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Plan B: Start a national investment bank

Dear Chancellor,

In 2008, you said that a Keynesian stimulus would be a "cruise missile aimed at the heart of recovery". Three years on, may I suggest that austerity is a "cruise missile aimed at the heart of recovery"? If everyone is being austere at the same time - householders paying off their credit-card debt as the Prime Minister wants, businesses deleveraging, the government cutting its spending - the economy is bound to shrink. It is one thing to be austere when the need is to reduce overheating. It's quite a different thing when the economy is freezing and the need is to restart growth. The question is: where is growth going to come from?

I accept that, for reasons of politics and confidence, you cannot now abandon your commitment to your deficit-reduction programme. What we need, though, is to revive the conceptual distinction between current and capital spending. You should aim to achieve a balance of revenues and expenditure on current account, but augment capital expenditure. Banks cannot be forced to lend, or households and business forced to borrow. Therefore, the government has to provide the stimulus for new capital investment on a scale sufficient to overcome the cumulative forces of austerity. But, for the sake of the public accounts, and also to give confidence, it would be far better that the programme of public investment be entrusted to a separate, independent institution.

You already have an instrument to hand: the Green Bank. But it is to be given only £3bn and prevented from borrowing. A bank that can't borrow is no bank at all. We need a proper national investment bank, with more capital and the ability to raise private money.

My proposal is very simple. You should use part of the proceeds of the sale of government shares in bailed-out banks to increase the capitalisation of the national investment bank. A limited fiscal commitment - say, £10bn in subscribed capital, with contributions drawn down over the next four years - would allow the new bank to finance enough spending to more than offset the £87bn of reductions in public investment planned before 2015. In this way, it could bolster confidence and increase demand without adding to the deficit. To those who say there are no "shovel-ready" schemes, I would reply that the commitment to a large programme of capital investment, of itself, would give confidence ahead of the start of the investment.

The difference between the total and the government contribution would be funded from the bond markets. This is the magic of leverage, of course: the magic that got such a black name as a cause of the crisis. But a national investment bank is an opportunity to turn that magic to a constructive end.

In fact, an investment bank would kill three birds with one stone. First, through its funding programme, it would create a new class of bonds - long-term, but with a yield pick-up over gilts, reflecting the modest credit risk of the bank - which could include features that fit the needs of the UK pensions industry, the need for renewing infrastructure and the demands for energy efficiency. Second, by lending for the long term, it would help long-term growth. And finally, by ramping up its operations now - when the corporate recovery is being hamstrung by shrinking bank lending and fiscal austerity - it can offer a boost to aggregate demand when it is needed most.

Robert Skidelsky is emeritus professor of political economy at the University of Warwick. He is a crossbench peer and a biographer of John Maynard Keynes

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This article first appeared in the 17 October 2011 issue of the New Statesman, This is plan B

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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.