Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Month: October, 2013

Will the Council Tax Freeze become a Plague on all our Houses?

A few things have come together to lead to this post. In recent days there has been a party political fight in Scotland over a challenge made by Labour regarding the long-standing council tax freeze in Scotland. Arthur Midwinter, a well-known local government expert, weighed in against the consequences of the cumulative effects of the freeze. At the same time the Scottish Government dismissed the criticism on the basis of the apparent high popularity among the electorate regarding the continuing freeze to the tax.

As this was going on I was preparing a class on local government finance and this led me to look a bit more closely at the data and to reflect more widely on local taxation, the freeze and the future of property taxes.

We have had a freeze on the council tax since 2007-08 in Scotland. Ironically, it was pointed out to me today that the idea arose in Scotland from Glasgow city council during the Purcell regime and was subsequently taken up by the SNP minority government thereafter. The Scottish councils and the Government agreed a Concordat that protected the share of total Government spending allocated to councils and allowed them to have unrestricted access to a series of previously ring-fenced policy areas. As Arthur Midwinter pointed out, however, falling total spending has to be met by councils in proportion to their share, as well as paying for the cost of the freeze in council tax and making efficiency savings. This, he concludes, translates into deep job and service cuts. Moreover, Midwinter contends that the specific ending of ring-fenced programmes is essentially anti-poverty in its effects on things like the Supporting People Fund, the Fairer Scotland Fund and the Community Regeneration Fund.

While much has been made of this choice to remove the ring-fencing of these sorts of programmes, less has been made of Midwinter’s other key point – that freezing the council tax is regressive in the sense that higher band properties, generally occupied by higher income households, receive more financial benefit from the freeze than low income households in low banded properties. Moreover, those who receive council tax benefit get no financial gain from the freeze. These distributional effects are cumulative.

At a broader level there is a damaging long term consequence – households get the benefit of falling real terms council tax payments but elected councils lose their ability to set tax rates and be accountable for their mix of services. Instead income sources funding revenue expenditure are essentially removed from any local control or even influence (other than growing the tax base through land release and construction).

Are we content that this difficult to reverse dismantling of local taxation should continue?

People may rightly dislike aspects of the council tax: it has pretty major problems. The flat bands mean those in the top band only pay twice the band D rate even those the price of the property may be twenty, thirty or more time more expensive.  The tax base is valued at 1991 prices and there is no general revaluation (a necessary condition of any reasonable property tax). The council tax was a quick fix in the early 1990s to get the then Government distanced from the poll tax – but it should not have then been fixed in stone. It should have ben reformed, modernized and revalued – but even so, its failings do not warrant the ending of local discretion over local taxation.

The English are of course now embarking on a council tax freeze though the main difference there is the Localism-inspired dismantling of a national system of council tax benefit.

The big point for me, especially if one fundamentally believes in a system of local government that has financial responsibility for tax-raising on democratic grounds, is that reform of local government has to be comprehensive and fix finance, the functions and the geography of local government at one and the same time. Previous failings reforming local government from the top-down have too often failed because they re-jigged one side of the Rubik’s cube without fixing all of it.

If we go back to the venerable Layfield Commission in the 1970s, still the best of its kind, it said there were fundamental choices to be made between a centralising versus a localizing empowering approach. In addition they made the important point that we do not necessarily require one local tax but could in principle use several to raise the same revenue in total.

Later in the early 1990s, the Joseph Rowntree Foundation published a report (Alternatives to the Community Charge, 1991) that argued that funding mechanisms should be linked to service type so that national redistributive or needs based services delivered locally should be paid out of government grants but local amenity and facility services should be funded by local taxes and that this could readily involve local property and income taxes. However, any taxes proposed should be feasible (e.g. regular revaluations), fair in an affordability capacity to pay sense, should promote local accountability and be consistent with wider economic and policy goals.

As earlier posts will have made clear, I think we do need to tax property and that local taxes which reflect the benefits to property values of local services does not seem unreasonable. This may be a tax on capital values like in Northern Ireland or something more like a land value tax.

While not underestimating the populism angle, it has to be recognised that the current road may lead to a much weaker system of local government. If that is not what one wants, then it is time to consider a broader set of reforms of finance. And that is before we even think about non-domestic rates. The short run fix needs to be debated in terms of its long-term consequences and the viable alternatives that might be presented.

The Value of Policy Failure

There is a lot to learn from our mistakes. This simple message is artfully developed in the excellent new book – The Blunders of our Governments by Anthony King and Ivor Crewe.  Older readers will recall King and Crewe as stalwarts of election nights and TV political shows in the 1980s and 1990s. The authors go through the worst policy failures of the Thatcher, Major, Blair and Brown governments (with a postscript on the Coalition). While there are points that one might (I believe) reasonably take issue with, King and Crewe devise a simple analytical framework around human error (agency) and system failures (structures or institutions) that should be part of the basic appraisal checklist of policy development at all levels of governance.

How do they define a blunder? It is not particularly scientific but you know when you see it. It is not when there is a genuine judgment call that goes wrong but it usually has familiar symptoms – high costs relative to benefit, refusing to see the problem hurtling towards the Government, actively or passively ignoring the overwhelming evidence, and displaying the personal and institutional attributes they list (and we discuss below).

You can imagine the main examples of previous government blunders:

  • The poll tax
  • Miss-selling private pensions
  • The child support agency
  • Exiting the ERM
  • The Millennium Dome
  • Individual Learning Accounts
  • Tax Credits
  • Assets Recovery Agency
  • Countless IT infrastructure projects such as in the NHS
  • London Underground PPP
  • ID cards.

The fun bit is re-reading these disaster and horror stories. The useful bit is building a rudimentary framework around these ideas of agency and structure. The illustrations of human error are:

  • Cultural disconnect – ministers and advisors making assumptions that we are the same as them. Nicholas Ridley apparently advised people struggling with the poll tax to sell a painting.
  • Groupthink – the pressure to conform requires an institutional counter-balance, a devil’s advocate to stop uncritical and unthinking consensus. In a recent episode of The Newsroom , the network employed its ‘red team’ to critique every aspect of a risky news story (though note that in this fictional case it did not stop a bad story getting out).
  • Prejudice and (not enough pragmatism). In this case, this is about intellectual prejudice and making unwarranted shortcuts in analysis – something we are all guilty of at times. Like groupthink we need dispassionate pragmatic filters to stop this running over cooler analysis of policymaking.
  • Operational disconnect – the authors restate the military maxim that those who plan should be put in charge of execution too. They feel however that too many ministers are not interested in operations.
  • Panics, symbols and spin – the unending news cycle and the prioritisation of spin leads to panic and kneejerk policymaking on the hoof, often led by populist but un-analytical media.

The systemic failures are associated with:

  • The centre can’t hold – the authors contend that compared with other successful and otherwise relatively effective nations, the UK prime minister’s office is tiny and cannot possibly cover the range of government – so it cannot really control or direct its ministries
  • Musical chairs – simply too much ministerial movement compared with other countries where ministerial tenure is long enough to get genuine expertise and commitment into the job.
  • Ministers as activists – and as a consequence of the above, ministers want to make an impact, be very active and memorable so that they can advance their career. It certainly does not make for careful, considered government.
  • Lack of accountability – it is often argued that compounding these problems are systemic accountability failures in terms of individual ministers, and relates to the mystical separation of strategy and operations (recall Michael Howard on Newsnight).
  • A peripheral Parliament– the authors fret about the lack of Parliamentary control and influence, the weakness of what used to be called standing committees on legislation and, slightly surprisingly, laud the Scottish system that both combines select and standing scrutiny functions (and can also initiate legislation).
  • Asymmetries of expertise – this is the well-known principal-agent problem with ministers and advisors over-relying on consultants – the authors argue that blunders in government have on occasion followed from excessive reliance on experts from outside.
  • A deficit of deliberation. – the absence of evidence and the failure to draw sufficiently from, carry out and indeed learn from pilots.

Not only is this book entertaining, if mildly contentious in places, it presents a catalogue of hideous mistakes. It also sets out a series of concepts and consequent lessons, which can help us learn from these blunders and employ a series of safety devices and checklist rules that might in future prevent governments, organisations and the like doing really stupid things. If nothing else it presents us with a series of thought experiments that should be a part of policymaking in the real world.

Does this all speak to current policy worries? King and Crewe identify well-rehearsed Coalition policy disasters such as English student fees but specifically identify ongoing policy development around the welfare reforms and help to buy. Are they, as it were, immanent blunders? Discuss.

Housing and the Scottish Draft budget

I gave evidence with colleagues from SFHA, CIH (Scotland) and ALACHO this morning at the Infrastructure and Capital Investment Committee of the Scottish Parliament. Like the other committees they are scrutinizing the current draft 2014-15 Budget and all of them have been asked to link this to the way in which policies and the budget fit with the overall Scotland Performs outcome indicators of the National Performance Framework.

The written evidence is already up on the Committee  website and the actual report of the oral evidence should be there in a few days (see below).

http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/65145.aspx

I append to this post my own written evidence, such as it is.

Written Evidence to the Infrastructure and Capital Investment Committee, Scottish Parliament, October 9 2013 meeting to discuss the 2014-15 Draft Budget

Introduction

I am grateful to have the opportunity to comment on the housing aspects of the Draft Budget for 2014-15 and also how it relates to the relevant indicators of the National Performance Framework (NPF). My submission briefly reports on progress since the investigation by the Committee into the 13-14 Draft Budget, it notes several specifically private sector housing policy challenges going forward and identifies further broader challenges that may impact on NPF outcomes.

Affordable Progress

Since the completion of the 2013-14 Draft Budget scrutiny, there have been several important positive developments concerning resources for affordable housing policy. The housing budget has grown strongly (the largest real terms annual increase across all headings, according to SPICe, 2013) for two main reasons, by first securing and consolidating the decisions of the Financial Capacity, Affordability and Development Subsidy Short Life Working Group and also second through the additional contribution made by the distinctive Scottish version of Help To Buy.

Shoring up affordable housing supply has been achieved by higher grant rates (£16,000 extra per unit), additional funds to maintain the overall programme (£44m) and certainty about the fully funded programme in 2015-16 – all will greatly help achieve social and affordable supply targets. Moreover, In particular the levels of grant and phased payments will help hopefully return associations to development in sufficient numbers.

But risks remain regarding the 30,000 supply target, notably the supply of, and the terms and conditions of private finance (a continuing concern also raised by the Working Group) and the business development problems facing social landlords as a result of welfare reform costs in the form of higher arrears.

It is also worth pointing out that while maintaining the level of 6,000 units is an important and laudable achievement, this is still only around the average level for social/affordable completions over the last dozen or so years. This is below the annual 8-10,000 level of national housing need that has been a benchmark since 2005.

Funding, via Barnett Consequentials, has also supported new shared equity private housing (£120m over two years) announced earlier in the year and (just last week) a further £220m over 3 years for Help to Buy 2.  The Scottish version is distinctive in that both market interventions are only for new build homes (the latter priced up to £400,000 per unit – lower than the £600,000 ceiling in England). The focus on new build is constructive and helps to mitigate concerns about a demand bubble that have been strongly and widely voiced regarding HTB2. But note also that the money is a repayable loan from a restricted loan and equity investment funding route – it has to be repaid and cannot be recycled.

Clearly not all of the HTB2 properties can be considered affordable supply (and it applies to existing owners too).

Private Sector Challenges

The private housing market is relevant to the work of the Committee because of the fundamentally systemic nature of the housing sector and the interdependencies across tenures (e.g. S75 planning agreements for affordable housing or the role private renting plays in tackling homelessness). Key areas of concern include private house building, mortgage lending, house prices and the private rented sector.

Private house building is at historically low levels in both Scotland and England. After the shock following the financial crisis annual completions have generally continued to fall ever since. This is bad for the industry and its capacity, the wider economy and in the longer term for the development of mixed communities. The Scottish version of HTB clearly helps the industry but we should recognize how far it has contracted. Stable market conditions, complementary policies and their local application and in particular avoiding further speculative instability will be in everyone’s interest if it can resuscitate the new build market sustainably.

Aspects of the private market are effectively reserved and we should note the current interest by the Bank of England in monitoring and if necessary responding to evidence of speculation through intervention in the lending industry and even monetary policy. There must be a concern that this will focus too much on the metropolitan housing market and take insufficient account of more peripheral housing markets at different stages of market recovery i.e. Scotland and the North.

Scotland will shortly have its own new housing market lever in the form of the Scottish buildings and transactions tax that will replace SDLT in 2015-16. We do not know yet what its rates will be but that it will be progressive and tax at the margin rather than as a ‘slab’ tax. I would hope that future Governments will resist the temptation to tinker with it but rather leave it to do its mildly counter-cyclical behavioural work on prospective buyers as prices increase.  Setting the rate should take account of this small but potentially useful feature.

Finally, the Government has recently published its private renting strategy which seeks to develop a sector where high standards are enforced and where the sector is open and attractive to large scale investors and ultimately can help support the economy and the flexibility required of a modern housing system. The market rental sector has grown considerably in part due to the dysfunction of the home ownership market in recent years and part of the sector is now an important part of the solution to tackle homelessness and it has been subject to major HB cuts and reforms. Future housing policy development must take full account of the rental market – it is where most short run housing solutions (and problems) occur and it is now a significant quantitative part of the system.

Broader Questions

I would make four broader points, several of which featured in last years ICI 2013-14 Draft Budget report.

  • While evidence of innovation is welcome, the adequate and affordable supply of private finance for social housing remains a concern.
  • Last constructed in the middle of the last decade, Scotland requires an up to date national  benchmark estimate of housing need.
  • The profile of the bedroom tax controversy and impacts on the ground are of course imporant in different ways but we should recognise both the wider range of HB cuts across low income households as a whole and the changes still to come with Universal Credit.
  • There still seems to be little interest in evaluating the efficiency, effectiveness and outcomes of the various new programmes we have in sufficient depth (except afterwards as an ex post exercise).

Conclusions

This has been in many respects a positive year for housing funding and should provide a welcome degree of stability into the system at least until 2015-16 and hopefully beyond. How does this outcome and the wider housing system perspective speak to the three key housing NPF indicators?

  • build more new homes
  • provide solutions to those in housing need
  • support GDP growth to UK level

New build as a whole will be supported by the interventions identified above in the context of a slowly recovering market. Sustainable market recovery, more affordable housing, the continuing evolution of the housing options preventative model and the longer term fruits of a positive private rental strategy can help meet need and allow a more balanced flexible housing system to support the economy’s potential – but that is a long term vision of what might happen if we have a period of stability and consistency. This budget at least appears to be moving in that direction.

Reference

SPICe (2013) Financial Scrutiny Unit Briefing: 2014-15 Draft Budget SPICe: Edinburgh.