Why the Government has made this recession much worse than it needs to be

Guest blogger Graham Martin, a member of the Labour Housing Group Executive, looks at how Government inaction in housing since the election has cost the Treasury a fortune and made the recession worse.

Delays in setting up a housing programme to follow on from Labour’s – due to Government inaction and incompetence over the past 18 months – has cost the economy 200,000 jobs and 100,000 new homes, at a significant cost to the Exchequer, and a net increase in borrowing.

The two key statistics are:

1. The number of new Affordable Homes started on site in England in the six months to 30 September 2011 was just 454 (1), a fall of over 90% on the same period in the previous year.

2. The average Government subsidy required to build a home under the Governments new ‘Affordable Homes Programme’ is below £20,000 per property (2).

Despite the current hiatus between programmes, the Government still says it intends there to be a programme of around 370,000 new ‘Affordable Homes’ to be built and completed from around now to March 2015 (3)– made up of 170,000 in the Homes and Communities Agency ‘Affordable Homes’ programme, the release of 100,000 plots of Government land and the promise of 100,000 new homes from the recycling of right to buy receipts back as ‘Affordable Housing’.  Clearly the Government is able to make available the funding within the current Comprehensive Spending Review period.  So why the delay?  And what’s the cost and damage?

Government figures indicate that every new home built supports 2 additional jobs for a year. The cash benefit to the Government from 2 jobs (one new house) will be around:

From (4):

  • Reduced benefit payments – say a saving of £7,000 per person in reduction in State Benefits claimed
  • From tax and national insurance paid – say extra income of £5,000
  • From Corporation tax payable by developer and ‘trickle down’ suppliers, say £1,000 per property
  • From extra income spent by employees – assume 10% of extra disposable income collected in VAT – say £1,500.

Total headline benefits to Treasury would amount to around £21,500, compared to the estimated average subsidy of £20,000, equalling a surplus of £1,500 per property commissioned.

In practice most of these figures are probably an underestimate: I have tried to veer on the side of prudence.

There are also so other indirect but very significant savings, including:

  • The extra say £13,500 net extra spending power (after VAT) of the two extra employees (per extra property) will feed into extra income for local shops and businesses, and in turn generate extra earnings, employment and tax income
  • Building an extra 50,000 homes in the missed six months (or extra 100,000 homes in the probable missed year) will also generate substantial further savings not least through:
    • Saving in Housing Benefit reflecting difference in rents of ‘Affordable Homes’ and alternatives at full market rent in private sector
    • Marginal reduction in total Housing Benefit bill from extra 100,000 homes reducing upward rental pressure on private sector renting
    • Much larger savings where families moved from/avoid need for temporary (and very expensive!) homeless accommodation to an ’Affordable Home’,

If the Government had got ahead and put a programme in place earlier, the spending would have resulted in an immediate saving to Treasury in short term (so reducing borrowing) and a marginal longer term reduction in future benefit costs. I would welcome feedback on these calculations and the argument underlying them.

Notes

1 These are properties built by Housing Associations (and to a lesser extent Councils and Private Builders) either for below market renting or for Assisted Purchase (Affordable Home Ownership]. Source Homes and Communities Agency Press release and Website.

2 Figure derived by dividing total grant awarded by properties contracted for figures have been released in batches so no single source, but average clearly below £20,000 per property from batches sampled. A lot of individual examples exist of Housing Associations being able to build at well below the stated £20,000 subsidy per new home.

3 Approximate figure from totalling all the initiatives announced.

4 Benefit savings derived from benefit tables, income to treasury conservative estimate (I have found references to some work by Mark Hoban MP (now a Treasury Minister ) in 2007 using HoC Library data to calculate loss of tax at around £7,300pa per person, but figures not necessarily fully comparable. I am assuming average earnings of employment generated at £20,000 per person.

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2 Responses to Why the Government has made this recession much worse than it needs to be

  1. Pingback: Time to think in billions for housing | Red Brick

  2. Bernard Crofton says:

    I do agree it is down to inaction; I do not think it is due to indolence, but inaction in the belief that the private sector would take up the slack. Of course in housing, there is never a quick response.* The credit market controls demand more than demographic and supply, and the market meachanisms for land will ensure that there is only a very limited incentive to builders.

    Excellent summary. Would that the two Ed’s would take it up.

    * Dela Nevitt used to teach that the only way to create a “perfect market” in housing would be for everyone to leave their homes every morning and bid for another home ate the end of the working day.

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