Wednesday 27 October 2010

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.

Friday 22 October 2010

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.

Wednesday 13 October 2010

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.

Monday 4 October 2010

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 ...