Planning for long-term growth tells us what we should do in the short-term

Demand-friendly cuts and tax rises will boost UK PLC now.

Two things are striking about yesterday’s report of the LSE Growth Commission. The first is the very strong implication of its conclusions that the path to future prosperity is decidedly one involving, indeed demanding, government involvement in the economy rather than the state stepping back. The second is what its prescription for long-term economic growth says about how we should get the UK out of its current economic malaise.

The first isn’t a political statement. Indeed, the Commission points to evidence that the pick-up in Britain’s relative productivity growth began in the 1980s, and is largely attributable to the policies of Conservative (but also Labour) governments. Most of the growth-enhancing reforms are clear victories for economic liberals: increased labour market flexibility, better active labour market policies, and openness to foreign capital and labour.

But what the report also makes clear is that the benefits of simply removing such barriers to growth has run its course. The authors couldn’t be clearer that “demands for ever greater deregulation and reductions in government spending as a panacea for the UK’s growth problems are misguided.” Rather it is now the state that must act and invest wisely if the UK is to keep pace with productivity growth in other leading countries. Investment in education at every stage from pre-school to vocational training is advocated. The authors argue for new and better government institutions – and indeed public investment – to stimulate investment in transport and energy infrastructure. And a new role is claimed for the state role in subsidising R&D through a business bank, taking “a wider view of the social returns to innovative projects”.

All in all this amounts to a significant increase in state involvement in the economy. It’s also hard to see how this agenda is compatible with the current government’s plan to load future fiscal consolidation entirely onto departmental spending between now and 2018. As SMF research has recently shown, protecting education spending – let alone increasing it – alongside health at the next spending review will impose politically unacceptable cuts on other public services. There will certainly be no scope for increasing public investment in infrastructure, or scaling-up Vince Cable’s business bank.

In other words, the supply siders had some useful insights in the 1980s, on which the recent productivity spurt was largely based. But the prescriptions of advocates for a small state and blanket deregulation are now the road to economic lassitude.

So what about the short term? While the Commission focuses on long-term growth rather than remedies for the current stagnation, there is a strong link between the two. The reforms advocated will take many years, and perhaps decades, to bear fruit. All the more important to start immediately. But with the deficit reduction programme now running to 2018, and an aging population likely to put further pressure on the budget thereafter, action can’t wait until the (hopefully) sunlit uplands of the next decade.

Rather than seeing the short- and long-term as distinct challenges, we must find a way to tackle the current economic problems in a way that lays the foundations for future growth. A huge and immediate investment strategy for our creaking transport, energy and housing infrastructure is the way to square the circle. And the chancellor can do it without deviating from his current deficit reduction plan.

How can this be achieved? With £31bn of further fiscal consolidation in the pipeline by 2018, the chancellor should bring forward cuts to elements of public spending which do little to support the economy, recycling the saved money into infrastructure investment between now and 2018. Prime examples of such "demand friendly" cuts include cutting benefit payments and give-aways to the better-off, and axing financial incentives for rich people to save more.

A growth-boosting deficit reduction strategy relies on funding the investment plan in ways that won’t damage demand in the economy. For this reason, having picked the low-hanging fruit on demand-friendly cuts, some proportion of the necessary £31bn should come from growth-friendly tax rises. Income tax and corporation tax should be avoided. But much higher property taxes would raise money while having little impact on growth. The socially beneficial effects of a well-designed tax on housing allocation is another story. Raising that money immediately and investing it between now and 2018 would kick-start growth and help to leave UK PLC set fair for a productivity boom in the decades ahead. 

Photograph: Getty Images

Ian Mulheirn is the director of the Social Market Foundation.

Photo: Getty
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As long as the Tories fail to solve the housing crisis, they will struggle to win

The fall in the number of homeowners leaves the Conservatives unable to sell capitalism to those with no capital. 

For the Conservatives, rising home ownership was once a reliable route to government. Former Labour voters still speak of their gratitude to Margaret Thatcher for the Right to Buy scheme. But as home ownership has plummeted, the Tories have struggled to sell capitalism to a generation without capital. 

In Britain, ownership has fallen to 63.5 per cent, the lowest rate since 1987 and the fourth-worst in the EU. The number of private renters now exceeds 11 million (a larger number than in the social sector). The same policies that initially promoted ownership acted to reverse it. A third of Right to Buy properties fell into the hands of private landlords. High rents left tenants unable to save for a deposit.

Rather than expanding supply, the Tories have focused on subsidising demand (since 2010, housebuilding has fallen to its lowest level since 1923). At a cabinet meeting in 2013, shortly after the launch of the government’s Help to Buy scheme, George Osborne declared: “Hopefully we will get a little housing boom and everyone will be happy as property values go up”. The then-chancellor’s remark epitomised his focus on homeowners. Conservative policy was consciously designed to enrich the propertied.

A new report from the Resolution Foundation, Home Affront: housing across the generations, shows the consequences of such short-termism. Based on recent trends, less than half of millennials will buy a home before the age of 45 compared to over 70 per cent of baby boomers. Four out of every ten 30-year-olds now live in private rented accommodation (often of substandard quality) in contrast to one in ten 50 years ago. And while the average family spent just 6 per cent of their income on housing costs in the early 1960s, this has trebled to 18 per cent. 

When Theresa May launched her Conservative leadership campaign, she vowed to break with David Cameron’s approach. "Unless we deal with the housing deficit, we will see house prices keep on rising," she warned. "The divide between those who inherit wealth and those who don’t will become more pronounced. And more and more of the country’s money will go into expensive housing instead of more productive investments that generate more economic growth."

The government has since banned letting agent fees and announced an additional £1.4bn for affordable housing – a sector entirely neglected by Cameron and Osborne (see graph below). Social housing, they believed, merely created more Labour voters. "They genuinely saw housing as a petri dish for voters," Nick Clegg later recalled. "It was unbelievable." 

But though housebuilding has risen to its highest levels since 2008, with 164,960 new homes started in the year to June 2017 and 153,000 completed, this remains far short of the 250,000 required merely to meet existing demand (let alone make up the deficit). In 2016/17, the government funded just 944 homes for social rent (down from 36,000 in 2010). 

In a little-noticed speech yesterday, Sajid Javid promised a "top-to-bottom" review of social housing following the Grenfell fire. But unless this includes a substantial increase in public funding, the housing crisis will endure. 

For the Conservatives, this would pose a great enough challenge in normal times. But the political energy absorbed by Brexit, and the £15bn a year it is forecast to cost the UK, makes it still greater.

At the 2017 general election, homeowners voted for the Tories over Labour by 55 per cent to 30 per cent (mortgage holders by 43-40). By contrast, private renters backed Labour by 54 per cent to 31 per cent. As long as the latter multiply in number, while the former fall, the Tories will struggle to build a majority-winning coalition. 

George Eaton is political editor of the New Statesman.