Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Month: March, 2014

Ten Years After

Earlier today I was sent a thought-provoking paper from the Home Builders Federation. Entitled ‘Barker Review: A Decade On’, it is a sobering account of the housing supply-side and a Review dubbed the most significant review since the 1977 Housing Policy green paper. I would definitely recommend reading this new paper. Here, I am just going to concentrate on the introduction (pages 2 to 3), which effectively makes the killer points. There is also a handy summary of the Barker recommendations and how they have fared since the review.

The first point is that the decade since 2004 has been a lost decade, a ‘social and economic disaster’ and that the ‘ housing crisis facing the country in 2014 is far greater than that discussed by Barker in 2004’. While it is of course important to recognise that the housing supply delivery system was decimated by the aftermath of the 2007-08 financial and economic crisis or post 2010 policy change by the Coalition Government, the HBF argues that it is ‘difficult to see’ how the step-change in production proposed in 2004 would have happened.

Second, the delivery of housing supply against the targets set by Barker ‘paints a bleak picture’, as a result of the combination of the post 2007 environment but also the limited ambition of the targets and mechanisms proposed. The most optimistic Barker targets proposed annual private starts of 260,000 units per year. Given what was actually built since 2004, the cumulative deficit is now of the order of 1.45 million units. The evidence also suggests that household formation has been 40,000 per annum higher than Barker forecast. Even taking into account the effects of rising non-affordability of the owner-occupied market pricing people out of home ownership, slowing down the decline in affordability would require 200,000 private starts per year and actually improving the housing market (Barker’s more ambitious goal) would require a vertiginous 320,000 units started per annum (and sustained at that level for years to come). This gives a real measure of the depth of the affordability problem.

More than three-quarters of the 36 Barker recommendations were implemented by Government or by the building industry. These ranged across the planning system, regional affordability, planning gain, social housing, private renting and evidence and monitoring. What happened to many of them is instructive, for instance:

1. Government should establish a market affordability goal. This was a public service agreement target (increase long term housing supply and affordability). It was abolished along with the others PSAs by the Coalition Government.
2. Further research to increase the evidence base, led to the setting-up (recommendation 3 and 7) of the National Housing and Planning Advice Unit. This was abolished with the incoming Coalition Government.
3. Recommendations 5 and 6 (regional affordability monitoring and regional) planning bodies delivering the regional affordability target – regional housing boards and regional planning bodies merged in 2008 and abolished in 2011.
4. Recommendation 23 – greater use of UDCs and developing new towns – a process that has carried on in fits and starts but is still relevant right up to the recent Budget announcements.

The HBF report goes through all of the recommendations and what happened to them – not all negative by any means, but more a case of entropy and disorder winning out over the original coherence of the Barker proposals.

This is not to say that the Coalition has not retained or come round to many of the proposals, they have. It is also reasonable to note that times change and new priorities emerge. I could even say that elements of the localism agenda are reasonable and sensible. However, the bleak conclusion from the HBF informed by an assessment of subsequent policy interventions remains a pessimistic one.

As the HBF report implies, Barker probably did not go far enough; it certainly could have focused more on the industrial organisation of the building industry which, to me, remains an important unexplained element of supply inelasticity (i.e. it is not just the planning system). A colleague of mine, a genuine expert on planning and housing supply, once said to me that the problem with the Barker review was that it would provide a rightward shift in the supply curve (and this might be one-off) rather than a permanent increase in the supply elasticity ( i.e. a flattening of the curve). Unfortunately, recent years have provided a leftward shift in the supply curve and certainly not much evidence of greater elasticity.

One of the recurring mantras of this website in recent months has been the need to recognise the long term nature of policy responses to deep seated housing policy problems. This is as true of rent-setting in the social sector as it is of progressive housing benefit reform or tackling local taxation. There needs to be genuine political consensus if long term worthwhile policies are going to have any chance of being fully implemented. This is all the more so the case with attempts to tackle the housing supply problem. The evidence in the HBF paper (and not only there) does not provide grounds for much optimism.

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Housing Benefit: The Devil in the Devolution Detail

IPPR has suggested that in the event of a ‘no’ vote, further devolution should include transfer of Housing Benefit (HB) to the Scottish Government. This work by Guy Lodge and Alan Trench was trailed in the Scotsman last weekend and published by IPPR on Tuesday (Devo More and Welfare: Devolving Benefits and Policy for a Stronger Union) and is a proposal receiving support and consideration in many quarters. The point is made that housing policy is devolved but in one respect it is not – the welfare payments that are so important to rental income. Cannot housing be dealt with more comprehensively if wholly devolved? At the same time, the widely recognised dislike in Scotland of the Coalition Government’s welfare reforms, especially the bedroom tax, has galvanised opinion and interest in welfare policy reform both from those who favour independence and those who do not.

The essence of their proposal can be summarised thus:

  1. There is no strong argument for devolving those benefits which are a core of the UK’s social union.
  2. But devolution of some aspects of welfare benefits could improve social and economic outcomes by among other things providing more joined-up policy.
  3. Housing benefit should be devolved because it is so closely linked to social housing policy and the housing element of Universal Credit should be separated where such HB devolution has occurred.
  4. The Work Programme and the child care element of Working Tax Credit could also be devolved, as could Attendance Allowance.
  5. Devolved governments might also be given a general power to supplement UK welfare benefits funded from devolved budgets.

Clearly one needs to accept the authors’ fundamental position on the referendum i.e. the position of devolution-plus and the social union. I think that their argument for devolving the work programme and attendance allowance – integration of funding and service delivery and joined-up programmes, most of which are already devolved – make a lot of sense. But I remain unconvinced about what they propose for Housing Benefit although it is more developed than was the SNP’s pledge to devolve HB in 2011.

The authors persuasively argue that devolution of welfare has to meet a series of internally consistent criteria. They accept that HB is to an extent counter-cylical but put this is wholly down to rents going up in the Private Rented Sector. They contend that social housing policy and property tax policy is devolved (or will be shortly) which helps their ‘integration’ case. They also build on the wider IPPR housing policy proposal that devolved governments (or local authorities) that makes a case for combining supply subsidies and HB in a single grant which can then be used with discretion to meet housing need – and thereby reverse the decline in supply subsidy relative to demand subsidy. They also propose that the devolved government should have the power to supplement HB funded from devolved funds.

I would make a number of responses to the report. First, if the cyclical element of HB is primarily down to the rental market why not just devolve HB for social housing – would that not fit better with the integration of social housing policy? Second, I agree that devolution can breed policy innovation that can have wider UK-level benefits so reform should support that capacity. Third, providing supplementary powers to add to welfare benefits (and potentially reduce too?) is interesting but is paid for directly out of the devolved budget. By the same token, the Scottish Government will need to effectively negotiate the change to the Block grant or increase in assigned tax revenues or tax powers that would fund long term changes associated with greater welfare benefit powers. This is a one off decision with long term consequences and not in any sense a straightforward calculation.

I have three more critical points to make. First, on balance I disagree that housing is quite as devolved as is suggested. In particular, mortgage lending and lending to social housing is not devolved; neither is the wider tax treatment of home ownership or that of private renting. I do not think we can talk about integrated policy if we are only looking at one sector of an inherently interdependent system. Second, I fundamentally disagree with the idea of combining benefits and supply subsidy and providing it locally. I think this will lead to a proliferation of local means tests (like it has in England with council tax reduction and in higher education) and there are massive transitional issues for benefit recipients. I would have thought the experience post 2010 of attempting to implement redistributional welfare reform should be a cautionary tale.

Third, we need a different big picture or vision about benefits – and I think that requires a  radically recast HB and would be done so in order to overcome its remaining major structural problems that were there before IDS and are still there now. My own end point for welfare benefits would be a more generous general cash benefit and a much more constrained housing allowance. But that is about a radical change in direction. Ironically, UC could be the precursor to the cash element. I do not, however, for a moment think that my proposal could or should be rapidly introduced. It needs to be phased in, transitional effects damped, and would emerge after a consensual political process designed to develop a comprehensive approach to the relationship between general cash benefits and specific housing support. We presently rely on housing benefit to do two things that seem increasingly problematic: allowing for a miserly cash benefit by meeting all eligible housing costs for the poorest and, increasingly, playing a role compensating for low wages for the poor in work. Neither of these outcomes makes for a better housing system or ‘make work pay’. A substantially larger cash allowance and a more targeted tenure neutral housing allowance aimed at affordability considerations would be a better goal.

Finally, I should declare an interest. After the 2011 Scottish election, Mark Stephens and I wrote a short paper on devolving HB for CIH/SFHA as a result of the SNP’s election manifesto pledge. We argued that it is not sufficient to simply move the responsibility of a welfare benefit, the point is to actually develop a more efficient and progressive form of income-related housing subsidy. We argued that simply working with the same level of HB funds in a context of austerity greatly reduces the scope to do something worthwhile with these new powers; otherwise, there will be an invidious combination of winners and losers. Clearly, IPPR have considered this via their proposed supplement but it is not for me really enough. Instead, Mark and I argued that rather than seek to use such an opportunity to ameliorate the bedroom tax or otherwise tinker with benefit levels at the margins of budgetary discretion, we should consider what is required to make a systematic step change.

The IPPR report is a thoughtful and considered contribution from the devo-plus perspective. I think it moves us forward even if I have specific issues with key aspects of what they propose. While I might not agree with the specific housing subsidy proposal I do think we should be thinking more boldly and debating wider reform as a result of both the DWP reform programme and the opportunities created by the constitutional debate. Yesterday, Vince Cable gave a lecture on the economics of the independence vote at the University. I asked him what he made of the IPPR proposal and he indicated in principle support for devolving tax and benefits subject to  proper assessments of their individual impacts and a sense of thinking though their unintended consequences.

More Discussion of Reforming Property Taxation

Fresh from a recent post on land value taxation I am writing on this subject again, this time in response to my colleagues at Heriot Watt who have just published a report for the Joseph Rowntree Foundation (After the Council Tax: Impacts of Property Tax Reform on Places, People and House Prices by Glen Bramley, Chris Leishman, Mark Stephens, David Watkins and Gillian Young). Their report critiques the current council tax, runs  comparative analysis of a revalued council tax and contrasts it further with a flat rate percentage tax on property values (similar to current arrangements in Northern Ireland). They also discuss a policy trajectory to move from the council tax to a better local property tax and ultimately to a national tax on property, one that looks a bit like Schedule A imputed income tax and also the excess returns tax proposed in the Mirlees Review.

What is the critique of the council tax? This is well known ground but in essence the tax is a higher proportionate burden on cheaper properties than on more expensive ones. Second, it has not been revalued since 1991 and is hopelessly out of date both regionally and within local housing markets. Third, we now have something like a third of all tax units (households) benefiting from the single adult discount. Fourth, there is the insidious effects of long term council tax freeze and now also the localising of council tax reduction.

What are the authors’ empirical findings? First, a shift to a flat rate property tax (or indeed a progressive one) would shift the tax burden toward high value London and the South East. The authors deem this redistribution so large that it would require to be phased-in or damped. Second, the flat rate percentage property tax would be progressive with respect to the burden on different income groups with considerable benefit aimed at lower income groups. Middle income groups would also see a reduction in their liability in general. The authors argue that for those who do lose out in the low to middle income brackets it would be possible to compensate them with savings made from reduced rebate bills. Fourth, the authors argue that a property tax is generally not deemed to be fair and that some form of income tax would be required, preferably embedded in a hybrid property and income tax structure. Finally, they report econometric results that suggest reforming property tax could make a modest but statistically significant contribution to moderating house price volatility.

How would they implement tax reform and overcome obstacles? These are in many respects the key questions. First, the authors suggest a cap on London property taxes as part of the transition and consider ways to help low-income losers from the tax change in that part of the country. They also consider the Housing Market Task Force to transition the local property tax to a national tax based ultimately on the old Schedule A imputed rental income tax.

What do I think? The purist response would be to go for a land value tax and to rehearse the argument of my recent post and that might lead one to support the comprehensive Mirlees review position on the tax on excess returns (a variant of Schedule A). But if we were to start from the present position and work towards something coherent and possibly enduring what needs to be done? First I would revert to a national system of council tax benefit – I don’t accept either the localism argument for it or the idea that it allows a lower Universal Credit taper (it patently does not if we consider the total taper facing low income working age households). Second, I would legislate for 3-4 yearly automatic revaluation of property. It is one thing to bring the council tax data base up to date – it needs to be done regularly and consistently, forever more that there is such a tax.

That is the easy bit(!). I think we then need to consider what kind of local taxation we want and what kind of general taxation on housing/property. Locally, I was always taken by the idea of having multiple local taxes (i.e. two) – a property tax (like the Northern Ireland one) associated with paying for amenity or facility services that are fundamentally local and a local income tax related to national redistribute services that are delivered locally like education (as was suggested in a report Alternatives to the Community Charge written for the JRF more than 20 years ago by a number of experts including Tony Travers). Nationally, we are back into the territory of tenure and tax neutrality and the Mirlees Review – but the point is to develop taxes that do not favour owner occupied housing per se and do not do inefficient things like tax at the point of transaction. These are bigger questions than for this post.

The big difficulty in all this is persuading those that need to be convinced that we should on efficiency and fairness grounds unpick the council tax. We need to develop a political consensus around reform and one that has a place for a sensible property taxation and try to make revaluation normal and boring instead of completely beyond the pale. Any reform programme would need to be one with a lengthy transition and protection period for losers and would thus need bipartisan support. While I do not minimise the difficulty of achieving this – it can be done as phasing out mortgage interest tax relief showed. But first we must convince the men and women from the Ministry that the council tax is so bad and that the problems it is creating for local government and the housing market – do indeed require us to invest treasure and time to try and fix it on a long term basis.

Unfortunately, this is one of those rare policy questions where the infamous previous experience of a botched and cataclysmic attempt to reform local government finance brought down a prime minister and is simply an area where it is incredibly difficult to build any sort of institutional commitment to reform. The report by Glen Bramley and colleagues is both thought-provoking and a welcome effort to move this debate forward thereby staking a claim for a more humane and workable form of housing taxation and local government finance.

Land Value Taxation

I was speaking at the Scottish rural housing conference in Birnam, north of Perth, on Friday. While I would never claim to have any expertise in rural matters, I am interested in taxation and housing. So, when invited to talk about land value taxation, something that hitherto I only have had cursory exposure to, I was happy to give it a go. We had a very lively session from which I thought I would make a few reflections.

In a 2005 IPPR paper (1), Ian McLean charted the history of the land value tax idea. Going back to Tom Payne’s use of John Locke’s property rights arguments to justify taxing land, through Ricardo’s attack on unproductive economic rent from monopoly land owners and on to Henry George and the ‘crank’ idea to have a single tax through taxing land. McLean, like Andy Wightman elsewhere (2), also stressed that Lloyd George, supported by Churchill, twice proposed an LVT for the UK prior to the First World War. The debate after the Second World War was shaped by the Atlee Government’s planning legislation which was supposed to combine the granting of planning permission with some form of land development or betterment tax – and four successive attempts subsequently to introduce and make work such taxation abjectly failed.

More recently, the debate around the LVT has turned on three wider questions – using taxation to moderate the housing market’s volatility (e.g. John Muellbauer and the Joseph Rowntree Foundation), whether it should be a replacement for council tax and business rates within a reformed local government finance settlement (McLean and Wightman), or if taxation of economic rents in general should be at the centre of systemic tax reform (Mirlees Review)?

The core idea is taxing unproductive economic rent derived from land ownership. Taxing the economic rent in land values but leaving the structures untaxed should allow ‘society’ to capture a proportion of the gains landowners receive in uplift in values as a result of planning permission and the benefits of public infrastructure support. Agricultural land would be untaxed.  Thus, landowners with planning permission have an incentive to build and there is no tax disincentive to make the land productive. Of course, in reality, the taxes will take many different forms but research by the Lincoln Land Institute suggests that there are modest positive effects of increased production on land as a consequence of such taxes (3).

The Mirlees review identifies, rightly, that housing is inefficiently and unfairly taxed. They want to reduce the use of transactions taxes in general including stamp duty and would not return to betterment taxes captured at sale. In addition they argue for a tax on the returns made to housing assets in excess of risk free returns. This would replace council tax, which is of course in many respects a dysfunctional tax. In principle they could extend the economic rent argument to a land value tax but they worry about the practicalities of establishing and running it.

Should LVT be a local or a national tax? The case for a local model is hampered by three issues. First, the breaking up of council tax benefit creates an uncertain future of help for low income households to pay local taxes. Second, there are the long term corroding effects of the council tax freeze on democracy and accountability.  Third, there is the wider Rubik’s Cube trilemma of working out comprehensive reform through the best mix of local-central services, the right geography for local government and how to pay for it.

Local property taxes of one kind or another may be encouraged, perhaps more so if they were combined with a local income tax associated with paying for national need and redistribution services locally delivered. However, the key point made by those who propose a national (UK or Scotland) tax is that it could be used to moderate price volatility and that very variation in prices locally makes for an unstable local tax base.

Cutting to the chase – is this a debate about taxing land for better fairness and housing/property market arguments or is it about more efficient and durable local government finance revenue raising? I think it would be simpler to keep the tax centralised and to recognise that local government reform has to operate consistently on the three levels mentioned above. However, just getting to first base on making a case that will be listened to about reforming council tax is pretty difficult at the current time. Reforming local government finances on a durable and defensible basis will require significant political consensus and support for change across the political system. That simply does not exist. But that is also not to say we should not continue to make the argument for change.

Taking that rather depressing reality to heart, what about the barriers and the politics of land value taxes? The tax would have to be valued and in particular the value of land would need to be separated from structures for each land use. Once such a tax base existed, it would need to be maintained and updated. This is certainly not beyond us – Lloyd George managed. But it will be initially expensive to establish, we can expect valuation with appeals and more widely there is the sense that property taxes are increasingly viewed as challengeable and illegitimate. Automatic valuation systems can help once the tax base is established along with transactions and planning permission data but it is this wider issue of acceptability that must be overcome.

A second concern for property taxes, ignoring rebate systems, concerns the asset-rich, cash-poor pensioner problem. Perhaps, as has been suggested by writers like McLean, that we need to support the development of deferred fees till property sales take place? It might also make sense to operate a proper phased transitional shift towards such a tax, damping the impacts on those most affected.

A final thought: it would be good to get a discussion going about how to make progress on rational tax reform for areas like this which have both high salience and visible articulate losers (the opposite of benefit reform).

Footnotes:

1. McLean, I (2005) The Politics of Land Tax – Then and Now. IPPR: London.

2. Wightman, A (2007) A Land Value Tax for Scotland. Scottish Green Party: Edinburgh.

3. Dye, R and England, R (2010 Assessing the Theory and Practice of Land Value Taxation. Lincoln Land Institute: Washington DC.