Welfare Benefits and the Scottish Referendum

This morning the Institute of Fiscal Studies published an ESRC-funded study on the level and implications of Scottish welfare benefit spending, as well as the Coalition welfare reforms and the issues that would confront an independent Scotland (Phillips, 2013).  It is an excellent report and raises many important points in a studiously neutral way. Not surprisingly, both campaigns spun it their way. Interestingly, I have also been reading the new book on the economics of the referendum by Gavin McCrone. His lean text is a clearly argued and balanced assessment of the major issues, including welfare benefits. There is considerable common ground between the two authors, even if the campaigns appear to have been reading completely different IFS documents.

What are the main points? First, benefits account for about 30% of all government spend in Scotland and a little over 11% of GDP. State pensions are the biggest contributor followed by child and working tax credits and then disability living allowance/attendance allowance (i.e. in Scotland Housing Benefit is only the fourth largest benefit).

Second, benefit spend per head is higher in Scotland than Great Britain but the difference is shrinking (now only 2% more). However, IFS think that specific trends in ageing and disability are likely in time to increase once more the relative welfare spend per head in Scotland relative to GB. Expenditure on disability benefits per person is 22% higher in Scotland.

So, what explains these differences? IFS point to:

• An age profile that has more older people and fewer children in Scotland
• A higher level of disability benefit claims at all working ages in Scotland as well as the larger proportion of older households (who are more likely to be claiming disability-related benefits)
• Housing benefit costs less in Scotland because the private rented sector is smaller (where HB costs are typically much higher) and the larger social sector in Scotland has lower rents than in GB.

A further consequence is that Scotland has been marginally less affected by the welfare reforms underway and anticipated out to 2015 (a 1.6% fall in household incomes compared to 1.7% in GB). This is again due to lower rents but also the income distribution in Scotland which lessened tax changes, and also because of the larger share of pensioners (who are generally less affected by the changes compared to working age households).

Finally the IFS considers SNP reform proposals should there be independence and argues that reversing the bedroom tax changes would cost about £50 million a year and while that might be ok, they argue that keeping the triple lock for basic pensions would become very expensive in the long term, as it would tend to push the basic pension up relative to average earnings.  They also point out that independence would create the opportunity to improve on some of the less well designed reforms e.g. the benefit cap, uprating local housing allowances capped at CPI and separating council tax benefit from the rest of the Universal Credit. The yes campaign made much of this in the media today but it is important to note that the IFS argue that there are better ways of making the same savings in each case – not reversing them. The IFS are also skeptical about the feasibility of having more radical reform of welfare benefits based on an enhanced contributory principle.

McCrone makes several additional points. First, it is important to recognise the broader need to reform the welfare benefits system to remove anomalies, simplify and reduce poverty traps, but he notes that this is a very difficult context within which to undertake it, one likely to worsen the position of many of the worst off in society. The underlying need for reform is often lost in the heat of the battle over the shape the cuts and reform are presently taking. McCrone notes the large number of losers even within the DWP impact assessment – which has a small net benefit overall. Like many others he is concerned second with the reforms to disability benefits and the hardship they cause to so many of their client group.

Second, he argues that even without independence there is a case for devolving certain benefits, such as: Housing Benefit (since the rest of social housing policy is devolved), maternity allowances, TV licenses for the over 75s, industrial injuries benefits, attendance allowance, widows’ benefits and carers’ allowance (a case can even be made for the new personal independent payment replacing DLA, and severe disablement allowance).

I have argued elsewhere (with Mark Stephens) that HB should not be devolved unless as part of a wider set of income-related benefits. Moreover, McCrone himself acknowledges that long term demographic trends will increase the cost of these benefits and that will have to be paid for out of higher taxes or cuts elsewhere (or economic growth). If Scotland is independent this will have to happen to a large extent (depending one presumes on the exact parameters of any post-yes vote negotiations over basic pensions), as it would with a pure form of fiscal autonomy. McCrone argues that if there is a no vote, there is a case for something akin to Purviss’ devolution-plus – increasing the taxes raised in Scotland beyond that proposed by the 2012 Act, including a share of other taxes via assigned revenues – to increase accountability and reduce the dependence on the block grant from Whitehall. If so, the increasing cost of local management of devolved benefits would be more transparent, localised and credible to the rest of the UK[1].

Welfare benefits will be one of the touchstone issues for the referendum – and it is one which the yes campaign thinks they can make effective progress with (as they will also do regarding the growing English Euro-scepticism and the prospect of a vote to leave the EU after the UK general election). What the IFS report shows, as does Gavin McCrone’s book, is that welfare reform is a thorny complex multi-faceted area, beset by issues including long term demographic patterns and connections to other areas of social policy like housing, disability and ageing. Whatever happens in the referendum, it will, as with so many other issues, remain highly problematic and no constitutional solution will remedy it of itself. Far from it. As with other economic and financial policy areas – the resourcing trade-offs between taxes, spending cuts elsewhere and economic growth will shape what is possible if, as seems likely, there will be a natural growth in welfare spending.

References

McCrone, Gavin (2013) Scottish Independence: Weighing up the Economics. Birlinn: Edinburgh.

Phillips, David (2013) Government spending on benefits and state pensions in Scotland: current patterns and future issues. IFS Briefing Note BF139.

---

[1] Alongside a needs assessment for relative spend for every devolved country and English planning regions to replace Barnett.

Do EU Procurement practices discriminate against UK and Scottish construction firms

Keith Kintrea and I recently completed a short paper as part of the Scottish Govenrment’s procurement review[i] (Review of Procurement in Construction: International Evidence by Keith Kintrea and Kenneth Gibb, University of Glasgow). The client has kindly allowed us to produce briefings on the paper and, in addition to this post, a longer version will shortly appear on the Policy Scotland website (http://policyscotland.gla.ac.uk).

It is often anecdotally observed by a number of Scottish Government stakeholders that non-UK (and non-Scottish) companies appear to dominate public contracts in their own countries while, within the UK, home companies are said to often lose out to competition from elsewhere.  A case which caused particular controversy was the award in 2011 of a £1.4bn train building contract for Thameslink to Siemens of Germany rather than to Bombardier, based in Derby (see Maer, 2012).

The essential question posed to us was: is there is any substance to the allegation that the operation of EU procurement processes results in UK construction firms being shut out of public contracts in the rest of the EU, while non-UK firms are provided with access to UK markets through the same processes? The implication of the allegation is that other European countries compared to the UK are able to provide more support to their home construction industry within the confines of EU frameworks when procuring public works.

The argument is often popularly made that the UK is overly compliant with EU rules and has sought to ‘gold plate’ them through an excessively regulatory approach (e.g. Burgess Salmon (2012) to the detriment of UK business. In response, the Department of Business and Skills (2013) has sought to develop new guidance for UK government departments in transposing EU regulations into UK law in order to limit any such gold plating.

We approached the question recognising that by its nature it is difficult to adequately answer in the absence of rigorous, specific research. It also turns out that the data available on cross border procurement is weak and the literature relatively sparse, and often indirectly rather than directly relevant. We conducted a desk based UK and international review and drew on academic literature, grey evidence, online sources including social sciences database search engines and Google Scholar. We also snowballed from sources in the papers and reports we identified.

It is impossible to address fully the validity of the anecdotal claims about the impact of the EU procurement procedures or the degree of penetration of UK (and Scottish) construction firms in European markets, and vice versa. The data and the research are too underdeveloped.  It is interesting to note that the perception that there might be (direct or indirect) discrimination with the system is held far more widely than in the UK. A Europe wide business survey reported by the EC showed that nearly half of all business surveyed believed that local preferences influenced public procurement to a high extent, and only 14% believed there was no discrimination against no-domestic bidders (EC, 2011, p. 143)

For the UK, what we can observe is that it is relatively a stronger player in the OJEU advertised processes than its economic scale would indicate compared to EU averages – which might suggest that it is more compliant than some other countries. But, within that level of activity, its proportion of cross-border procurement is also close to the average. Overall, especially for the bigger EU countries, the overall level of cross border activity is quite low, especially for ‘works’ procurement.

There are various explanations for the relative position of different Member States. There is some suggestion that variations in OJEU throughput arise from legal and administrative and policy differences between member states which help to shape engagement with the system, the size of contracts (above or below thresholds), and whether concessions are used, for example. This is in line with the findings of Wood (2004) who identified the diverse experiences with public procurement across Europe, the uneven development of procurement systems over time, and the different pattern of state support for key sectors as explanatory variables. The survey evidence quoted above also shows there are good reasons why firms do not make more of EU cross-border public procurement.

All the reports that have considered the question of direct discrimination find it difficult to demonstrate unequivocally. Wood (2004) commented: ‘Few respondents mentioned examples of discrimination in direct breach of EU procurement rules. Those provided are difficult to evaluate as to the substance of the allegations, particularly as no concrete evidence was submitted to us’ (2004, p.6) and ‘there was no concrete evidence of discrimination by other EU countries’ (p.2).

Altogether, we recognise that there is a need for a lot more understanding in this area. Despite the more than 20 year history of EU public procurement processes it is only now that that the EC has started to provide the kind of data that helps to bottom these questions out. It is notable that in the important field of construction the extant data does not disaggregate helpfully for us to understand its particular position. There is a clear need to understand better the role of indirect cross border procurement through affiliates and the role of imported supplies.

There is considerable variety of practice across the EU and that the key to this lies in differences in administrative and legal systems and policy positions across Member States. This may lead to variety in outcomes but we do not believe there is robust non-anectdotal evidence of UK firms being systematically disadvantaged.

 References

Burgess Salmon LLP (2012) Comparative Procurement: Procurement regulation and practice in Germany, Sweden and the UK,  London: London.

Department of Business and Skills (2013) Gold Plating Review: The Operation of the Transposition Principles in the Governments’ Guiding Principles for EU Legislation. London: BIS

European Commission (2011) Evaluation Report: Impact and Effectiveness of EU Public Procurement Legislation. Brussels, Brussels:  European Commission Internal Market and Services. Sourced at:      http://ec.europa.eu/internal_market/publicprocurement/modernising_rules/evaluation/index_en.htm

European Commission (2012) Annual Public Procurement Implementation Review

2012, Brussels: European Commission. Sourced at: http://ec.europa.eu/internal_market/publicprocurement/docs/implementation/20121011-staff-working-document_en.pdf

Maer, L (2012) Public Procurement. House of Commons research Library Standard Note Economic Policy and Statistics SN/EP/6029 (20 Janaury).

Wood, A. (2004) Investigating UK Business Experiences of Competing for Public Contracts in Other EU Countries, London: Office of Government Commerce

---

[i] This post was co-authored with Keith Kintrea and draws closely on parts of the report submitted to the Scottish Government referenced in the text.

Reflections on ‘Housing in Scotland’ by Audit Scotland

While I was away Audit Scotland published its sector study on Scottish housing. I should declare an interest: I was a member of its advisory board. The focus of Audit Scotland is on the effectiveness of public money and hence they emphasise public and social housing sectors but also private finance going to that part of the housing system. (and, to a lesser extent, housing benefit and its on-going reform). There is correspondingly less emphasis on private housing where often (though not always), the funding streams are either reserved or not of the public sector. In that sense this is not a truly holistic study of the Scottish housing system; nevertheless, it is a useful and welcome analysis.

While aspects of the work were widely welcomed by housing policy and practice in Scotland, it was rightly pointed out (e.g. by SFHA) that some things, inevitably, have moved on since it went to print e.g. the Scottish cross-sector working group on affordable supply concurred with aspects of what they recommended. For that reason I want to concentrate on their longer-term structural or key messages.

They make several recommendations to both the Scottish Government and to councils. I focus below on four aimed at the Government (paraphrased below) but would note the importance of the comments they rightly make about long term asset management of council stock:

• Demonstrate how its long-term vision for housing underpins national policies and informs local planning and practice.

As I have indicated in previous posts, I do think government should articulate such a vision and do so consensually. This is so in order that subsequent policy means can be consistent with a shared set of ends. I do however also think that we as commentators, academics and interested parties must actively contribute to what that vision should be and the policies required to move the housing system feasibly in that direction.

• Improve its reporting of housing budgets, spend and outcomes.

When acting as an advisor last year to the Infrastructure and Capital investment Committee of the Scottish Parliament, much time was spent trying to make spending on affordable housing more transparent and connect local plans and approvals to budget spending and on to buildings started and completed. This was non-trivial headache generating stuff, made worse by also having to track in-year revisions as a result of Barnett consequentials.  The point is that we should not have to rely on SPICE (the Parliament’s excellent information unit) to get to the bottom of it. The Government is accountable for the success of its new supply policy and must make it absolutely clear what is going on in open and simple terms. This is admittedly difficult (though far from impossible) because the process spreads over several financial years.

While I do think progress is being made there are further problems. It is arguably the case (or anecdotally so) that fewer developing housing associations are actually taking funding and building than councils originally assumed when they put their plans in. We need more evidence on the gap that is alleged to be growing between approvals and actual starts. More broadly, it is hard to plan across years when (welcome) Barnett consequentials and other in-year revisions take place and make such a substantive difference to totals, as they have in recent years.

• Improve the detail and reliability of national information about housing, including an assessment of current and future need.

Of course few people would disagree with the expectation that national (and local) housing need estimates should be consistently and comprehensively calculated and measured. However, this requires both an analytical consensus on how it should be measured and calculated, and, it must be implemented though equally consistent application of data capture, measurement and interpretation both nationally and locally. These are challenging but I would argue necessary conditions in this tine of austerity and backroom cuts but, I would stress, there were plenty of problems securing consistent local needs analyses across Scotland well before the financial crisis. This needs to be a priority.

• Review the financial pressure on the sector including financial capacity to develop and fund new social and affordable housing.

The recent working group also established the need for updating and understanding financial capacity. Since the controversial study in 2010, developing housing associations have reduced financial capacity, and increasing numbers have actively chosen not to develop. Both associations and councils have had to come to terms with arrears, voids and other revenue-damaging impacts to their business plans as a result of the benefit reforms. Objectively, these changes reduce capacity but more important, we must distinguish between the notional demand that financial capacity measures and the actual effective demand for finance that social providers are actually willing to express given the conditions they face. The gap may well be widening  between notional and effective demand, at the same time that notional demand (capacity) is falling. We need to understand financial capacity but also effective demand.

The Audit Scotland report is a valuable resource and should be widely used. My comments above are reflections that arise thinking in response to these ‘key messages’ as they appear now in July 2013. There is good source material here and I will certainly be using several of their exhibits and analysis in my teaching and other work.

Reviving the Oswald Hypothesis?

In a new working paper for the Peterson Institute for International Economics written with David Blanchflower, Andrew Oswald has returned to the forefront of the debate around the correlation between high home ownership rates and higher unemployment (‘Does high home-ownership impair the labour market?’).

The new paper can be found at http://www.piie.com/publications/wp/wp13-3.pdf.

Oswald set off quite a controversy after earlier papers in the late 1990s focused on evidence that there was such a link and also how it might be explained (i.e. that home ownership somehow led to labour frictions and other imperfections that pushed up joblessness). The response to the ‘Oswald hypothesis’ was sometimes sceptical and often openly critical.

In a paper we wrote about the role of home ownership and the economy in Housing Studies (2012, p.), Tony O’Sullivan and I concluded that:

“Oswald (1997, 1999) hypothesised that owner-occupation leads to higher levels of unemployment than otherwise would apply because of high house purchase transactions costs, high housing access costs for younger households and because housing-induced constraints on migration lead to poorer job choices. Oswald also suggested that areas with high homeownership levels may deter entrepreneurs from setting up new operations, and that homeowners commute more than renters, generating transport congestion”.

We agreed with Dietz and Haurin (2003) who “concluded that studies using micro-level data tend to reject the Oswald hypothesis while aggregate studies tend to be more supportive, and that while homeownership reduces mobility this is insufficient on its own to increase unemployment.”

The new paper is a careful empirical analysis of US States. It then goes on to speculate on the mechanics or explanatory forces that might explain the observed strong correlation. It also rules out a series of confounding arguments based on empirical counter-positions and, to be fair, identifies a number of possible flaws in the argument or evidence. While the authors continue to use some of the earlier explanations for the association between unemployment and home ownership, they do add some new arguments or refinements. The paper is essentially an empirical problem that is observed, its causes hypothesised and a general call made for further debate and detailed investigation by the economics community.

I want to make four main points in response. First, to what extent does the new empirical approach overcome earlier questions? Second, do earlier key problems remain? Third, what more might we say about the underlying causes of this relationship? Fourth, and to the extent there is some kind of validity in the core finding – what are the policy implications?

The paper looks at an annual panel of US states from 1985 to 2011 (including shorter sub-samples). They conclude that rises in home ownership are followed by a (long) lag to substantial increases (i.e. a doubling) in unemployment. This is caused by mobility problems, longer commutes and lower new firm formation (as well as some other factors – see below). The empirical section involves a series of tests to make the case that this correlation is not a spurious artefact. Nonetheless, the tone is one of provisional and tentative findings. They accept that, while they have eliminated some other explanations in the data (e.g. the 2006-07 crash in house prices), there may yet be omitted variables at play and that there may also be exogenous forces to do with changes in the structure of housing markets that are not measured in the data. Most importantly, they acknowledge that they have no fully-worked theory for how the housing market disturbs labour market equilibrium. But the point is that this statistical exercise is prima facie evidence for more research to get behind these findings.

I still think there are conceptual issues with this work. The main one for me is the lack of specification of the process not in terms of the labour market but rather the housing sector’s role. By this I mean that, while they say they do not expect the unemployed to be among the home-owners, they say little about the precise ways in which the housing system as a whole is causing labour market problems. What is the owner occupation rate a proxy for? Similarly, the authors say that high rates of home ownership re associated in the US state data with lower levels of new firm formation. Again what is actually being measured – what is the home ownership rate a proxy for? Third, they make the odd throwaway point about high renting low unemployment in the Swiss case and the converse in Spain. How can one make such a leap from state-level data? Particularly, as there is actually quite a lot of implicit regional and urban economics explanation going on in the US analysis and then make aggregate nation-level points where one would have thought institutional and other omitted variables are more likely to be working.

I did think however that in addition to returning to their earlier arguments (e.g. mobility and transactions costs) they raise some interesting spatial drivers of the correlation: spatial-mismatch, sprawl and congestion and other urban externalities relating to NIMBYISM (i.e. the argument that existing home owners do not want businesses in their locale that might adversely affect property values). Will urban economics provide better micro explanations that the previous work criticised for instance by Dietz and Haurin?

Finally, they argue that if this correlation is bone out by a plausible explantory model then it raises difficult questions for policymakers promoting home ownership. They even nod to taxing investment returns (e.g. imputed rents). This was taken up by the Guardian this morning as more evidence that the fixation on home ownership is misplaced. In our 2012 paper we concluded that there was precious little evidence that home ownership growth benefited the economy but perhaps had selective micro-social benefits e.g. for parenting and child outcomes. On this basis we could not see a justification for a general tenure-focused subsidy favouring home ownership per se. This does not rest on a specific argument that the housing system’s inflexibility leads to future higher unemployment. But were that to turn out to be the case – it would be another reason to wish to re-balance the unevenness of the distribution of housing policy and subsidy.

I am sure Blanchflower and Oswald’s paper will get its way and be the subject of much more debate and testing. If this should lead to closer conceptual work on the relationship between the housing system and the labour market that can be empirically modelled – it would be a very worthwhile result.

References

Dietz, R and Haurin, D (2003) ‘The Social and Private Micro-level Consequences of Home Ownership’, Journal of Urban Economics, Vol. 54 (3), pp. 401-50.

Oswald, A (1997) The Missing piece of the unemployment puzzle. An inaugural lecture. Available at: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/inaugura.pdf.

Oswald, A (1999) The housing market and Europe’s unemployment: a non-technical paper. Available at:
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/homesnt.pdf.

O’Sullivan, A and Gibb, K (2012) ‘Housing Taxation and the Economic Benefits of Home Ownership’, Housing Studies, Vol.27 (2), pp. 267-79.

De-residualisation

Many of you will have seen the nicely constructed piece by Alex Marsh today reporting his take on the roundtable we held last week at the ISA43 conference at the University of Amsterdam (http://www.alexsarchives.org/can-we-should-we-de-residualise-social-housing/).

The theme of the roundtable was ‘Can we, should we de-residualise social housing?’ Alex was asked to look at the question from an English perspective. As his post indicates he directly answered the questions posed and wrote it up as a substantive long post. I will not go into the details of Alex’s comments but rather say a little bit about why we organised this roundtable and the broader international perspective (as well as a perspective from Scotland).

The session asked participants and the 70 plus audience whether the current crisis and commonality internationally of dysfunctional housing systems offers an opportunity for a more positive, broader and perhaps novel role for non-market housing? I was drawn to this topic because of a growing sense that while we as commentators often ask government and agencies to spell out their vision for social housing – we rarely if at all actually do it ourselves. A theme of the wider conference (‘At home with the housing market’) and one clearly articulated at the conference by both Ray Forrest and Suzanne Fitzpatrick was the abject failure of progressive forces to mount an effective riposte or counter-position arguing for more progressive housing and related policies. Is there a social housing vision that we can construct from different countries’ experiences?

We had a rather Anglo-Saxon set of speakers: two from the USA (ED Goetz and Rachel Bratt) as well an Australian perspective from Mike Darcy and the aforementioned Alex Marsh, the judge from Bristol.

What were the main messages:
• Engineering a greater political debate that seeks a positive wider (and deeper) role is essential – though this is currently difficult (to put it mildly).
• It is not easy to observe a coherent US social housing policy at all (though plenty of evidence of successful local programmes and innovation through for instance not for profit intermediaries).
• Good local US programmes like community land trusts, etc. are working but with modest effects.
• Low-income housing tax credits were viewed critically by in-country experts and others present (as was the Australian version – the NRAS model).
• Public housing in the US, dominated by the dynamic of race, was described as a dead or ‘afterlife’ policy – despite the fact that particularly in some rural and small town communities it worked perfectly well.
• The English dimension emphasised the changing nature of subsidy (away from price subsidy), the importance of and interrelationship between social and the growing private rental market.
• Australia signifies where trends seem to be moving more widely – shallower subsidy and affordable rather than social housing based on cross subsidy – but not really tackling the major market failures that create a need for affordable intervention in the first place.

It goes without saying that Scotland is qualitatively different from England, it is a much smaller housing system, which is a challenge as well as an opportunity, but it also has to work within public finance constraints and welfare benefits set in Whitehall. The major differences are probably: a belief in and a mechanism for council housing to be constructed at a decent scale (and funded in part by government grant), the imminent abolition of the Right to Buy, a large number of smaller housing associations, and innovative use of guarantees to support affordable mid-market investment. Grant rates are rising at the margin and there appears to be strong opposition to the Coalition Government practice of higher rents at reletting (social rents are a lot lower in Scotland). While there may appear to be a more (albeit somewhat dilute and contested) social democratic approach in Scotland to social housing – it is not necessarily financially sustainable nor is it obvious how embedded it is or to what extent it is a longer term priority of either government or the opposition.

We only had an hour and everyone who contributed to the session could reasonably be interpreted (by me!) as wanting to see a more balanced housing system that worked for the disadvantaged and would see social housing playing an important role in making this kind of impact happen. However, we did not come up with a vision or a well-defined sense of how social housing should be articulated in a feasible national housing system for the future emerging from the current economic, financial and political context. It will be something I am going to try to put down on paper over the next few weeks but it is also a challenge for the reader, which I hope they will take up?

On Rent Policy (again)

What is going on? Inside Housing has reported (‘Rent convergence plans threaten build rates’, July 12 2013) the threat arising from the UK Government’s recent statement that it was minded to end the English rent convergence process after 2014-15. The threat is that business plans will have to be ‘torn up’ and plans for building and investment will be undermined. The IH story suggested that ending convergence early means that the incremental increase of traditionally lower council rents towards association rents will not occur fully and that this might impinge on their ability to repay debt agreed in the 2012 HRA settlement. As a result, less new homes than planned can be built. Moreover, in London, where several developing housing associations have rents still below target rent levels, would also face reduced development capacity.

This is only the latest in a series of disconnecting policy changes that appear to be doing much to undermine social providers’ capacity and tenants’ ability to make sense of price signals.

We know that it is highly likely that affordability problems will grow through HB increases being capped and that this will be lower than the new rent increase caps recently proposed in England for the next 10 years. We also know that both the current 3-year affordable housing programme and the one recently announced by the Spending Review are premised on reletting vacant properties at ‘affordable’ rents – rents based on the local proportion deemed affordable of the equivalent local housing allowance. The first decision (reported on today) can be rationalized, can make sense on one level or is perhaps inevitable – given the continuing commitment to this form of cross-subsidy and the ongoing lack of alternatives.

I have written several posts now that have touched on this direction of travel. After the pain of rent formula, convergence and lengthy adjustment to business pans, this is in effect now to be dismantled. Yet, development is increasingly to be premised on low capital subsidy, sweat equity from the existing stock and cross subsidy from now higher relet rents. It does not really add up.

This new commitment to localizing (ultimately to individual landlords) social rent-setting will take years to unwind but one cannot but think this has been an expensive and ultimately fruitless business. In Scotland there has never been enthusiasm for a national rent policy, partly because rents are lower and the pressures (at least until recently) have been appreciably weaker. Yet in Northern Ireland, alongside the proposed selling off the Housing Executive stock, there is considerable appetite for a national rent formula and a convergence or harmonisation process.

What I find striking is that the tenant’s perspective and the principle of informed choice have been wholly lost. While one may rightly quibble with the model for the formula rent and its technical shortcomings, it did nonetheless promise to provide consistent local price signals for consumers and thereby make choices a little more transparent. This was, at the turn of the millennium, supposed to be part of a three-part process including choice-based lettings and benefit reform. It is ironic that while the Government struggles to implement its much further-reaching benefit reforms, it is at the same time making non-market price signals that much more obtuse.

Essentially, a short run housing supply programme requires local rent freedoms to work so we give up the coherence of a well-established long-term system thereby creating wider unintended business plan consequences in different parts of the country. Yet, no-one really thinks of, or argues for, the affordable housing programme as a long tem basis for augmenting non-market supply on a large scale into the long term. It is another unhelpful example of short-termism.

The End of the Right to Buy in Scotland

All my working life it has been hard to avoid the Right to Buy, such has been its dominance in housing policy, ideological debate and electoral politics since 1980. This morning the Scottish Deputy First Minister confirmed that legislation in Scotland will outlaw it in 2014 but not without a three year final opportunity for tenants to exercise the Right before the avenue is closed off forever. It will be a little strange when it has gone – but as many have said, it is a policy that is well past its political sell-by date.

This is the third significant Scottish reform to sales policy in a little over ten years. First, we had the modernised Right to Buy, which widened the Right, created high pressure market areas where suspension of the RTB was possible, but it also greatly reduced discounts to new tenants (but kept the much larger discounts for existing tenants who still operated under the original provisions). Then, second, the SNP abolished the RTB for new build housing to encourage councils to build again.

Third, and after a consultation period, is the decision today to end it altogether, albeit in a slightly odd delayed and somewhat counterproductive way (there is bound to be an artificial unhelpful bubble in sales). Scotland was also distinctive from England through most of the post 1980 period because of the greater willingness of different kinds of Scottish government to allow councils to re-use their capital receipts (which they did extensively to improve their stock without recourse to rent increases).

Nonetheless, nearly 500,000 homes were sold in Scotland and the DFM believes that, as a result of the abolition, as much as an extra 15,000 homes will stay in the sector over the next decade (I would like to see the assumptions behind that calculation). If true, that is important in a context of a Government trying to add 6,000 units of social and affordable supply each year in the face of a huge waiting list of the order of something like four hundred thousand households.

While there are not many in the housing professions who will mourn its passing, at a more basic political level it was a powerful redistributive and empowering mechanism – it was just that it did this in an arbitrary and untargeted way doing little for those at the bottom end.  And, at least initially, it was also a weapon deployed on councils by a hostile central government.

The big picture issues of course were cumulative and incremental – the slow residualisation of the sector, the growth of re-sales increasingly into private renting and the sense of inevitable decline for many social landlords. Politically, you might have thought at one time this was an untouchable policy such was its primacy.  In a context where opposition has become so consensual on Scotland in recent years it has been vaguely bizarre to see the Conservative party continue to champion and even seek to re-start it as an important part of their brand.

In many respects, this journey to wind up the RTB in Scotland has been a triumph of devolution, built around a Scottish consensus (not counting the Tories).  This has also succeeded against the backdrop of a stalled housing market – and in some ways is reminiscent of that other successful gradualist policy achievement – the abolition of MIRAS.

House Prices, Consumption, Wealth Effects and Policy

The precise relationship between house prices, wealth effects and consumption, as George Osborne hinted when he introduced the notorious Help to Buy policy, is a bit complex.

In an intriguing blog on the LSE’s EUROPP site, re-posted on the Pieria site (1), an academic team (Browning, Gortz and Leth-Peterson) has re-engaged with this debate looking at Danish data from 1987-96. They focus on equity withdrawal (consumption loans secured by housing equity collateral) and distinguish between older and younger home-owners. They believe that their data supports the income expectations perspective on these questions: higher future expected income leads people to increase spending and thus bid more for housing pushing up house prices. So, rather than house prices driving consumption, the causality is quite different (i.e. both are led by a third factor – expectations of earnings).

This is important because it suggests that policy aimed at pushing up house prices might not have the desired consumption and aggregate demand impacts on economic growth. The authors of the paper/blog argue that their evidence suggests that in particular older owners are consumption-insensitive to house price increases but younger households use the fact of increased housing equity as a means of a degree of credit expansion for consumption (non-housing) loans.

Interesting stuff. I should say that while I have not yet read their full paper in the Economic Journal (2), and though I have a degree of sympathy with the intuition of this analysis, a few questions should be aired before getting into the wider debate about the issue.

The authors point out there is considerable controversy about the relationship between house prices, housing wealth and consumption. In our 2012 paper in Housing Studies (3), Tony O’Sullivan and I retraced the academic controversy. There is as much disagreement about the theoretical relationships, as there is about the data and what is tells us. For instance, those who think that income expectations drive consumption indicate that the effect varies over time and the market cycle. Others argue that short-run speculative factors are important in determining house prices (and their fundamental determination does logically comes first).

There must also be questions about the transferability of this micro panel data analysis to the UK. Is Denmark sufficiently similar, for instance, as the UK in institutional, lending, housing market and welfare regime terms, and in the context of the 1980s and 1990s – well before the unusual financial context prevailing since 2007-08? Also, is the issue solely captured by consumption loans based on housing equity? For those who are not liquidity constrained, consumption may rise in the knowledge of rising housing equity, savings fall, because they feel wealthier, but without necessarily taking out a loan – but unfortunately this kind of wealth effect is harder to measure. A fascinating question is also how these people respond to falling prices, equity and income expectations (a question addressed in the behavioural economics literature) (4)?

The policy debate that emerges from this paper is incredibly contemporary. In our paper in 2012 we noted the ambivalence of the Government’s economic view of the transmission mechanism: the Bank of England stated it did not believe in a relationship where house prices impact on consumption though earlier Treasury work relating to the conditions for joining the Euro did make this connection.  In 2013, it is hard not to conclude that HM Treasury now thinks that the underwriting of borrowing by moving purchasers can both support the economy and ultimately stimulate all the good GDP-enhancing aspects of increased transactions and confidence, more supply (possibly) and feel-good wealth effects on broader consumption. And, I would suggest, they do not fully consider or engage with the consequences of possible bubbles and other bad things that might also follow.

The interesting new research on Denmark’s home-owners suggests that the transmission mechanism is less strong than is often suggested. These findings may or may not be transferable to the contemporary UK in economic recovery mode. Nonetheless, there remains a remarkable disconnect between government macroeconomic hope and aspiration, beliefs about how important specific sectors like housing actually impact on the economy, and the absence of long term stability-based policies which seek to neutralize or normalise the impact and wider effects of the housing sector. We have had 25 years or so of research and data on housing’s relationship with the economy post deregulation – yet we remain in the dark about key parts of this vital relationship and can only conclude that policymakers should be cautious about the assumptions they make and beliefs they hold about how this plays out.

(1)           Rising house prices don’t tend to fuel greater consumption by households (Martin Browning, Mette Gortz and Soren Leth-Peterson) in: http://www.pieria.co.uk/articles/rising_house_prices_dont_tend_to_fuel_greater_consumption_by_households

(2)      ‘Housing wealth and consumption: a micro panel study’, Economic Journal, Vol.123, pp. 401-28.

(3)      O’Sullivan, A and Gibb, K (2012) ‘Housing Taxation and the Economic Benefits of Home Ownership’, Housing Studies, Vol.27 (2), pp. 267-79.

(4)      See, for instance: Wilkinson, N (2008) An Introduction to Behavioural Economics. Palgrave Macmillan: Basingstoke.