The prospect that the UK economy will enter a long period of stagflation – low or no economic growth combined with high inflation – has increased markedly in the last few months.
An excellent report commissioned by Shelter on housing investment and economic growth, produced by a global economic consultancy, FTI Consulting, and written by eminent economists Vicky Pryce, Dan Corry and Mark Beatson, published last week, considers the arguments for an economic stimulus to promote growth led by an increase in housing investment.
The report makes a strong general case for an economic stimulus, showing how prospects for growth have diminished over the past year and arguing that the Bank of England’s quantitative easing of the money supply is insufficient and needs to be matched by further action in fiscal policy. It argues that the markets are now even more concerned by the threat of slow growth than the need for fiscal retrenchment.
The report concludes that “Action to increase investment in housing has attractive properties in terms of increasing growth quickly”. Housing investment in current market conditions would not add to inflationary pressures: there is spare capacity in the industry, unemployed skilled builders and outstanding planning permissions waiting to be built. And housing construction has a relatively low propensity to consume imports. The authors repeat the argument from the Barker report that construction is highly cyclical: it is often the first sector to go into a recession and the first sector to come out, so it is known to have economic leadership qualities.
Housing investment is a good stimulus for a number of reasons. Compared to many capital projects, it could be got underway quickly with early benefits. As an intensive user of materials and equipment, it has a strong beneficial impact on the supply chain, boosting jobs down the line. The report suggests that every £1 of demand for construction activity generates £2.09 of economic output as the effects ripple through the economy. It is labour intensive, bringing unemployed people quickly into jobs so they stop requiring benefits and start contributing taxes.
There is a debate as to the best method of undertaking a housing stimulus. Boosting private sector supply would only be effective if there is effective final demand, and there are problems with both mortgage availability and general affordability. A boost would therefore have to be either through direct public investment or through a subsidy to final private sector demand. It seems likely from the thrust of the evidence in the report that direct investment would be a stronger and more reliable option.
As the Chancellor’s Autumn Statement approaches, the case for additional housing investment should be made loud and clear. In making the case for extension of the right to buy to fund additional investment the Government has partly accepted the case. Ed Balls’ call for a repeat bankers’ bonus tax to fund an additional 25,000 homes puts Labour in a strong position, but there seems to be scope for a much more radical and far reaching plan that will tackle housing needs as well as providing a welcome boost to the wider economy.