate, Progressive Solutions Required, for the deranged.
Get yourself over to Youtube and take a look at Gordy shaking hands with the "Gorilla", head honcho at Lehman Brothers, and running some tune about free markets.
Reagonomics, my arse. It was Greenspan running massive deficits with a bit of help from Stiglitiz because, as he later admitted to a Congressional committee he didn't believe the bankers were mad enough to jump off a cliff.
The bankers were given the power to jump the cliff by Clinton, pal of Stiglitz, in the Glass-Seagles act.
Read some history. These capitalists, they're so devious.
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Anonymous | 25/08/2010 6:52 pm
Yes, Mr Vine, you are right to be apologetic.
The Insitute of Fiscal Studies run the figures through the mincer and don't come up with the new Jerusalem you did.
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Sidney Webb | 25/08/2010 10:23 pm
Interesting and unnecessarily insulting Anonymous - play nicely now.
If I am wrong then how do you explain this quote:
"IT HAS taken almost two years since the collapse of Lehman Brothers, and more than three years since the beginning of the global recession brought on by the financial sector’s misdeeds, for the US and Europe finally to reform financial regulation.
Perhaps we should celebrate the regulatory victories in Europe and the US. After all, there is almost universal agreement that the crisis the world is facing today — and is likely to continue to face for years — is a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago. Unfettered markets are neither efficient nor stable.
But the battle — and even the victory — has left a bitter taste. Most of those responsible for the mistakes — whether at the US Federal Reserve, the US Treasury, Britain’s Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks, have not owned up to their failures."
Seems to clearly put Reagan and Thatcher in the frame.
Now if you are very nice I can provide you with the source of the quote - but only if you apologise for being so nasty, and have the decency to put a name to the unnecessary insults.
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Sidney Webb | 25/08/2010 10:31 pm
By the way Anonymous - who put Greenspan in charge of the Fed?
Bush?
Clinton?
Bush?
Reagan?
Carter?
And who did this lifelong Republican get his lift into power from?
Nixon?
Ford?
Rand?
The answers to both give the lie to your attempt to try to pin this on any Democrat, or indeed anything other than lack of regulation.
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Len White | 26/08/2010 0:13 am
Anonymous | 25/08/2010 1:53 pm accuses me of 'NuLab orhodoxy' for pointing out that housing investment is a bad thing to cut coming out of a recession. Instead of trying to be insulting, address the issue. Borrowing to fund 20% of affordable homes, the rest of it funded by private borrowing, leads to people being employed who would otherwise be on benefit and they pay taxes too. There is also a multiplier effect as materials and supplies are bought and people spend their wages. The net effect is that public spending in total goes down not up. Not even keynesian, just basic economics.
Anonymous | 25/08/2010 5:13 pm - is it the same person, it's so confusing - accuses me of regurgitating wikipedia in the comment about Joseph Stiglitz. What a good idea, I'll try that next time.
Sorry to disappoint, but I have read whole books on the subject- yes anonymous, whole books, have you ever tried that? I highly recommend Stiglitz's book 'Freefall' on the sinking of the global economy. Cameron Osborne Clegg and Cable would do well to read it, and it has an excellent summary for our anonymous friend to attempt.
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