Ah, austerity. The policy that collapsed real wages, shut essential public services, and slowed the fight against avoidable mortality, as well as helping fuel the populist revolt that was Brexit – it’s coming back.
This is the central fact being lost in the supposed “relief” felt by some over the installation of Rishi Sunak and Jeremy Hunt in Downing Street. Under new management, the UK is, as the financial expert Dario Perkins memorably put it, no longer suffering a “moron risk premium” when it borrows money. Sunak and Hunt can, unlike Liz Truss and Kwasi Kwarteng, be trusted to make the national accounts add up. But their means, in tomorrow’s Autumn Statement, will be spending cuts, along with tax rises that hit “everyone”. This approach is being painted as inevitable. Yet neither aspect of the Sunak/Hunt plan is inevitable at all: austerity is, as it always has been, a political choice. And it will only be renewed because Sunak and Hunt are refusing to countenance the most evident flaw in the British tax system: its failure to tax the country’s vast stores of housing wealth.
Hunt is reportedly planning to announce £35bn of spending cuts. That is a reduction in the government’s annual budget of a little under 3 per cent. That may not sound like much, but cuts will be greater than that wherever the axe falls, as spending in some of the most expensive areas – the NHS, defence, the triple-locked state pension – will be protected.
These cuts are not necessary. The UK’s “fiscal gap” could be paid for solely, not in part, by tax rises if the government chose to tax the wealth held by Britain’s homeowning class.
Imagine someone – a young professional, 29, without family wealth – bought a house in London 25 years ago, in November 1997. Their home was typically priced for the time, which meant it cost £95,000. An 80 per cent mortgage allowed the buyer, let’s call him James, to put down a deposit of £19,000 in order to own it. That property is today worth £553,000. And if James, who is now 54, was to sell it, he would not pay any tax on the £458,000 in “capital gains” he has made on the £95,000 he paid.
What is just about that? If you actually earned £458,000 in income by working, rather than sitting in a home, you would pay £204,000 a year in tax, at today’s rates. But if you have done nothing more than had the good fortune to buy a house 25 years ago, you can walk away with nearly half a million tax-free.
A 29-year-old today – Jessica, say – attempting to buy in London without family wealth would have to pay James that £553,000 to buy his home, handing over £110,000 up front as a deposit if she too took out an 80 per cent mortgage: that is nearly six times as much as James paid (or 3.2 times as much after adjusting for inflation).
The extraordinary tax-free gain that James can make by selling his home is a major reason why it is so much more expensive for Jessica to buy James’s home in 2022 than it was for James to buy it in 1997. By waiving capital gains tax on people’s primary homes, the British state has made buying a home very attractive to anyone with money, driving up demand at a time when successive governments have constrained supply.
Introducing a tax on primary homes, as Adam Corlett and Jack Leslie of the Resolution Foundation have argued, could raise up to £11bn. Combined with other measures to redress “the passive accumulation and transfer of housing wealth”, as Corlett put it to me (such as a “lifetime receipts tax”), could raise yet more revenue. Such policies – along with the reintroduction of Sunak’s health and social care levy, scrapped by Truss at a cost of £15bn – could alleviate the need for Hunt’s imminent spending cuts.
Introducing a tax on James’s £458,000 in capital gains, or anyone’s primary home, would have its flaws. James would face a £128,000 tax bill if he sold his home and had to pay capital gains tax on it (though he would still be left with a third of a million more than he paid for his house in 1997). The threat of such looming tax bills could freeze parts of the housing market, the argument runs, deterring people from selling.
There is an alternative: the government could introduce a property, or land, tax. This idea – which is a major part of how American cities fund themselves – nearly happened in 2012, when George Osborne and Nick Clegg made a deal on a so-called mansion tax that would have charged homeowners 1 per cent a year on homes worth more than £1m. David Cameron (and Eric Pickles, the coalition’s housing secretary) vetoed the deal: appeasing middle England mattered more than the UK being all in it together.
Sunak, trailing by more than 20 points in the polls, will not have the courage to rewrite the UK’s inequitable approach to taxing housing wealth. And Keir Starmer may prove no better. If Labour gets into power and fails to change the system, that will partly be its fault, but it will also be the fault of the electorate. Seven in ten of those who own their home, who tend to be older, voted in the 2019 election, while only half of those who rent did so.
Politicians of all parties have created an unfair system for a rational reason: they reward those who show up, because those who show up can reward them. The British tax system is unjust, and it is likely to remain that way for as long as older homeowners vote while young renters do not.
[See also: What to expect from Jeremy Hunt’s Autumn Statement]