The ASI's 2017 Budget Wishlist

Ahead of the Budget on Wednesday 22nd November we give our view on the changes the Chancellor should make to cement Britain's economic recovery, and end Britain's productivity and housing crises. 

Sam Bowman, Executive Director, on how we should tackle the housing crisis:

"Housing is unaffordable because too few houses are being built in the places people want to live. Too few houses are being built because getting planning permission is extremely difficult and unpredictable – the fact that land given permission rises in price by over one hundred times, in some cases, is strong evidence that planning is the important bottleneck. This leads to phenomena like ‘land banking’, which occurs because developers need to ensure a supply of land they can build on in the future to make sure their workers and machinery will be in use throughout the next few years.

"Cracking down on ‘land banking’ will threaten the existence of smaller housebuilders that will not be able to absorb the costs of unpredictable land supply, and make the market less competitive. What the Chancellor should really do is announce a major revision of planning regulations. One, revise green belt rules so that land within a short walk of an existing railway station is made available for development – 3.7% of London’s green belt made available in this way would give us land for one million new homes. Two, liberalise height and infill restrictions within existing residential areas so that streets of detached and semi-detached houses can densify into mansion flats. The only way to get cheaper housing is to build more of it – remove the regulatory barriers to supply and a housing boom will follow."

Ben Southwood, Head of Research, calls on the Chancellor to scrap Stamp Duty: 

"Popular giveaways are usually to be avoided, but this year Philip Hammond has the opportunity to please both the public and hard-nosed economists.

"Stamp Duty Land Tax is the most damaging major levy on the books, slicing 75p off the economy for every pound it raises—many multiples more than council tax, income tax, or VAT. It gums up the housing market by lumping people with huge bills for moving, stopping people from moving to get new jobs, and discouraging downsizing or upsizing.

"It’s also hated by those who pay it, coming in one giant bill and usually the largest single payment a household will ever make to the exchequer.

"Whether he funds it by raising other major levies, fixing the regressiveness in our current property taxes, or finding some more spending cuts, Hammond should avoid tinkering and scrap the whole thing. Voters and the UK economy will thank him."

Sam Dumitriu, Research Economist, says the Chancellor needs to reform corporation tax to boost capital investment in the economy:

"The UK has one of the lowest levels of capital investment in the EU. Only Portugal and Greece invest less as a share of GDP. At the moment, businesses can only deduct the cost of long-term investments in plants or machinery gradually over the life of the investment creating a bias in the tax system against the long-term productivity boosting investments we desperately need. Recent budgets have compounded the problem – capital lives have been lengthened and the Annual Investment Allowance has been cut from £500,000 to £200,000.

"In Wednesday’s Budget, the Chancellor should reform corporation tax to allow businesses to immediately expense investments in new plants and machinery to boost investment and raise productivity. Recent research suggests that this simple change could raise investment by around 17.5% leading to substantial job creation and a 2.5% wage increase."

Things not to do: Build much more social housing

There is a need for social housing for groups unable to afford ownership or private rentals, or those with special needs. But the biggest shortage in Britain is of private houses at affordable prices.  

In the 1970s and early 1980s social housing, called council houses, represented 35 percent of all houses. They were nearly all owned by local authorities and let out at subsidized rents. Waiting lists were long, sometimes 20 years, and constituted a major bar to mobility of labour, because someone moving to where there was a job would have to give up their place on a waiting list and have to start again.

Furthermore, the right to live in a house subsidized by taxpayers and ratepayers was a heritable asset. Once acquired, it could be passed on to children or dependents. There was a thriving black market sustained by people who no longer lived in their council houses, but let others do so for money while they pretended to be still tenants themselves.

The houses were generally not well maintained. There were always more claims on local authority funds, and tenants were not motivated to repair houses they did not own, so repairs and maintenance tended to involve lengthy waits, while property deteriorated in consequence. Some council estates became by-words for squalor.

The policy of Right to Buy transformed that situation. Government gave council house tenants the option to buy their home at a discount. If they had lived there for more than 2 years, they could buy at 20 percent below its independently assessed market value. This rose to 50 percent if they had lived there for more than 10 years. Many tenants bought, thereby ending the need for annual subsidy. The properties were immediately better-maintained, smartened up with fresh paint. Windows and pipes were fixed immediately since people were now protecting their own property.  

Purchasers felt they had acquired a stake in the country, since the home could be part of their estate, giving a substantial sum to their heirs. This was a population group that had previously owned no assets.

Rather than return to mass social housing, local authorities should be empowered to buy farmland in their area, give it planning permission, and sell it on to house-builders, setting a time limit for new homes to be built upon it. This could add a million new homes within 4 years, bringing down house prices to within the range of young couples. Huge numbers again would become home owners instead of the state dependents that social housing would make them.

Why we should tax improved land values

Tax is complex, and it's natural that people would change their mind when they come into contact with new arguments and new evidence. In the past I've argued that we should only tax unimproved land values. After all, taxing improved land values reduces the incentive to improve land. But I've changed my mind: we have to tax value added, and we do it on everything else, so there is no reason to have a special land preference.

I have always wondered why land value tax enthusiasts were so obsessed with VAT. They have a very specific animus against it, as will surely be demonstrated in many twitter replies to this very piece. Nearly all taxes reduce value-added.

Taxes on capital income reduce the incentive to add value by saving and building up capital. Taxes on labour income reduce the incentive to add value by working, and indeed by gaining experience, qualifications, and skills. Transactions taxes reduce all of this and reduce the value added when something moves from someone who values it less to someone who values it more.

The only exceptions are firstly Pigovian Taxes that balance out externalities—they're more like prices than levies, and make people take into account the cost of their behaviour to others—and secondly lump sum taxes.

Lump sum taxes are those that are extremely difficult to avoid. There's a general rule that the more elastic the response to a given tax, the more inefficient it is; each pound changes more behaviour. Well the response to lump sum taxes is the least elastic—the most inelastic—of the lot. Examples are a tax on height, a poll tax, and a land value tax. Reclaiming land is possible but very difficult, and essentially impossible in the most valuable parts of cities. All of these are highly efficient because none of the incentives around adding value are changed.

Now the first two seem obviously unfair to most people. I think the third is unfair too, for reasons Sam explains here:

If buyers know that they’ll have to pay £10,000 in tax on a piece of land they valued at £100,000, they’ll only be willing to pay £90,000 for that land. The tax lowers the returns from land ownership which is reflected in the value of the land. The current owners of land are the ones who bear the full cost of future tax bills.

It's best seen as a one-off raid on current property owners, or alternatively a nationalisation of all land. Technically a one-off raid on current kebab shop owners is efficient too—if the tax only relates to past behaviour then there can be no response to it. But not hitting people for retrospective (legal) investment decisions seems like a basic threshold for a civilised, and indeed prosperous, society.

A more compelling candidate for the "single tax" base is consumption, which is what the value-added tax hits. But we currently tax consumption of property values at a far lower rate than most other goods, especially as it gets pricy. Expensive flats are massively tax-advantaged because of the intentionally-regressive council tax banding system.

Yes, taxing consumption reduces the total value added by business and commerce in society, but we have to fund government programmes somehow. If we don't want to discourage economic activity with our taxes then we need to slash government spending. Since wealth is just stored-up claims on future consumption, raising consumption taxes is also a one-off tax on wealth. However, a switch to a single consumption tax would not require higher total tax take, just the same roughly-two-fifths taken in a clearer way. And it is less arbitrary, by hitting everything, rather than a single asset class.

What taxing consumption doesn't do is expropriate particular people for arbitrary reasons, disincentivise saving and investment compared to consuming now, or arbitrarily encourage lifestyle, consumption, or employment choices—many of the taxes on the books do.

Amazingly, markets even sort out these workers' rights things

We don't need to be paying all that much attention to the newspapers to see that there's something of a fight going on over workers' rights. Uber seems to be on one side of the contractual line where drivers are classified as workers and thus has certain costs it must carry as a result of employing people, Deliveroo on the other side of that same line where all are self-employed.

And, of course, all those costs of employment are going to come out of the workers' wages in the end, as is true of any division of compensation into wages and costs of employment. It isn't though necessary for all of this to be done through the law an the state's definitions:

Founded by Harry Franks, Sten Saar and Stuart Kelly in 2016, Zego has set out to re-invent commercial insurance for self-employed people, with a particular focus on contractors powering various parts of the gig economy. Its first product is pay-as-you-go scooter and car insurance for food delivery workers utilising platforms such as the Deliveroos of the world.

Unlike traditional insurance, which can work out prohibitively expensive as a proportion of income for food delivery drivers who may only work part time and even sporadically, Zego charges by the hour, with drivers only buying cover for when they are logged in to the various on-demand food ordering services they contract for.

We have no brief for this company, indeed know nothing about them other than what is in this source article. But here we do have that private sector, that market lubricated by that thirst for profit, coming in to solve one of these problems. And it's not that difficult to imagine such a service offering other forms of insurance - sickness, say - or a method of saving for holiday pay, pensions and so on. 

Do note again that all of the costs of those things offered by a more traditional employer will be incident upon the workers' wages. So their paying for them directly, if they should wish them, will not impact upon net wages at all over time.

Who would have thought it, eh? Markets unadorned manage what some insist can only be achieved through the heavy hand of the state?   

Things not to do: Renationalize the utilities

Most of those who advocate renationalizing the utilities can have no idea what the utilities were actually like when they were publicly-owned. The term itself is an illusion, because the public could exercise no ownership rights; these were exercised by politicians, civil servants and labour unions. When telecoms, energy and water were state-owned, they were characterized by high costs, high prices, inefficiency, lack of modernity and under-investment.

In the absence of competition, customers were effectively captive, so their needs and wants did not have to be addressed. Economists spoke of "producer capture," since the utilities served the interests of the producers in the absence of any consumer power. They were invariably over-manned, since the monopoly gave the unions huge power to dictate terms of employment and to oppose any job losses that new technologies and efficiencies might bring.

They were mostly loss-making, supported by subsidy from taxpayers. Crucially they were under-invested because there were always more demanding claims on public funds. Politicians satisfied electorally powerful groups, but infrastructure renewal carried no votes. In the 1970s the state telephone service would allow you to rent with quarterly payments a handset designed in the 1930s. Phone calls were costly, and overseas calls were prohibitively so.

Water was conveyed along cast iron pipes laid down in Victorian times, and burst water mains in cities were reported daily in the news.  

Gas appliances were bought from gas showrooms in high streets, but customers had to go in person because the showrooms all had unlisted numbers to avoid being bothered by telephone calls. Electricity was inefficient, losing vast amounts of power in transit. It was also expensive, and disconnections for non-payment were common.

They were all transformed by privatization. The formula RPI – X for maximum prices meant that prices came down for nearly all of them, X being the savings anticipated from technological innovation. In the case of water the formula was RPI – X + Y to give the water companies the funds to renovate the storage and conveyance that was so badly outdated.

The greatest change was that they were opened to competition, to give customers the choice between competing providers. What had been thought of as natural monopolies were opened up by allowing different providers to use a common transmission network or grid.  

Privatization made them efficient and cost-effective and gave customers a choice. Renationalization would turn the clock back to the over-priced, inefficient and shoddy services that prevailed under state ownership.

There's not an unlimited amount of ruin in a nation

As Adam Smith pointed out - and as we all know - there's a lot of ruin in a nation. There is not though an unlimited amount. As Zimbabwe shows us and as Venezuela is having a damn good go at proving:

There are two morals to draw from Mr Mugabe’s long, ignominious career. The first is that bad policies, corruptly implemented, can wreck a country with alarming speed and go on wrecking it long after you would have thought there was nothing left. Venezuela has little in common with Zimbabwe culturally, but has also achieved disastrous results by embracing a Latin version of Mugabenomics. By contrast, Botswana, Zimbabwe’s culturally similar but well-governed neighbour, was roughly as rich in 1980 but is now seven times richer.

We can also look at this over a longer timescale, using Angus Maddison's numbers. Roughly enough GDP per capita over history and geography was some $600 a year (these are 1992 dollars, adjusted for inflation and price differences across place). That's simply what a place without what we would call "an economy" in anything like the modern sense produces. There are indeed places out there, thankfully ever fewer of them, which have never had more than this. Those 700 million still living in these conditions tend to be - tend mind - to be some portion of a larger economy, rather than entire nations living at this level.

Except, of course, in our examples of people testing quite how much ruin there actually is in a nation. The real result of Mugabenomics, and the Bolivarian Revolution is testing that limit, is that it is possible to entirely destroy an economy, to reduce living standards to those of the Stone Age. For that's where Zimbabwe has got to, that $600 a year per head, roughly enough, in those 1992 dollars. 

Things not to do: Cap energy prices

In 1979 my colleague, Eamonn Butler, co-authored a book entitled "Forty Centuries of Wage and Price Controls."  The book showed that, throughout history, all attempt to fix prices by law had led to shortages, economic dislocation and black markets, and had ultimately collapsed. Throughout history, starting with the Babylonian emperor, Hammurabi, people have thought there was a fair and just price for things. Thomas Aquinas thought the same.

Politicians, including Richard Nixon and Edward Heath, have imposed price caps when people thought that businesses were profiteering unjustly when prices of scarce commodities rose. The problem is that price is a signal that responds to changes in supply and demand. When the price rises it tells consumers to use less of a product if they can, or to switch to cheaper alternatives. It similarly tells producers to step up production or to enter the market to take advantage of the increased price. In the absence of that signal those messages are not conveyed.

To impose prices by law is akin to blocking up a thermometer to stop it registering temperature. The heat pumping into a room will continue if nothing is done to stop it, despite the now-fixed reading on the thermometer.  In a similar way, prices fixed by law will do nothing to redress the imbalance between supply and demand that price changes indicate.

Energy prices have many components. They take account of the costs of extraction of the energy source, the costs of processing it, the costs of transporting it, and the costs of distributing it. They also factor in changes in the total demand for energy, something subject to short-term weather and seasonal changes and to long-term trends. Changes in any of these components can affect energy prices, some gradually, some sharply.

If energy prices are capped, energy companies will have less incentive to locate and extract new sources, and some potential sources will be unprofitable to develop at the capped prices. They will have less incentive to invest in new facilities and to invest in upgrading existing ones. The result will be energy shortages in the future. The politicians who enact energy price caps will be bidding for the support of today's consumers at the expense of tomorrow's ones. Pegged prices now will lead to blackouts in the future.

The way to put checks on price rises is to make it easier for new companies to enter the energy market to compete with existing ones, and for consumers to switch easily between suppliers. Competition and the fear of losing customers will restrain companies from raising prices without threatening the future supplies of energy that price caps will.

Even over Brexit it's necessary to use actual logic

The Centre for European Reform tells us that Brexit will be bad, very bad, for us here in Britain. The reason being that they're unable to see the logic of what they themselves are saying. Which isn't when you come to think about it, quite the right way for us to be running the affairs of a nation state.

A UK trade deal with the US will create more problems for British agriculture and food consumers than it would solve.

Their statements are as follows. A trade deal with the US would mean that the US agricultural lobby, something which has a great deal of political power over there, would be able to determine much of the terms under which agricultural trade would take place. Well, OK, let's take that as being true - whether it is or not. They also tell us that lower land prices, greater efficiency and so on make US food cheaper. That is indeed true. Finally, they insist that if the US ag lobby can determine the terms of trade then that will mean the UK would have to have low tariffs and barriers to that cheap US food. OK, again, just let us accept that statement.

They then tell us this would be bad for UK consumers. 

What? Consumers are made worse off by having access to cheap food? In which universe does that happen? 

There's something about this toxic mixture of trade and Brexit that is turning people mad. The entire point of the exercise of trade itself is to gain access to those imports, those things which foreigners do better or cheaper than we do. That's it, there is no other here. 

Seriously, more cheaper food doesn't make consumers worse off. 

Things not to do: Increase Corporation Tax

In the popular mind there is a degree of attractiveness in taking money from profitable businesses and spending it on desirable things such as health and social care. The call for Corporation Tax to be raised resonates with those who think in terms of "corporate bosses," "fat-cat CEOs," and "multinational businesses." Politicians, ever quick to buy votes, note that the likely beneficiaries of spending on such things as health and social care are far more numerous that the board members of big companies, and have far more electoral clout.

There are problems in raising Corporation Tax, though.  All tax is ultimately paid from someone's wallet or purse. Corporations are not people, but the taxes they pay are paid by people.  Studies of Corporation Tax show that it is paid principally by three groups of people: these are the shareholders, the customers and the employees. If some of the profits are taken by government, there is less money to be distributed in dividends to shareholders. If their taxes are increased, businesses will try to recoup it by increasing the prices they charge to their customers, and there will be less money in the wage pool, the sum available to pay the wages of their employees.

Studies show that the greatest burden, over 60 percent of Corporation Tax, is ultimately borne by the workers. The second largest group to pay are the customers, and the third group paying toward the tax are the shareholders. Thus the promise of higher taxes on corporations will impose most of its burden on employees and customers rather than on the faceless corporations who it is claimed will pay them.

There is another problem. It is that increases in Corporation Tax often result in less tax being collected, not more. And reductions in its rate usually yield more tax revenue.  The reason behind this apparent paradox is that the increased taxes make corporations less profitable, so their activity is less worthwhile. Increased investment, which brings expansion and jobs, is less attractive. Businesses do less and earn less, so the Treasury take is reduced. This effect is increased by the higher tax rates deterring foreign firms from locating in the UK.

When Corporation Tax is reduced, however, businesses take the opportunity to expand, and foreign firms to locate here, so the tax base is broadened, enabling more revenue to be yielded on a lower rate.  Practical experience has confirmed this effect. Most recently in the UK, as Corporation Tax has been lowered in stages from 28 down to 19 percent, the revenue yield has been greatly increased. In the year 2016-2017 the tax yielded £56bn, a 21 percent increase on the previous year. In purely cash terms this was still a 12.6 percent increase.

Although politicians talk of raising the tax back up to 28 percent, and how they plan to spend the "extra money," the reality would be that less money would be raised, making spending cuts a more likely prospect than the promised largesse.

Is land banking to blame for the housing crisis?

One of the most frustrating aspects of the housing debate is that even among the people who accept that the fundamental problem is insufficient supply, there are a sub-category who choose not to blame restrictive planning laws but instead lay blame at so-called land bankers.

They point out that the UK’s biggest house-builders are sitting on around 600,000 plots of land with planning permission. As Olly Wainwright at the Guardian points out “that’s four times the total number of homes built last year.”

The idea is that rather than simply build out a new development and sell it on the market, the big house-builders are sitting on land based on the assumption that land prices will rise in the near future. I’m reasonably sceptical that the logic of land speculation works. By forgoing construction in the hope of future land value rises, it suggests that the market is substantially undervaluing the price of land. In fact, they’re undervaluing land to such an extent that it makes sense for house-builders to forgo the substantial income they can get from building on the land and selling it on.

Perhaps this makes sense, if like Daniel Bentley or Liam Halligan, you believe there is a fundamental lack of competition in the housing market. I don’t buy it. It’s true that three house-builders built a quarter of all UK new builds, but three supermarkets (Tesco, Sainsbury’s and Asda) make up more than half of the UK grocery market and few people would argue that supermarket prices are being kept artificially low. In fact, even after the increase in the cost of imports after the EU referendum, UK food prices are still cheaper than in 2013 when a supermarket price war drove costs down.

As my colleague Sam Bowman, points out to me. There are roughly as many major house-builders (about 20) as there are car manufacturers and even fewer smart phone manufacturers, yet I know of no columnist complaining about the ills of car banking or smartphone banking.

So why do developers sit on land with planning permission? A tragically under-read blog by the ‘Unconventional Economist’ has the best explanation I’ve seen. He argues that planning risk is to blame. The land market simply doesn’t function like a traditional “just-in-time” production line where inputs are acquired just as soon as they are to be used.

He points out:

“The answers lie in the fact that the market for land is imperfect and land is not freely available to be purchased ‘off-the-shelf’. That is, a developer nearing the end of one housing development cannot simply phone a land wholesaler and purchase a new parcel of land to develop. Rather, they must: 1) first search and acquire information on what land is available; 2) negotiate with potential sellers; and 3) in the case of markets with strict land-use regulations, they must navigate the planning system, including seeking planning approval.

“If a developer fails to acquire the land and seek planning permission in sufficient time to maintain continuity of production, they risk having their resources sitting idle (e.g. employees, plant and equipment) and may ultimately go out of business.”

Restrictive planning systems mean developers could find future projects scuppered at short notice and create an incentive for firms to store up land with planning permission to keep the conveyor belt moving.

In the areas with the greatest demand for new housing, well-thought out planning applications are often rejected. For example Tory Councillor Judy Terry in a depressing piece for ConservativeHome gives countless examples of the planning system rejecting or slowing down good proposals.

“A campaign to protect nightingales scuppered a scheme to provide 5,000 new homes at the former Lodge Hill army camp near Rochester in Kent when Land Securities pulled out after spending £11 million on the plans, which were approved by the local council but referred to a public enquiry.”


“It took three years for a derelict site in Haringey to eventually win approval, on appeal, during which prices had risen by 60 per cent. A similar story in Ipswich delayed a major project for more than ten years.”

Plus, who could forgot the absolutely bonkers time that 2,000 (!) homes were blocked from development near Canary Wharf (!!) in order to save an ASDA petrol station (!!!).

When developers face such dramatic risk is it any wonder that they choose to sit on land with planning permission rather than building out as fast as they can and running the risk that a few bad planning rejections block the pipeline and leave builders, plants and tools sitting idle