Maybe expectations are now so low that no news feels like good news, but yesterday’s budget could have been a disaster.
In the last couple of months it has been open season for Conservatives of various stripes to propose wasteful, occasionally crackpot schemes to buy more votes: increasing the subsidy to student loan holders; blowing billions on new council estates; banning things like land banking because people don’t understand how that market works; or forcing the NHS to forgo £200 million in revenue to give people free use of hospital car parks.
Thankfully, the chancellor ignored such ideas, for the most part. And he made many of the right noises — acknowledging that the housing crisis is primarily a problem with supply and that one of the solutions is to allow more housing density around existing infrastructure, especially in London and the South East. That is a policy that the Adam Smith Institute and others have been trying to get on to the agenda for years. If done seriously, that could get us hundreds of thousands of privately built new homes and substantially cut housing costs, especially in the most productive parts of the country.
Mr Hammond could and should have gone much further on stamp duty, the most damaging tax on the books. Raising the threshold is a mild step in the right direction, but doing it only for first time buyers will not produce the improvement in housing allocation that we really need. Older people will still face a huge disincentive to downsizing and the larger homes they are living in will remain out of the hands of younger families. It may decrease efficiency by introducing a new cliff edge and incentivising young people to put off their first purchase until they can maximise the allowance.
But be careful about overstating the problems with this. The OBR says that this will probably increase housing costs by as much as the tax bill is reduced by. But these are not at all equivalent costs — when you pay the tax man your stamp duty bill, the money is totally lost to you. When you pay an extra £5,000 on a house, you will likely get that back when you eventually sell the house. It’s still bad, because being forced by high prices to invest massive amounts of money in the value of your house is risky and difficult for most of us, but it is a very different thing to actually losing that money in tax.
It could have been a lot worse. But it did little to address the biggest problem the country has, namely low productivity growth and the resulting slow wage and economic growth we have endured for nearly a decade. Now, accounting for population growth, we’re looking at per capita GDP growth at less than 1 per cent every year for the next four years at least. This kind of economic malaise cannot be addressed with a “steady as she goes” approach, preferable as that is to the bizarre ideas of some of Mr Hammond’s colleagues on both sides of the House.
There is plenty that could be done. Liberalising planning, both to allow more density in existing urban areas but also to free up some green belt land, would both improve affordability and substantially improve productivity by allowing more people to more to the prosperous parts of the country. Changing corporation tax so that businesses can deduct the cost of their investments from their tax bill up front could produce massively more investment, generating growth in capital-intensive industries across the country. Genuine commitment to innovation would mean changing our labour laws so that “gig economy” firms can try out new employment models, without fear of being cracked down on because they’re getting too successful and making market incumbents nervous. True tax simplification could raise more from the least damaging taxes, like VAT by eliminating exemptions, with the revenues used to cut the really harmful taxes we’ve got.
All of this would require the government to acknowledge that there is a deep problem, and that its obsession with Brexit is distracting it from the reforms we can make at home (regardless of the deal we make with the EU). If the country nearly voting Jeremy Corbyn into Downing Street in June did not do this it is unlikely that some scary economic forecasts will. My suspicion is that Hammond has the right instincts on many of these issues and would go a lot further on planning reform and tax simplification if he was allowed to by his colleagues. So, unambitious as the budget was, it was nice to see that a grown up is in charge of the country’s finances.