John Penrose is MP for Weston-super-Mare and a former Cabinet Office minister. This article forms a chapter of his paper ‘A shining city upon a hill: Rebooting capitalism for the many, not the few’.
Crisis, What Crisis?
Britain’s economy isn’t working properly anymore. In the wake of the 2008 banking crash, and in the face of new digital challenges and disruptive technologies, it simply isn’t delivering the goods. Wage growth has been anaemic for most of us, while a few have become extraordinarily rich. Too many of life’s basic, unavoidable essentials (like housing, energy, water or transport) either don’t work properly, or are so expensive they’re rip-offs. The system feels rigged; stacked against hardworking families by a complacent, comfortable, out-of-touch global elite.
Part of the problem is that politicians haven’t responded properly to these issues. Rather than proposing exciting, attractive ways to modernise Britain’s economy and equip our society to prosper and thrive in a digital, post-Brexit, post-crash era, we are refighting stale battles (such as whether to renationalise railways) from the 1970s instead. And the vacuum is being filled by populists who would make us poorer and polarise our communities as well.
Generational Justice: Are The Kids Still Alright?
Beyond the shift in the balance of power away from customers and towards companies there’s another, broader problem: Britain’s demographic timebomb of ever-more elderly people, with ever-bigger medical bills, social care costs and state pensions, funded by ever-fewer working-age folk.
Britain’s economy in its current form won’t be able to cope with this challenge, because the problem is structural; the demographic timebomb is exploding faster than our economy will grow, and because we increase state pensions faster than working-age people’s wages too.
Unless we do something, the result will be ever-bigger borrowings to fund the extra spending. And, equally importantly, because big Government debts hamstring economic growth, crowding out private sector investment so wealth-creating projects can’t happen and driving up interest rates so the remainder cost more than they should as well, we risk stifling growth and dampening wealth creation for years.
And even though the Office for National Statistics (ONS) figures for wealth inequality in the table below show little change overall, ownership of housing and financial assets (shares, bonds etc) has become far less equal.
This change matters because, in Britain, those assets are mainly owned by older people who were already on the housing ladder when the latest bout of price inflation put prices out of reach of their children, and who already had a portfolio of investments when the Bank of England’s Quantitative Easing programme pushed up its value significantly after the 2008 banking crash.
Taken together, these factors make Britain’s economy unfair to everyone younger than (roughly) 45. Housing costs – whether renting or buying – already make up a historically high proportion of their monthly bills, so they find it harder than previous generations to live well, let alone save for the future. And then, when the demographic timebomb goes off, they will either have to cut spending on really important things like health, pensions or defence dramatically, or raise taxes equally dramatically, to avoid being bailed out by the IMF. As the graph of Public Sector Net Debt (PSND) below shows, either option means they will have less disposable income and a lower standard of living than their parents and grandparents enjoyed.
This means that, as a society, we will have bequeathed a cold and mean future to future generations. And that is morally wrong. We cannot burden future generations with enormous bills because we were too lazy, or too cowardly, to fix the problem while there was still time. Demography should not become destiny, so we need answers which will make sure it doesn’t, for our public finances and our housing too.
Make Builders Build
The Government’s Housing White Paper says housebuilding is in crisis, and it’s right. The only way to make homes more affordable is to build a lot more of them. We haven’t built enough homes for decades and the lack of supply has caused soaring prices and created one of the biggest barriers to social mobility in Britain today.
How do we do it? By Making Builders Build: getting developers to build much faster once planning permission has been granted on a particular site, and giving local communities a share in the value that is created when permission is given.
At the moment, the value of an acre of land goes up by at least ten times—often by a whole lot more—when it gets planning permission. That happens before a single brick has been laid or a single home has been built. The value of actually designing and building beautiful houses to rent or buy is far less than the trading gains made by land speculators. As a result, and entirely logically given the economic incentives which have been created, a large part of the sector’s business model focuses on capturing the speculative gains on the price of land which might get planning permission, rather than on the value created by actually building things once it has.
But that’s completely the wrong way around. It should not be easier to buy land, do nothing, aim to get planning permission and then flip for a profit than it is to build houses. From a moral and an economic standpoint, design and construction should be the things that add value to land, not hope or speculation. Planning permission is a huge and value-creating decision, taken by each local community. So they should see some of the value that is created.
So we need a tax on the speculators’ profits, paid straight to local councils on the day that planning permission is given or changed, to give neighbourhoods a financial incentive to grant more planning permissions for new homes, and to fund the local services like bigger schools, GP surgeries and fibre connections, that turn dormitories into communities.
Fortunately, we don’t need a new tax to do it. The Community Infrastructure Levy (CIL) could do what’s needed with a few (small) tweaks:
- Most of CIL’s exemptions and limitations would go, making it much simpler and easier to understand.
- Councils would publish their Community Infrastructure Levy rates for each area in advance, so speculators and developers would have certainty about what they would have to pay when permission was granted or changed.
- Paying the levy on the day planning permission is granted or changed means the money for local services arrives when it’s needed, so they can be built and ready when people move in, rather than dribbling along a couple of years later.
Best of all, it would completely replace the hideously overcomplicated section 106 agreements, with all their uncertainty, unpredictability and lawyer-friendly viability assessments. It would be simpler, faster, cheaper and more predictable for developers, planners and landowners alike.
And that’s pretty much it. The only other change would be to give local Councils the power to charge business rates and council tax based on the date planning permission was granted, rather than when construction finally begins on site. We could give big developers a few months’ grace to get their crews on site, but then the meter would start running. They would have a huge incentive to build and sell promptly, rather than to take their time.
Equally important, the same forces would apply to the hedge funds that own derelict brownfield land in town and city centres. These sites already have old, unused permissions, so the clock would start ticking immediately. Just think of the enormous shot in the arm—the jolt of adrenaline—that we would give to urban regeneration projects everywhere, right across the country, if the owners could no longer sit on them for years waiting for something to turn up.
An End To Boom & Bust: A Binding Fiscal Rule For UK Governments
‘Lord, give me chastity, but not yet’ has been the UK’s economic motto for years. Economists of the political left and right all agree; we save less, invest less and build less economically-vital, growth promoting infrastructure than we should. We’ve got a rock-and-roll economy that lives for today, and doesn’t invest for tomorrow.
With the current budget close to balance, we have a once-in-a-decade opportunity to rebalance the UK economy away from this historic and much-analysed over-reliance on consumer spending, towards a less brittle, more sustainable, higher-investment model instead.
This matters because borrowing to pay for the day-to-day spending which improves our lives today, rather than investing for the future, just pushes the bills forward in time, so our children and grandchildren have to pay them instead of us. That’s immoral and unjust; we can’t expect future generations to pay for things we consume today, like healthcare, defence or policing. But if we borrow to pay for them then we are effectively handing the IOU to our grandchildren, and expecting them to pick up the tab.
But other people have noticed the opportunity too, and are arguing for a return to Britain’s historically-ingrained bad habits instead. Spending pressures are already rising strongly, with calls for ‘an end to austerity’, and a clear risk that any spending will be diverted away from modernisation or productivity improvements.
That would be a disaster. If we start splurging cash unsustainably, we’ll just repeat the mistakes of the past. If eight tough years of austerity taught us anything at all, it should be that we’ve got to live within our means. By borrowing to spend money we haven’t got, we’ll go straight back to boom and bust.
The solution to these pressures, and to changing bad habits permanently, is to introduce a binding ‘fiscal rule’, to tie down future Governments so we only live within our means. We should introduce it as an Act of Parliament to enshrine the ‘golden rule’ that
Governments’ day-to-day budgets must always be balanced across the economic cycle, based on the existing and successful independent forecasting by the Office for Budget Responsibility (OBR) that’s already in place. This would still allow governments to borrow for long-term investments in genuinely-productive economic infrastructure like fibre-optics, roads or rail.
This matters economically, because businesses would have stronger, more predictable, stable foundations for wealth-creating investments in new jobs and technologies. Public spending on things like health, schools, police or defence could increase steadily, rather than in stop-go cycles.
But it matters socially and morally too, because we’d make Britain a generationally fairer society.
A UK Sovereign Wealth Fund
A fiscal rule means Governments have to put something aside when the economy is growing, to match expected borrowings during the next recession. So if we invest the fiscal rule’s budget surpluses in (for example) investment grade commercial infrastructure projects rather than in Government bonds at rock-bottom interest rates, we wouldn’t only be creating an enormous national ‘rainy day’ fund; we could create the seed capital for a British sovereign wealth fund, like Norway’s extremely successful version.
The Treasury and OBR’s recently-published Fiscal Risks and Sustainability of Government Accounts reports show the expected impact of the ‘demographic timebomb’, creating higher borrowings at an exponential rate from the mid-2030s onwards. Higher taxes and poorer public services are the inevitable result unless we act now. Starting a fund immediately will reduce (but not completely solve) these future fiscal problems significantly.
Politically, the fund would create a long-lasting social and economic legacy as profound as the creation of the welfare state, so we wouldn’t be consumed or defined by Brexit. We would have made Britain a generationally fairer society, by refusing to leave todays IOUs for our children and grandchildren to pay. And, by making the fund mutually-owned, a more socially-just society too because rich and poor would all own the same, equal personal stake. That would make us an asset-owning democracy on a scale that no other developed nation could match.