New Homes Bonus

The government has provided more details on the new homes bonus that local councils will get when they allow houses to be built.

I am certain that this is a step in the right direction in trying to counter the considerable disincentives LAs face in agreeing to new homes. It's hard, however, to be optimistic that it will lead to that much more house building. This will depend on whether the incentives are sufficient to offset the reduction in direct government expenditure and the moves to give local communities more say in decisions. On the latter the BBC reports: "Ministers say the number of new homes being built is at its lowest peacetime level for 85 years and it intends to overhaul the planning system to make it easier to get schemes off the ground and to give councils and communities the final say over where developments are sited." I continue to think that these two objectives largely contradictory.

Local growth

The government launched its White Paper on sub-national growth last week. This spells out the government's approach to local growth policy, lists the first local enterprise partnerships (LEP) to get the go ahead and spells out some of the details of the £1.4bn regional growth fund.

There are, unsurprisingly, complaints from LAs whose LEPs proposals have not yet been accepted. These complaints have been reinforced, by some impressive mis-reporting on the consequences of this (LAs outside LEPs can still be part of consortium bidding to the regional growth fund, despite initial press coverage to the contrary). Others complain about the overall amount of money available. Coverage has been largely overshadowed by the continuing row over housing benefit. This is a pity, because the White Paper spells out an interesting shift in the approach to local growth.

The previous government aimed to get poorer places catching up with richer. That is, it argued for making places more similar. This was always going to be very difficult. First, because the market amplifies small differences across places. Second, because different people choose to live in different places (e.g. higher skilled in the South East) and who you are is much more important than where you live in determining well being. Government might be able to overcome these two countervailing forces, but it would require spending so much money that no government could credibly commit to delivering on the objective. Given that the coalition government intends to spend a lot less money it has simply ditched the objective and accepted that places will be different. At the same time it has also recognised that who you are is as much, if not more important than where you live. This realism is encouraging, because it forces policy to consider the best course of action given local circumstances. This requires decisions made by local communities - hence the shift to LEPs from RDAs. For most policy areas this is a shift in the right direction (I still think there are concerns around transport and land use).

The White Paper then turns its focus to regulations (e.g. land use) and removing barriers to work (e.g. disincentives created by the benefits system). I might have quibbles with the details (e.g. I still don't see that the New Homes Bonus will be large enough), but these considerations are fundamentally important and were not well addressed by existing policy. They will also need to take centre stage in a world where the government has decided to spend much less money.

That brings us to the final part of the White Paper and the proposals for the Regional Growth Fund. In short, £1.4bn of money will be allocated to projects on the basis of competitive bids to central government. I can see there are arguments in favour of this mechanism: local areas have incentives to put forward their best projects, government chooses the best of the best; but it does fit uncomfortably with the decentralisation agenda. Personally, at a minimum, I would have liked to see some funds going to LAs to fund LEPs for them to do what they want in the broad area of local development.

Overall then, I think this represents a step in the right direction. Of course, whether the structural changes are enough to offset the large reduction in expenditure remains to be seen. I am, perhaps, less pessimistic than some because I think a lot of the previous "investment" was wasted. Others, I am sure, would strongly disagree with that assessment.

Housing Benefit Reform

The housing benefit reforms are certainly generating a great deal of debate. So far, I would argue, precious little light.

Here are some of my observations and my "known unknowns".

Placing a cap on housing benefit either reduces the overall cost of housing provision or increases the amount of housing that is provided with a fixed budget (because the state stops paying high prices for some of the housing it is purchasing).

Some people will have to move from high price accommodation in high price areas. This will be a cause of considerable distress for the individuals involved. We have estimates of how many people will be affected but very little idea of what will happen in terms of where these households relocate. I suspect that stories about them all having to move to Hastings greatly exaggerated.

There must be some effects on house prices because of the redistribution of public sector demand. These effects will differ by area (down in the highest cost places, up in the cheaper places). The effects of this will be complicated and not all negative. For example, we might see middle income families who currently face long commutes able to move closer to their work. A (big) part of the problem is the overall supply of housing. Will government reforms to address this problem, such as the new homes bonus, be enough to offset the move towards more local say on planning decisions?

The changes to the rules will put upward pressure on wages for the lowest paid workers in high cost areas. In the private sector firms will have to respond. In the public sector national pay structures already prevent wages from correctly reflecting costs of living. That is why some of the worst affordability problems (or at least the ones which get a lot of attention) involve nurses, social workers and teachers on low levels of public sector pay. Will the government do something to address this issue?

In terms of the move to 80% rents for new social housing, to what extent will this simply be a transfer from capital expenditure to revenue expenditure? Will the implicit subsidy via rents be enough to offset the fall in per housing capital subsidy? What will all this do to work incentives for individual households? It must change them, but how?

I do not currently know the answers to any of these questions and what I have read of the debate suggests no one else knows them either.

The Spending Review: Jobs

We are told that (more than?) half a million jobs in the public sector will go as a result of the spending review. As well as trying to figure out which families are hardest hit, the media are full of stories trying to identify which places are likely to prove least resilient.

Abstract from issues about the timing and speed of cuts, it is as interesting to think about the long run impact on the economic geography of the UK. A growing public sector has clearly propped up total employment in some areas that are very bad at generating private sector employment. The direct effects of public sector job cuts simply must be bad for those areas. But the tricky thing to predict is how the economy will adjust to this initial effect. For the private sector in these areas there are two offsetting indirect effects. The first is that public sector jobs create demand for local goods and services - so cutting them will be bad for the private sector. High public sector salaries also create distortions in local labour markets - particularly in competing for the best workers - so this cutting jobs will be good for the private sector. The coalition is banking on the second effect being larger than the first. Labour used to think that the latter effect dominated in the South East, but that the former dominated in the rest of the UK. In reality we simply don't know the magnitude of these two offsetting effects.

The situation is further complicated by the fact that the demand response is likely to generate a supply response as people move away from places where demand falls disproportionately as a result of public sector job cuts.

In the end, the balance of these effects are likely to lead to a redistribution of population towards areas that are relatively good at generating private sector jobs. This may be bad for the balance across places, but there are things policy can do (e.g. around the supply of housing) that mean many individuals may be better off as a result of these moves (at least compared to staying put).

I should finish by noting that, in terms of long term welfare, these "job effects", are surely second order compared to the debates about what kind of public goods we want the state to provide. But I doubt that observation will prevent further speculation on the spatial impact of the spending review.

House prices

Interesting to see Grant Shapps talking about house prices yesterday. He suggests we need a period of stability.

Personally, I would go further than this: given house price to income multipliers, stable won't do it - we need falling real house prices. I can well understand that no government minister will ever call for this!

It's more interesting to see how they think they will achieve it: "Mr Shapps admitted the Government could not ‘dictate’ house prices, but said it would help stabilise the housing market by using economic policy to ‘keep interest rates low’. [...] Mr Shapps also vowed to look at building regulations to make it easier to build new homes."

The second of these is key. Keeping interest rates low increases demand and prices rather than lowering them.

Who benefits from HS2

On reflection, aside from my doubts about the overall benefits of HS2, it is puzzling that the transport secretary chose to highlight the benefits to the North East ("This great connectivity is fantastic news for the North East and other regions and will transform the economy").

Economic modelling of these wider impacts suggests that, if they do arise, it is likely because of the increased accessibility generated by the new high speed line. But a Y-shaped line to Manchester and Leeds surely means accessibility improves least for the North East? Perhaps there is some new "research" that suggests otherwise but to my mind, the spatial distribution of any gains is yet another uncertainty about these wider economics impacts.

Even more high speed 2

Philip Hammond, the Transport Secretary, has backed plans for high speed routes to Leeds and Manchester.

A year ago I wrote of the former government's HS2 plans: "the wider benefits - e.g. 'regenerating the north' - are even more uncertain. I suspect the only thing we can say with any certainty is that they are likely to be overstated." So I was delighted to see Mr Hammond upholding that tradition with his assertion that: "This great connectivity is fantastic news for the North East and other regions and will transform the economy, I have no doubt about that at all."

In short: The case for spending £33bn on high speed rail is greatly exaggerated; the case is even less convincing in light of government spending cuts; yet all the main political parties are for it. Go figure ...