• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

A Social Democratic Future

Policy paths towards equality and efficiency

  • Home
  • Investing in productive infrastructure
  • Wider Housing Ends
  • 2018 Housing Policy
  • Consultation Responses
  • News
  • Economic Policy

Time for a Social Democratic Surge

Pathways to London inclusive housing affordability

4th December 2021 by newtjoh

Although the Greater London Authority (GLA) was established in 2000, it only assumed responsibility to administer, to allocate, and to deliver centrally funded affordable housing programmes in 2012 within a policy framework set by, and negotiated with, Whitehall.

The current mayor, Sadiq Khan, is responsible for two overlapping centrally funded housing programmes: the Shared Ownership and Affordable Homes Programme 2016 to 2023 (2016-23 SOAHP or 2016-23 programme) and the Affordable Homes Programme 2021 to 2026 (2021-26 AHP or 2021-26 programme).

The GLA was allocated £4.8 billion in 2016-23 SOAHP central government funding to deliver at least 116,000 affordable homes by March 2022, a deadline that due to the impact of Covid on delivery was subsequently extended to March 2023.

By April 2021, around 72,000 dwelling starts and 34,500 completions from that programme were recorded. Of the remaining 43,000, around 17,000, according to the mayor, are to be started in 2021-22 and 26,000 in 2022-23, accordant with targets previously agreed with Whitehall.

In November 2020 £4bn from the successor 2021-26 AHP was allocated to deliver 35,000 affordable homes across London by March 2026. London-wide allocations from the GLA’s first bidding round for that programme were announced on 31 August 2021, when £3.46bn was allocated to 53 housing providers to deliver 29,456 homes, none of which have started yet.

The mayor expects the 2021-26 AHP – running alongside the extended and outstanding preceding 2016-23 programme – to provide a combined total of c.79,000 affordable new home starts by March 2026.

The Housing Committee of the elected London Assembly at its 19 October  meeting(the committee), coincident with the publication of its 2021 Affordable Housing Monitor (2021 Monitor),  considered issues relating to the past and future delivery of these two programmes.

This post uses most current up-to-date information that the committee, other forums, and the official affordable and other housing statistics published in November 2021 provide(d) to illuminate London-wide trends and issues likely to impact on affordable housing delivery until 2029.

Associated policy development implications at both central and local level are identified and related, where applicable, to the core themes of A Social Democratic Future, including the real fiscal crisis of the state.

The core conclusion is that the driving principle of the mayor’s successful 2017 Affordable Housing and Viability Special Planning Guidance should be extended nationally, but in a way cognisant with regional, sub-regional, and local housing market characteristics and values.

Such a policy shift would align to the line of current political least resistance to make the Section 106 process simpler, with greater certainty and transparency, making paramount the principle that the planning gain attributable to granting of residential planning permission should be recycled to the maximum possible extent to the provision of affordable housing and supporting social infrastructure.

It should be combined with changes in the public accounting treatment of housing investment that reflected its productive income and wealth effects and its self-funding capacity over a 30-year period.

This should tap into a discernible overlapping political and technical consensus that the provision of affordable housing must be mainstreamed through measures that directly reduce the cost and price of housing into both public and private business models, and thus blur the distinction between market and social housing, so lessening the trade-off between maximising social rented and total affordable currently aggravated by constrained central housing capital budget allocations.

1          Defining and tracking affordable housing

What precisely counts as an affordable home is itself a complex and contestable concept that tends to be tautological rather than illuminating.

The government’s definition was published in the 2012 National Planning Policy Framework, last updated July 2021.

Broadly speaking, dwellings provided at least 20% below local market rents (including service charges where applicable) and 20% below local market values in the case of discounted home ownership, including shared ownership, are counted affordable under that definition, which must remain at an affordable price for future eligible households or include provision for any receipts to be recycled for alternative affordable housing provision is required when public grant is involved.

Defining a dwelling as affordable, of course, does not make it by itself affordable for households of varying circumstances subject to local housing market conditions.

The GLA definition of affordable housing attempts to address that consideration, whilst maintaining conformity with the government’s definition of affordability and other programme funding conditions, where applicable, by requiring it to be made available “at a cost low enough for eligible households to afford, determined with regard to local incomes and local house prices”.

For example, the GLA defines London Living Rent (LLR) as an: “intermediate affordable housing tenure with a London-specific rent introduced by the mayor that will help, through sub-market rents on time-limited tenancies, households save for a deposit to buy their own home. Rents are based on one-third of the estimated median gross household income for the local borough, varied by up to 20 per cent in line with ward-level house prices, and capped to reflect the maximum affordability for an eligible household. Providers of LLR homes funded through the Affordable Housing Programme (AHP) 2021-26 will be required to offer tenants the opportunity to buy the LLR home on a shared ownership basis during their tenancy and within ten years. Finally, the benchmark rents also vary based on the number of bedrooms within the home”.

In planning delivery terms,  Delivering affordable housing (HP4) and Affordable housing tenure (HP6) policies of the 2021 London Plan, published in March, specified the following split of affordable products delivered (proportion of total affordable units provided expressed as 100%) expected to be provided in a development):

  1. a minimum of 30 per cent low-cost rented homes, as either London Affordable Rent or Social Rent, allocated according to need and for Londoners on low incomes (A1);
  2. a minimum of 30 per cent intermediate products which meet the definition of genuinely affordable housing (A2);
  3. the remaining 40 per cent to be determined by the borough as low-cost rented homes or intermediate products (as A1 and A2 define) based on identified need;
  4. Where the proportion of (total affordable) homes provided in in a development exceeds 35% (50% on public land or on industrial sites, and public sector landowners with agreements with the mayor across a defined portfolio of sites, or 60% in case of an appointed strategic development partner), their tenure (split) is flexible, provided that the homes are genuinely affordable, as A1 and A2

The presumption is that the 40 per cent to be decided by the boroughs under (3) will focus on social rent (SR) and London Affordable Rent (LAR). HP6 does, however, recognise that for some boroughs a broader mix of affordable housing tenures will be more appropriate, “either because of viability constraints or because they would deliver a more mixed and inclusive community”, in which case it should be determined through the local Development Plan process or through supplementary guidance.

Social housing is allocated with reference to statutorily defined need categories and is mainly allocated to those on low incomes or are otherwise medically or socially vulnerable.

Intermediate housing in the guise of LLR mainly caters for potential households in employment with moderate to average (middle) household incomes below £60,000; households with gross household incomes of up to £90,000 per annum can be eligible for some intermediate home ownership products, primarily London Shared Ownership (LSO).

As an indication of prevailing actual affordable intermediate costs, a proposed 100% intermediate affordable development in Ealing will offer one bedroomed dwellings attached with a market value of c£450,000; translating – assuming that purchased equity stake is 25% on mortgage with 10% deposit found paid – into a monthly cost c£1,239, including a £223 service charge; and two bedroomed units attached with markets value between c£550-600,000 translating into a monthly cost of c£1,500, including c£300 service charge. Properties will be initially offered to eligible local households demonstrating annual household incomes of £60,000 before higher income applicants are considered.

The official statistical sources

There are lies, damn lies, and statistics. Official housing statistics, of course, don’t propagate lies. They do, however, suffer from frequent definitional and consistency discontinuities, from subsequent revisions of previously published data, from gaps in coverage, and from reporting shortcomings (such as source data omissions and miscoding). All can impact on data accuracy, completeness, and transparency. Data owners can decide what to publish, in what format, over what period, and what is included and omitted.

Published data then gets subject to competing political spin narratives, selective in what data and what time periods are highlighted, presented to paint a picture of the past, present, and future that the narrator, accordant with their own organisational interests and preferences, want beholders to see.

All this makes the interpretation of housing data over time difficult, time-consuming, and an invariably less than definitive experience: confusion can consequently trump understanding.

It is important to understand what a particular statistical source in each case is describing and what it is not.

Tables 1 and 2 of GLA Affordable Housing Statistics reports affordable starts and completions that the GLA has funded or monitored as part of a wider regeneration programme. It can omit affordable housing activity undertaken by councils and other registered providers (mainly housing associations) not recorded by the GLA. It is thus a subset of total gross new affordable housing supply provided in London over any set period.

The affordable housing statistics series published by the Ministry of Levelling up, Housing and Communities (MLHC) in its Live Table 1011 is more complete, but it is only published annually in November. It “aims to provide a complete picture on affordable housing delivered, irrespective of funding mechanism”, including new build and acquisitions from the private sector, (although not losses through demolitions or sales), as well affordable completions reported in local authority as well as GLA statistical returns to MLCH, some section nil grant 106 units that the GLA in its 2019-23 returns may have omitted, as well as units funded through Right to Buy recycled receipts not counted in the GLA statistical series.

Although Table 1011S of that series reports total affordable starts only from 2015-16, Table 1011C provides a time-series for completions back to 1991-92, reproduced in Annex Table One.

The GLA and MLCH series are compared in Table 1 below.

Table 1 London2029

The MCLG technical note to the latest published 2020-21 series explains the variance between the two series, thus: “local authorities are asked to only record (in their LAHS return) affordable housing that has not been reported by Homes England or the GLA. To assist them in doing so and minimise the risk of double counting, Homes England (outside London) or the GLA (within London) sends all local authorities a list of the new affordable housing recorded in their administrative systems. However, despite best efforts, double counting may still occur if local authorities misunderstand the instructions on the form or if, due to differing definitions of completion of housing, local authorities considered that a unit had been completed in a separate financial year”.

It appears higher for completions, where it can reach 40%, as it did, most recently, in 2019-20, reduced last year to 8%. Around 76% of the 2020-21 starts in the MLCH series were recorded as funded either by Homes England/GLA but only about  a third of the same year completions.

Neither the GLA nor the MLHC affordable housing statistical series report net totals that take account of reductions in the affordable stock, including from right-to-buy (RTB) and from demolitions; both negative flows can be considerable.

A distinction on the margin can be made between losses due to RTB and demolitions: dwellings demolished are lost now and for ever as source of affordable housing and require the rehousing of previous occupants; yet when integral to a redevelopment or regeneration programme, they may be replaced in time.

Right-to-buy completions reduce the affordable stock and (all other things remaining the same) deflate the future flow of affordable housing opportunities (although receipts generated by the sale may enable partial replacement) but not the total dwelling stock: the dwelling sold can still be lived in by current and future occupants.

Also published annually each November, Table 118 Housing and Communities dwelling stock statistical series provides a net additional dwellings time series for London (E12000006) that is broken down into components, including new build completions, net conversions, and change in use, with demolitions netted off.

According to MLCH, it is the primary and most comprehensive measure of housing supply that provides the “only consistent data source for providing dwelling stock estimates and changes in net supply between census years in England (London), at least from 2006-7”.

That the series is adjusted to reflect the decennial Census result suggests the possible margin of error attached to it, however. And, like the GLA and MLCH affordable series it does not breakdown units provided by bedroom size (number of bedrooms).

It is not broken down according to tenure, and therefore it cannot be directly reconciled with the MLCH annual affordable housing series. It can only be inferred from both series, that gross affordable completions accounted about a third of total new build completions during 2020-21.

Programme phasing, starts and completions

The GLA affordable housing programme is subject to successive central government funding allocations, themselves subject to comprehensive spending review decisions. Each multi-year funding settlement then is allocated by the GLA to individual development partners following an application, competition, and moderation phase.

Development programmes then involve long lead-in times, requiring total scheme funding to be negotiated or identified, and the necessary scheme approvals to be secured and preparations undertaken, prior to any start on site.

Complex and multi-partner scheme developments take years to gestate and then complete. For example, the large-scale redevelopment of the Hackney Woodberry Down and Ealing South Acton council estates took or will take up to 30 years to complete.

The GLA’s Capital Funding Guide defines dwelling start as the date when the investment partner and contractor has signed and dated the building contract and the building contractor takes possession of the site or property and undertaken some necessary defined preliminary works, such as excavating for foundations or infrastructural drainage work.

The beginning of each programme cycle for such starts invariably is relatively fallow followed by a rapid pick-up that then is translated into a later bunching or concentration of completions towards the, or even beyond the end, of successive funding programme cycles.

For example, in 2014-15 over 18,000 completions were recorded (see Annex Table One London 2029), more than three times the volume recorded the following year, reflecting the concentration of completions at the end of the 2011-15 Affordable Housing Programme.

The latest stipulated date for 2021-26 AHP funded dwellings to start is March 2026 and the end date for their completion is March 2029: a potential gap of eight years between programme inception and end, and three between the start and completion of individual dwellings.

The preceding 2016-23 programme is attached with no backstop completion date, meaning that completions funded by that programme could possibly trickle-in towards the end of this decade.

In that light, October’s Housing Committee (the committee) was reminded that a family can only live in a dwelling when it is completed, not when it is started; on the other hand, assessments of programme delivery need to relate to the applicable programme funding and associated target arrangements.

Using GLA Table 1  affordable starts within the capital funded or reported by the GLA since 2008 have averaged annually, overall, around 11,000: 12,000 during 2008-12; falling to less than 9,000 in 2012-16; rising again to approach 13,000 during 2016-21, as Table 2 of this post catalogues in the next section.

Much care is needed in interpreting such overall averages, however, as they are sensitive to the choice of period surveyed. And any average taken over a period can mask variations marking that period or an underlying trend within an inherently shifting story, compounded as it is by programme phasing and the gap between starts and completions identified above.

Over 30,000 dwellings under the 2016-23 programme were started during 2019-21 suggesting a total figure of c43,000 remaining programme starts between April 2021 and March 2023, nearly double the average annual of 11,120 starts during the preceding decade (excluding any that may also be funded under the 2021-26 AHP).

Such a level of starts, if achieved, will then feed into subsequent 2021-26 completion figures, pushing them beyond the previously record 2008-12 completion average, plus some.

On the other hand, the smaller 35,000 dwelling 2021-26 programme will subsequently come on stream from 2023, pushing down the average annual start and then the completion rate towards the end of the decade.

A total of c108,850 expected GLA dwelling starts between the decade April 2019 and March 2029 (c30,500 2019-21 starts plus 43,000 remaining 2016-23 programme starts plus 35,000 2021-26 programme starts) by itself, if achieved, would provide an overall annual average of just under 11,000 for that period, and an even lower completion average. That figure, however, excludes the unknown number of starts that can expect to result during 2027-29 from any successor programme to the 2021-26 programme, and from any other additional allocations.

All of this, of course, shorn of context is prone to presentational cherry-picking.

Improving statistical reporting

Neither the GLA nor the MLHC affordable housing series break down start and completion activity according to bedroom category. This is an important omission insofar that much new affordable housing in London, as noted earlier, is delivered through multi-decade redevelopment/regeneration schemes. These often involve the phased demolition and replacement of existing social rented and other housing tenures by a higher number of one to two bedroomed units.

In that light, the 2021 Housing Monitor recommended that bedroom numbers should be included in the GLA data, which should also capture all gains and losses to the affordable housing stock, and that starts and completion data should also differentiate between funding programmes.

This website has asked both the GLA and MLCH to make efforts to reconcile its respective affordable housing series, and the MLCH its affordable and net additions series.

And, as the London Plan highlights, the growing importance of Section 106 in providing additional affordable housing supply within London means that it is crucial that their implementation and review mechanisms are monitored to ensure that the additional homes contractually committed are delivered in the form promised.

Its monitoring of affordable housing (HP7) policy, in that light, requires boroughs to have clear monitoring processes to ensure that the affordable housing secured on or off site is delivered and recorded in line with the requisite Section 106 agreement, and to share that monitoring information with the GLA to incorporate within its annual monitoring process, and, to underpin the accuracy of their statistical returns to MLHC.

These returns, in the view of this website, should record all individual housing obligations contained in section 106 agreements, and to track them according to whether they are:

  • delivered in accordance with the agreement; or,
  • remain outstanding; or,
  • were cancelled; or,
  • differed in quantum and composition to the original agreement.

2          What the published available statistics tell us and what they don’t

The most telling message conveyed by Table 2 below concerns programme composition.

Table 2 London 2029

It shifted from social rent (accounting on average for 64% of starts 2008-12) to affordable rent (55% of starts, 2012-16), then followed by shifts in favour of intermediate housing provision (50% of starts) and of social rent (31% of starts), both away from affordable rent during 2016-21.

The total and proportionate share of social housing should increase significantly further in the future on current plans. An August 2021 mayoral press release advised that 57 per cent of the 2021-26 AHP programme will be for social rent, of which half will be delivered by councils; shared ownership or London Living Rent accounting for the rest.

That increased 57% proportion compares to the 46% share that social rent took of the total number of affordable dwellings started in 2020-21, and the 64%, 30%, and 17% of total affordable completions that on average social rent accounted for throughout the 2008-12, 2012-16 and 2016-21 mayoral terms, respectively.

The 2021 Monitor also broke down starts and completion according to borough. Four boroughs completed over 2,000 affordable dwellings in total between April 2016 and March 2021 (over 500, on average, each year): Tower Hamlets, Newham, Southwark, and Ealing. At the top, Tower Hamlets, 4,306 completions, while the other three ranged from 2,709 in Newham to 2,070 in Southwark.
Four contributed less than 400: Richmond, Harrow, Havering, and Hillingdon, with Richmond reporting the lowest: 210.

With respect to social rent/LAR completions, Tower Hamlets, Newham, and Ealing all reported over 500 completions over the same period (18% to 23% of their respective total completions). Sutton reported two; Kingston, three; Harrow, four; and, Richmond, 16.

These headline figures, however, do not provide a good guide as to the progress of each borough in meeting the 2021 London net additional dwelling requirements that Annex Table Two London 2029 reproduces.

Ealing, for example, has a 10-year net completion target ending March 2029 of 21,570 dwellings. An October Planning Appeal decision noted that the borough is delivering, at best, 40% of its objectively assessed need for affordable housing while the council accepts that it cannot demonstrate a five-year supply of deliverable housing sites (consistent with it delivering its London Plan targets).

As the previous section noted, the GLA affordable housing statistics series only cover programme activity that the GLA monitors, thus excluding some local authority and housing association self-funded and nil grant section 106 activity. Nor does it breakdown starts and completions according to type of provision.

Table 3 provides that breakdown by utilising the more comprehensive and complete MLCH series

Strikingly, more than 50% of the total 10,800-odd affordable dwellings completed during the last two 2019-21 years were delivered through the nil grant Section 106 route – a progressive increase from the 13.7% recorded in 2014-15.

To put that secular trend into an even longer-term perspective, until 2013-14 (when they accounted for 12.7% of the total, a proportion that thereafter rose steadily year-on-year, as above) the share of the total affordable supply accounted for by nil grant Section 106 completions had had previously exceeded 10% in one year only: 2006-07 (see  Annex Table One London 2029).

Table 3: Affordable completions, according to tenure type and section 106 status, 2014-21

Table 3 London 2029

In tune with that,  GLA analysis of planning data, published in March 2021, reporting mayoral approvals of planning applications referred to the mayor during calendar year 2020 (largely because application concerned more than 150 dwellings), advised that 37% – the same proportion as 2019, a record – of the total 38,865 units approved (14,337), and 41% of habitable rooms (a better measure as it take account of dwelling size composition and mix) were affordable. That proportion had only reached 30% in 2017, after previously out-turning in the 18% to 25% range between 2011 and 2017.

Apparently discordant with that secular trend, however, MLCH Table 1011S indicates that only c16% of 2020-21 starts were expected to be funded through nil grant Section 106 route.

 Table 4 shows that successive ten-year average completions have not diverged from the 30-year average by more than 8%.

Over successive five year periods more variation is discernible, but the table provides little evidence that the political complexion of the government in power proved a major factor; the two lowest five year averages reflected, first, a squeeze on public housing investment in affordable housing during the early New Labour years; and, second, the during 2016-21, the tail end of fiscal austerity acting disproportionately on housing capital investment presided over by David Cameron and George Osborne, tempered in outcome by increased nil grant section 106 supply.

Table 4 London 2029

Completions recovered to reach record levels during the later New Labour years; as the previous section noted, new record levels can be expected at some point during the next decade as 2019-23 start levels subsequently feed into completions.

On the whole continuity interrupted by macro-economic, public expenditure, electoral, and programme cycles, rather than any overarching ideologically-led policy intervention, consistent with post-Thatcherite governments recognising the need for additional affordable housing, if not the means.

The primary and overwhelming message is that the delivery of affordable supply has grossly undershot assessed requirements and aspirations, regardless of the political colour of the governing party.

Table 5 below uses the MLCH net additions series. It records a near-doubling of net supply from the levels recorded in the early noughties to reach c32,000 by 2009. The impact of the GFC then resulted in a drop to c21,000 in 2012-13, then a progressive increase (interrupted in 2017-18) took it to a record c41,000 dwellings in 2019-20 (including c37,000 new build completions). It then dropped back, probably due to Covid-related impacts, by 9% to c37,000 (including c33,000 new build completions) last 2020-21 year.

A sharp fall in demolitions was also recorded in 2020-21.

Table 5 London 2029

Table 6 below advises that new builds account for most net additions, although between 2015-17 changes in use from office and other uses to residential reached 22%, prompting wider concern about the space and other standards. It dropped back later in the decade.

The source statistical series (MLHC, Table 118) is not broken down according to tenure. The relative negative impact of demolitions on affordable net supply outcomes can be expected to be higher: large scale demolition of existing social housing estates has generally been more prevalent in recent decades than redevelopment of privately owned stock, more predominant in in the 60’s and 70’s.

In that light, a Southwark Monitoring Report  covering the April 2004-19 period reported 15,237 planning affordable home planning approvals but a net increase in affordable supply of only 9,924.

The demolition of estates, such as the Heygate, close to the Elephant and Castle, subject to comprehensive and long-term redevelopment and replacement programmes can cause net affordable housing supply, taking account of demolitions, to subtract from gross affordable supply.

 Table 6 London 2029

The committee was told that housing associations and other social landlords face ‘competing priorities’ between maintaining existing buildings and developing new homes, with the cost of remediating fire safety defects and decarbonising homes reducing the capacity to build new ones. A central headwind echoed in the last meeting of the London First convened  Council-Led Housing Forum (the forum) held that same morning.

Richard Hill, vice chair of the G15 group of housing associations within London, advised the Housing Assembly committee that the ‘operating environment’ its members faced required them to re-focus on building safety and investment on their existing stock, causing their development numbers to go down, noting that housing associations face multi-million billion bill to fix safety issues over the next 15 years that came attached with an opportunity cost of around 72,000 new affordable homes foregone.

The London Plan, indeed, includes requirements for all developments of ten or more homes to be net zero-carbon and to incorporate sustainable urban green spaces as part of a wider drive for London to be a zero-carbon city by 2030.

The mayor in his August press release also confirmed that housing providers building homes funded by the new 2016-23 programme, on top of that core climate change sustainability requirement, will also have to meet new conditions on building safety and design, including:

  1. The installation of sprinklers or other fire suppression systems in new blocks of flats;
  2.  A ban on combustible materials being used in external walls for all residential development, regardless of height;
  3. Minimum floor-to-ceiling heights and a requirement for private outdoor space;
  4.  A ‘sunlight clause’ requiring all homes with three or more bedrooms to be dual aspect, any single aspect one- or two-bedroom homes to not be north-facing and at least one room to have direct sunlight for at least part of the day.

Switching to the crucial wider economic environment, deputy mayor for housing, Tom Copley, advised the committee that rising building costs along with shortages of materials and labour in the construction industry could “have a serious impact on scheme viability”, while Darren Levy, director of housing for the London Borough of Newham, starkly warned that: “We’re seeing materials, labour all increasing in cost. [There are] supply chain issues. There’s a general lack of stability. The labour market is becoming more challenging, there are fewer skilled operators available, and they have to a certain extent got a number of suitors in the construction industry in London… I do think, going into the next five to 10 years, it will have a significant impact into that future pipeline”.

On top of that, NIMBY-related opposition to developments that might meet London Plan and local plan requirements but are perceived as detrimental to the local environment and/or future house price prospects, will also need to be navigated.

One of the appealing characteristics of many parts of London is that high quality and high value residential areas are often cheek-by-jowl to social housing or mixed tenure developments. But residents of the former tend to possess more effective voice power in a local planning decision context to oppose and sometimes block high density new affordable housing developments.

The role of councils

On a positive note, a ‘renaissance of council housing’ was celebrated, which the forum was advised involved the delivery since 2018 of more than 8,000 affordable dwellings by London councils; a figure expected to rise to c.10,000 by March 2022, notwithstanding the recent impact of Covid.

As was noted earlier, councils have been allocated more than 50% of the 2021-26 programme for social rented accommodation, which is expected to translate into an additional c12,000 such units funded with GLA support over the next five years.

Southwark, for instance, has a longstanding commitment to provide an additional 11,000 council homes through ‘various means’ by 2043, as part of its efforts to maintain a net increase in the council stock; an aim helped in recent years by rising values that makes the right-to-buy increasingly unaffordable to existing tenants and by higher social housing re-provision levels after a period when losses of social rented stock resulting from estate -regeneration -linked demolitions and RTB’s exceeded gross new affordable provision..

Barking and Dagenham established in 2017 a wholly owned company, Be First, that with 400 hectares of development land, proclaims plans to “provide 50,000 high quality new homes and 20,000 new jobs by 2037”. More modestly, its 2020-25 business plan that the local cabinet approved in April 2020, envisaged “the delivery of 116 new homes in 2020/21 from four development projects and the commencement of seven new development projects to deliver a further 938 homes up to 2024-25, with an average of 73% affordable housing”.

Moving west, Ealing’s November 2020 Cabinet approved a £390million business plan for BLRP, a subsidiary of its wholly owned housing development company, Broadway Living. Along with the £99m grant that the council secured from the Greater London Authority in 2018, the investment will be used to build at least 1,300 affordable homes within the next six years. In total, the plan expects to see BLRP build 1,513 homes, with the sale and let of some of the homes subsidising the development of more homes for affordable let. The business plan projected that BLRP to pay for itself over the course of half a century by “recouping the initial investment through sales and rents”.

A lot can happen over such timeframes, however, and such local development company initiatives come attached with uncertain and elongated risk profiles embracing, but not exclusively, execution, development linked to market conditions, interest rate, and funding source, risk.

The experience of Croydon’s locally owned development, Brick by Brick, created in 2016 demonstrates their potential impact provides a salutary warning. It received £200m in development loans from the council, but by 2021, after its development programme stalled, had not produced any dividends or returns, contributing to its parent council and owner becoming in effect insolvent and unable to make a balanced budget.

Mr Hayes at the forum related a shift from the previous reliance on housing associations to develop affordable or acquire housing from developers to a reaction to the growth of ‘mega’ associations with confused commercial and social ends, drawing on his previous experience as Ealing’s regeneration-lead to note the actions of two associations in embarking on a bidding war for sites contrary to the local public and social interest.

Councils with their greater democratic accountability and their ability to co-ordinate planning with provision activity and to overview local housing and other markets are relatively well-placed to step-in and step-up provision to fill the gap left by HA’s hamstrung by post-Grenfell pressures to spend on their own stock.

Councils, however, compared to private housebuilders, face higher development costs, including across their material supply chains; in that light, moves to aggregate purchasing across organisations and to secure greater vertical integration of their development activity (such as setting up in-house construction arms) can be expected.

On a different but related note, drawing on his current role at Be First, he also noted the rising value of industrial land, reaching £6m per acre, as a constraint on direct provision, although he felt that values would plateau into the medium-term.

The forum was also told that some London authorities are also approaching their Housing Revenue Account (HRA) borrowing cap and that, overall, the scope for councils to expand further direct provision beyond current plans is likely to be limited.

Taken in the round, the conclusion must be that council provision of social housing will remain a sub-theme rather than a transformative one in London housing the next decade.

The funding environment

Pat Hayes, the current managing director of Be First, also highlighted at the forum possible policy risk, cautioning that the current mercurial ‘right-wing populist’ Johnson-led government, gyrating between radical market- and state-led interventions, could simply decide to move the policy goalposts concerning council provision.

The biggest risk, as it seems to this website, is the replacement of Johnson by a successor more wedded to Rishi Sunak’s proclivity for a smaller state and fiscal conservatism – a far from unlikely scenario, even though one still likely to be tempered by the wider political imperative to retain the recently won Conservative – in the absence of a more precise description – ‘working class’ and ‘red wall’ vote.

Certainly, central government cannot be relied upon to provide increased funding support. Although the 2021 Spending Review (SR21) did announce an additional £1.8 billion in total for housing supply, on top of the existing £11.5 billion investment through the Affordable Homes Programme (2021-26), of which £7.5 billion is over the SR21 period, 65% of the funding will be for homes outside London.

The government’s political driver to target resources to the North and the Midlands – the home of its ‘red wall’ seats – to further its Levelling Up agenda combined with the chancellor’s commitment to bring down the share of national income taken by public debt within three years, means that any further increase in centrally supported housing investment for London is unlikely.

The £4.9bn that Tom Copley advised the committee that is needed ‘every year for 10 years’ to provide affordable housing on the scale needed will remain ‘for the birds’ in the absence of imaginative and radical systemic change to the housing finance system, requiring at least some measure of cross-party support.

The concluding section will return to that.

Changing programme composition

The funding and other sources of affordable housing are multiple subject to frequent change. The average amount of public grant or other support required to deliver affordable housing varies according to tenure, location, and bedroom mix, the prevailing policy environment, as well as wider macro-economic and housing market conditions.

Public grant support was squeezed down practically to nil during the 2014-19 period when public housing investment became a key victim of fiscal austerity. A social rent unit will require more than twice as much public support than an intermediate unit.

As way of example, the GLA’s Building Council Homes for Londoners fund offered £100,000 per Social Rent/London Affordable Rent compared, compared between £28,000 and £38,000 for London Living Rent, London Shared Ownership (LSO) or other genuinely affordable intermediate unit started between April 2018 and March 2022.

Programmes comprising 90% social housing and discounted home ownership, respectively, will generate quite different numbers of additional housing opportunities for households of different social-economic characteristic.

Politics abhors a vacuum, and Tom Copley at October’s committee highlighted that the mayor had successfully argued (or, put another way, the government for its own reasons had been willing to accept the principle) for the majority of the 35,000 homes to be provided (started) by 2026 to be social rent dwellings, the “most affordable and most needed” homes, noting that “the government has come full circle from when it originally wouldn’t allow social rented homes to be created”.

He further pointed out that the 2016-23 programme of 116,000 dwellings was attached with £4.9bn grant support compared to £4bn for the 35,000 dwellings currently expected to be delivered through the 2021-26 programme.

The average unit public grant cost of £42,000 to provide each of the 116,000 affordable dwellings under the 2016-23 programme will rise (mainly due to the change in programme composition towards the more grant-intensive social rent, but also due to build cost inflation and the cost of design, quality, sustainability, safety and equality, diversity, and inclusion benefits) to a projected c£114,000 for each of the expected 35,000 dwellings of the 2021-2026 programme dwellings.

The reversion back to social rent should help to contain the central government housing benefit bill to a lower figure than would be the case if the same units were to be provided at the ‘affordable rent’ tenure (higher rents require more benefit where tenants are eligible, which the majority are) and at the margin should enhance work incentives; crucially, too, the shift from intermediate to social rent should more directly assist authorities to get a greater number of homeless families out of expensive and unsuitable temporary accommodation.

The downside, however, is the much higher subsidy requirement involved in providing a social unit and the resulting trade-off that exists at any given total level of grant availability between, on the one hand, maximising social housing and, on the other, total affordable numbers, largely explains why the total number of affordable dwellings that the 2021-26 programme will deliver (start) will deliver less than a third than its predecessor (expected delivery according to current conditions and plans).

The cross subsidy model

Providers, mainly the mega housing associations, ‘stretched’ receding levels of public grant over the last decade, buttressed by reserves providing a capital risk buffer, and by building units for market sale to cross-subsidise the provision of affordable homes, between and within schemes, for example, when large council estates are progressively demolished and replaced with a higher number and density of predominately private dwellings, which when sold to finance succeeding scheme phases.

But, as noted above, post-Grenfell and other spending pressures bearing down on such providers will curb its future scope.

Across recent decades the predominate development model has been cross subsidy, certainly within London and the main urban conurbations. The process has helped to maintain gross affordable supply during a period of constricted public grant support availability.

But the cross-subsidy model will not by itself provide the affordable housing on the scale required; certainly, in the absence of a scale increase in public grant that the current unreformed public expenditure and wider policy environment will not provide.

It suffers also from other shortcomings that can militate against or even undermine its purported purpose. Cross-subsidy is intrinsically sensitive to wider market conditions, which – as in the wake of the 2009 Global Financial Crisis (GFC) – can interrupt, delay, or even forestall development progress.

The model encourages – and even at the margin is dependent – on providers to maximise market sale proceeds. This incentivises them to market and sell units, for example, to foreign investors or wealthy parents of foreign students, pushing-up prices way beyond the reach of local people on moderate to above average local incomes.

Even where developers can only maximise sale proceeds by targeting local buyers, many of whom are likely to have far from high household incomes, who then, in effect, cross subsidise the affordable units, the numbers of which, in turn, in the absence of additional public grants support, can be crimped when market sales proceeds are limited by local purchasing power.

More fundamentally, but related to above, the cross-subsidy model is predicated on, and perpetuates, a housing system that become increasingly riven and driven by multiple market failures, concentrated in the more economically buoyant sub-regions concentrated south of the Humber and Trent and east of the Tamar.

Use of nil grant Section 106

London in recent years have, as Table 3 demonstrated, increasingly has come to rely upon nil grant Section 106 planning agreements (obligations) to deliver affordable housing. It is, in effect, a mechanism to partially recycle or ‘tax’ the uplift in value secured through residential planning permission; as such it is integral to the cross- subsidy model: a palliative to the imperfections of the broken wider housing market on which it relies.

In the past, information and expertise imbalances between local authorities and developers allowed the latter to game the Section 106 system to their own advantage, increasing developer profit at the cost the number of affordable units provided: St. Mary’s Residential Case study provides a high profile Southwark example

The progressive step-increase in the proportion of total new gross affordable supply taken by nil grant Section 106 since 2013 provides some evidence of greater local authority focus and effectiveness in negotiating and then securing delivery of higher levels of affordable housing within regeneration and other schemes using the cross-subsidy model (as well as to the sterling and painstaking work done by organisations, such as the Southwark-based 35% Campaign.

A key catalyst of that step-increase was the 2017 Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), now formally enshrined in the 2021 London Plan, supporting its polices including HP5 and HP6 (discussed below), are to be implemented, which must be taken into account as a material consideration in planning decisions.

A streamlined Fast Track Route was introduced for schemes that include at least 35% cent affordable housing, and 50% on public or redeveloped industrial land that enables them to progress without the need to submit detailed viability information and without late viability review mechanisms which re-assess viability at an advanced stage of the development process.

This, according to the mayor, “provided greater certainty to the market, sped up the planning process, and has helped to increase the level of affordable housing secured in new developments”. The consequent greater consistency and certainty has substantially improved outcomes.

Schemes that conversely do not provide the threshold level of affordable housing or meet other relevant policy criteria, or that provide off-site or cash in lieu contributions, must continue to follow the Viability Tested Route and are subject to viability scrutiny and late, as well as early, review mechanisms.

Tom Copley was asked at the committee whether more affordable housing could be squeezed from private developers through the Section 106 route.

He was not hopeful, however, no doubt taking his cue from his peer, the Deputy Mayor for Planning, Regeneration, and Skills, former Hackney mayor, Jules Pipe, who a month earlier advised the September London Assembly Planning and Regeneration meeting in a Question and Answer session that continuing to rely on developer section 106 contributions to provide affordable homes,  is “not a viable way of delivering the amount that we need as a capital city even combined with housing grants. Neither is sufficient….it is still obviously a very valuable tool and we would be loath to lose it. If anything, it needs to be enhanced, but quite how … when you are still requiring all these other things from a development, it will only pay for so much. Going back about ten years, it would have been standard for developers to expect about a 20% return. I think we are getting them down to about 12.5% on many of the developments that we see. Much below that, the real estate community will say, “Well, actually, we do not get enough return in London, we will go and develop elsewhere, thank you very much.”

That last point is addressed below.

4          What needs to be done  

The 2021 London Plan (plan), based on a Strategic Housing Market Assessment (SHMA) undertaken in 2017, publicised that London needs to deliver each year c66,000 net additional completions across all housing tenures for the next ten years, two thirds (c43,500 or 65%) of which should be in social or affordable tenures.

Yet the Planning Inspectorate report that reviewed it concluded that over the next 20-25 years capacity only existed to deliver only 52,000 net new homes per year. Consistent with that, the total ten-year target for new dwelling additions across London contained in the London Plan (reproduced in Annex Table Two) only totals 522,870 dwellings. Little evidence exists to provide confidence that authorities are on track to meet their targets with some, such as Ealing, reported earlier, unable to demonstrate sufficient progress.

The stark fact is that the past, the current, and the planned future provision of both total and affordable homes within London, as demonstrated in this post’s data tables, will continue to fall well short of the plan’s target and capacity.

The improved levels of annual net additions achieved in recent years, reported in Table 5, running at c40,000 still are less than two-thirds of the SHMA requirement, while the proportion of that total taken by affordable dwellings seldom exceeds a third.

Much therefore must change if future delivery is to approach declared needed levels.

On a positive note, a general cross-party – national and local – political acceptance has developed that new dwelling supply, and the share of affordable housing within that total, should, indeed, increase.

That acceptance, albeit sometimes masked by tactical discordant rhetoric – whether emanating from Whitehall or City Hall – has, however, been largely limited to the payment of lip service to a recognition that the ‘housing market’ does not work, save for some measure of government pragmatism in terms of policy change at the margin, such as lifting of the HRA borrowing cap.

But the radical and concerted changes to the strategic policy framework that real progress requires has stubbornly remained backstage.

Why land and multiple housing market failures bedevil new housing opportunity

The slippery slope began with the progressive divorce of the twin-principles enshrined in the 1947 Town and Planning Act that both development control and value vested with state. During the 50’s and 60’s the reduction and abolition of development (betterment) and changes in compulsory purchase legislation, in combination provided scope for developers to realise future gains from value uplifts attributable to the granting or even hope of residential planning permission.

That process and its resulting consequences has been clearly charted by the work Derek Bentley has done for Civitas, most specifically in The Land Question, which by piecing together various sources, noted that between the mid-1950’s and 1990’s, the average price of land attached with residential planning permission, at 2016 prices, spiralled from £150,000 per hectare to £1.3m, surging again to £5m by 2007, reaching £6.2m prior to the onset of the GFC. Values have risen subsequently. Land in agricultural use without prospect or hope of development is attached with an average value of £22,000.

This website in  The Measurement of Land Prices used similar sources to report 1994-2010 valuation trends of land vested with planning permission, while noting problems inherent in the compilation of land price indices (largely ceased since 2010) which try to provide weighted averages of an enormous array of transactions that vary according to site size, location and connectivity, other site circumstances, on the density of its development, and on the planning conditions imposed, as well, of course, on actual and expected future market conditions,

More recently, indicative land values of a hectare of land attached with residential planning permission across London ranged from £6m to more than £35m.

Technical detail should not, however distract from the clear and instructive story that Figure 1  below paints of the upward step-change in land prices that commenced in mid-fifties accelerating across cyclical oscillations, subsequently.

Figure 1

The financial liberalisation of the eighties, lubricated by the secular downward trend in interest rates, easier access to mortgage finance, and growth of dual income households, increased monetary demand for housing.

It was not accommodated by supply, constricted, as it was,  by the cessation of mass council building programmes and by a tendency towards market concentration in the private housebuilding sector.

The prospect of higher market sale proceeds, crucially, bids up the future cost of development value of land, propelling prices further upwards, sometimes in a frenzy to be followed by a subsequent bust that then compresses supply even further. Higher and rising proportions of residential development value, up to 70%, are now accounted for by land.

The housebuilding industry has been transformed from one marked by dispersed multiple small and medium-sized suppliers in often local markers competing on both quality and price to an oligopolistic structure dominated by a few large, mainly national, builders. The three largest Persimmon, Wimpey and Barratt, account now for around a quarter of the market, compared to 1988, when Daily Telegraph columnist, Liam Halligan, in his recent book, Home Truths, advised that 40% of completions were provided by 12,200 companies.

The end-result, now widely noted and recognised across the political and ideological spectrum, is that the these now dominant companies have become price-givers driven by an incentive to restrict supply to maximise their short-term profit rather than output, allowing them to make supra-profits – as much as £60,000 or more per house built, and to pay chief executive and other salaries and bonuses in the millions, while engaging in restrictive practices, such as inserting covenants that involve regular doubling of ground rents on properties that could be sold freehold.

It is a ‘market’ in name for a product – vital to individual and community well-being – distinctive in that it has risen in price so much in both absolute and relative terms in tandem with a quality decline, where consumers can exercise so little real choice. It is truly a market broken by the imperfections and distortions outlined above.

Two pathways – given the prevailing and expected future political and financial environment – appear to provide the best and most feasible routes to future London and national housing affordability.

1         Public accounting for productive housing investment

Across the short-to-medium term, there is little or no prospect of any further step-increase in central government housing investment funding arriving to push up that total substantially to lessen that trade off; the downside risk, rather, is that fiscal conservatism will have re-exerted itself within the Conservative government by the time of the next spending review.

Even in the unlikely event that a Labour or hung parliament was elected in 2023-24, a scale increase in housing investment would require it, not only to set fiscal rules that lift the current 3% of GDP ceiling on investment expenditures, but to juggle and prioritise competing public investment demands in such a way that both maintains financial market confidence and avoids construction industry material and labour shortages.

Recent speeches by the Labour leader and his shadow chancellor have emphasised that Labour next in office will be ‘fiscally responsible’ and will not ‘throw public money’ at problems for the ‘sake of it’.

Quite so, but also redolent of New Labour whose early headline adherence to previous Conservative spending plans to demonstrate its fiscal probity resulted in a squeeze on affordable housing investment during the early noughties, which had deleterious economic and social consequences.

A symptom of the real fiscal crisis of the state marked by a mismatch between the public expenditure requirements of the UK and the political and electoral willingness for them to be met through salient and efficient forms of taxation, or borrowing where economically and financially sustainable and appropriate.

Given that, it is both vital for, and incumbent on, the housing sector to make as strongly and clearly, as possible, both the economic and financial, as well as social, case for increased affordable housing investment, and to integrate that with supporting supply side reform to the construction industry.

Affordable housing investment due to rising rents and values, can be self-financing over a 30 year or plus time span. An increased supply of social housing should reduce and deflate the future costs of keeping priority households in expensive and unsuitable temporary accommodation.

A strong invest-to-save case, therefore, can and should be made, alongside, and integrated, where possible, with innovative reforms to the financing of affordable housing and its associated public accounting treatment consistent with the above.

2        A root remedy to engage with an overlapping political consensus: deflating future land prices directly by embedding affordability requirements 

The 2017 SPG  adopted the Existing Use Value Plus (EUV+) approach (current use value of a site plus an appropriate site premium), to determine the benchmark land value. It serves to embed known and increased affordable housing requirements, crucially, into the generation of shared future public and developer expectations on expected sale receipts and thus acceptable planning gain surpluses, then feeding into future land value and price expectations. That is getting to the root of the matter (addressing a core housing market failure: escalating land prices based on speculative rent.

Housing Policy Five (HP5) incorporated into the 2021 London Plan (para 4.5.4) confirmed that the approach seeks to embed affordable housing requirements into land values and create consistency and certainty across London, noting earlier where there had been a relaxation in affordable housing and other planning requirements, it typically led to higher land values, not an increase in housing delivery. It further advised that the 35 per cent affordability threshold level will be monitored and reviewed in 2021 to determine whether it should be increased, with any changes consulted on as part of an updated Affordable Housing and Viability SPG or through a focused review of the London Plan.

Jules Pipe did shed doubt, however, in September, as the preceding section noted, whether much more affordable housing can be squeezed out of the Section 106 route at the London-level, at least without wider, supporting, and concerted changes to the national policy framework.

A point, indeed, that this website’s  March 2018 Response to London Plan consultation advised that it : “fully supports the aim and content of the Mayor’s AHVSPG (2017 SPG) and believes that it sets a needed template for national housing policy reform as part of a needed package to repair Britain’s broken housing market. This requires the effective direct deflating of land values and a reduction in developer profit margins. But by the same token it is concerned that its intentions to be achieved requires similar reinforcing strategic policy reform at the national level, without which there is a possible danger of a developer ‘strike’ occurring at London-level as the largest housebuilders/developers migrate to locations where they can continue to enjoy excess super-profits. Cross party support for a sustainable reform – based on a credible and sustainable tailored incremental approach – is again a pre-requisite for the effective implementation of the needed package of reforms”.

The driving principle of 2017 SPG to close the gap between existing use and developed land value across all planning authorities should now be extended nationally, but in a way cognisant with regional, sub-regional, and local housing market characteristics and values, where necessary. In some lower value areas an EUV+ of, say, 30%, could, unlike London, render specific affordable housing thresholds almost superfluous.

In short, greater universality and consistency in ends and purpose at a national policy level, which allows a locally tailored treatment, rather than a uniform ‘one size fits all’ prescription, is required.

Such an extension and deepening of the principles of the 2017 SPG would directly reduce the cost of new housing: the root of the matter.

It would align along the line of current political least resistance to make the Section 106 process simpler, with greater certainty and transparency, making paramount the principle that the planning gain attributable to granting of residential planning permission should be recycled to the maximum possible extent to the provision of affordable housing and of supporting social infrastructure.

To take one example of that, the 2017 Conservative Manifesto  (p41) committed a future Conservative government to ‘work with private and public sector house builders to capture the increase in land value created when they build to reinvest in local infrastructure, essential services and further housing, making it both easier and more certain that public sector landowners, and communities themselves benefit from the increase in land value from urban regeneration and development’, consistent with an overlapping political and technical consensus that the provision of affordable housing must be mainstreamed through measures that directly reduce the cost and price of housing and that blur the distinction between market and social housing, into both public and private business models.

The corollary is, of course, is that London political stakeholders should gravitate towards such a broad-based cross- party campaign given that London’s housing outcomes largely depend upon the national policy framework.

Whether any government, especially a Conservative one with strong links with the housebuilding industry with its now entrenched vested and lucrative private interests, would possess the will, focus, and strength of purpose to secure such a change, remains open to doubt. After all, not much has come from the 2017 manifesto pledge.

Perhaps, before long, political necessity will breed boldness to do what is right. The time for helping that moment along is now.

Annex Table One London 2029

Annex Table Two London 2029

 

Introduction

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Housing, Macro-economic policy, Time for a Social Democratic Surge, Welfare State and social policy Tagged With: London

Winning the Final Straight

7th December 2019 by newtjoh

The polls, although tightening with the squeezing of  the Liberal Democrat and Brexit party vote share, continue to project a comfortable working majority for Boris Johnson on 12 December.

Labour itself seems resigned to limiting losses of seats in Brexit-voting areas in the Midlands and North, the same areas, as Brexit and Lies that Matter pointed out,  which will suffer the most from a bad-Johnson Brexit.

The 2017 Corbyn effect has not materialized this time round. His lamentable  failure to lance the anti-semitism boil, and his similar – but different – inability or unwillingness to relate to ‘Middle England’ in a way that his electorally successful predecessors – Attlee, Wilson, and Blair – did in varying ways, continues to dog his party’s prospects.

The actual result on Thursday, of course, cannot be predicted precisely in today’s uncertain political environment.

The young and undecided could still tilt towards Labour on the day.

Local circumstances and issues could intervene and disrupt the national pattern given the vagaries of our current electoral system.

The parties’ respective manifesto commitments, or, rather, lack of substantive ones that can be trusted, could still induce an unexpected decisive and late electoral effect.

Significant electoral shifts, however, invariably follow a wider groundswell of the popular mood. Yet that remains stubbornly stuck in muted cynical mode.

The Conservative’s resurrection of their ‘triple-lock’ commitment not to increase income, national insurance, and VAT rates compares with Labour’s to fund additional expenditure from increased taxes on companies and income-tax payers earning over 80k.

Although clear blue water, accordingly, has opened-up between Labour and Conservative on tax and spending, neither party have articulated a future economic and social vision that engages and resonates with the wider electorate.

It will be tragic if the lies of an entitlement-laden and amoral former Etonian prime minister allows him to win the day because Labour neglected to engage and enthuse Middle England voters, at a time when the intellectual tide has turned in favour of, and national need calls out for, a radical but feasible socialist or social democratic – call it what you will – programme in government.

To deny Johnson a working majority Labour must continue re-orient and its Prioritise its message, but with much more Focus, Consistency and Honesty.

It should mesh its vision and Brexit policy much more clearly, highlighting how a bad-Johnson Brexit will sunder the UK, undermine peace in Northern Ireland (NI), and generate unnecessary economic costs, acting as a deadweight drag or worse on growth and  hence the public finances across the UK.

This when the maintenance, let alone the improvement, of public services to an aging population in reality, will require increased borrowing to fund rising real current expenditures and/or higher taxes, which, if not direct, will be of the less transparent stealth variety, difficult to limit in incidence to higher income groups, even when intended. Funding social care is a case in point; honesty on that score is needed.

To be successful, both in electoral and sustainable strategic policy template terms, ‘Goody-bag’ giveaways and unattainable maximalist gestures should to be downplayed. Measures that interlock economic justice and efficiency should instead be prioritised.

Institutional reform to secure demonstrable efficiency in the selection, planning and delivery of infrastructural investment must be integral, and not subsidiary, to the design and operation of fiscal rule reform: greater fiscal latitude for productive public investment must go hand-in-hand with greater demonstrable efficiency in its selection and execution, as set out in  Making Public Investment Smart.

Individuals are empowered, in practice, to take control over their future by having pathways to suitable, available, and improved education, housing and job opportunities, forged and opened-up across the country, pushing up productivity and expanding economic opportunity to lower income households.

That, in turn, will depend upon high quality transport, digital, and social infrastructure in housing, education, and, to a degree, cultural services within existing high-productivity cities and areas – the London-Oxford-Cambridge triangle is a case in point – to maximise their potential to generate more growth through the further complementary agglomeration of productive firms and people.

At the same time, coastal and smaller cities and towns, especially in sub-regions located north of a line drawn between the Humber and Wash and in Cornwall, that have borne the brunt of decades of de-industrialisation, losing jobs not replaced by relatively stagnant or declining service sectors – the same areas that tend to the most exposed to the loss of EU Structural Funds – will also rely upon targeted and efficient productive investment in economic and social infrastructure.

Is the answer then, growth-friendly general or ‘place-blind’ policies to improve education, healthcare, infrastructure, and affordable housing?

Or more place-based policies to tackle regional inequality, where subsidies, grants, and public infrastructural investment are targeted to individuals and firms, according to location?

Both, according to International Monetary Fund (IMF) researchers in a recent world-wide survey of regional inequality, pointing out that the high cost of housing in high income regions and cities restricts domestic migration, while the rejuvenation of declining areas requires an expanded supply of locally available better paid jobs, supported both by an improved local skills base on the supply side and by rising demand for locally-produced goods and services.

A conclusion echoed in another recent paper on innovation policy, endorsed no less by Dominic Cummings, Johnson’s  human lodestar: an example of  the flow of the intellectual tide mentioned above, but all much more in accord with the Labour manifesto than the Conservative one .

In the UK context, that means partnerships between Whitehall, devolved, and local government to attract and sustain private investment to lagging sub-regions and areas com, where possible linked to university and other sources of expertise that can lead best to the cluster development of productive enterprises, combined with targeted and efficient productive public investment in site preparation, affordable housing, education and skills, and above all in improved connectivity allowing people to access quality employment opportunities within reach of their existing homes.

Reducing the friction of travel Trans-Pennine and within the West Midlands are two of the more obvious examples of productive public infrastructural investment contributing to long-term prosperity.

Another practical example of the potential of public investment to raise productivity and growth in a balanced and equitable way is a sustained increased in investment on affordable housing to a broad steady-state level, meshed with the planned expansion of apprentice and training opportunities targeted to indigenous young people.

Besides its social impacts that should help to mitigate and avoid existing and future labour bottlenecks within the industry, while enhancing human capital and productivity outcomes and making them more balanced in income and spatial distributional terms, thus interlocking economic justice and efficiency in practice.

The costs of providing infrastructural investment should be reduced by directly tackling market failure and rent-capture. Speculation in land largely explains the escalating cost of buying a home,  as is increasingly recognized across the political spectrum, most recently by the Conservative-leaning Financial Times journalist,Liam Halligan, in his recent book, ‘Home Truths’.  Another example of the current flow of that tide that Labour is not harnessing.

The land root of the current crisis of housing affordability, indeed, must be overcome for real progress to be made in a way that impacts on the majority of those wishing to buy and rent affordable housing, not just those most likely to qualify for social housing.

It is quite likely that a Johnson Conservative Brexit government will pivot towards variations of such measures – at least in early rhetoric before the inevitable capture and perversion of ends and process by the same vested interests that fund the party, choke them.

Labour should occupy that ground during the last week of the campaign.

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Brexit, Economic policy, Time for a Social Democratic Surge

The process and impact of Quantitative Easing (QE).

18th June 2018 by newtjoh

The Bank of England (BoE) statutory monetary policy remit or mandate since 1998 has been to secure price stability in a way that supports the government’s economic policy objectives. The Chancellor’s November 2017 annual letter to BoE Governor  defined that as the achievement of ‘strong, sustainable and balanced growth’. The same letter, however, underscored the government’s ‘absolute’ continuing commitment to price stability. That BoE mandate is operationalized by a forward-looking ‘medium-term’ inflation target of two per cent, as measured by the Consumer Price Index (CPI).

The primary monetary policy instrument open to the BoE to achieve that target is through influencing short-term interest rates by changing the rate – the Bank Base Rate (BR) –  that it levies for the near-term use of its own funds. But, BR, has been close or at its effective lower bound (ELB) – where reducing it further is expected to have little or insufficient impact on domestic real economic activity – for nearly ten years.

BR was reduced to a historic low of 0.5% in March 2009. It was then that the introduction of QE was also announced, in effect, to give a second string to the BoE monetary policy bow, in recognition that conventional monetary policy – changing BR – in the wake of the Great Financial Crash (GFC) had been rendered too weak to be effective on its own.

QE involves the BoE creating new money electronically and expanding its balance sheet massively in order to purchase financial assets, predominately longer-dated (5-25 years) government bonds (gilts), mainly from insurance and asset management companies, pension funds, and other non-bank institutions, https://www.bankofengland.co.uk/monetary-policy/quantitative-easing.  £375bn of such assets were purchased between March 2009 and July 2012, across three phases:

  1. £200bn between March 2009 and January 2010 (QE1);
  2. £125bn between October 2011 and May 2012 (QE2);
  3. £50bn extension announced in July 2012 (QE3).

There was then a lull until August 2016, when in response to Brexit uncertainty, the MPC announced, on top of a further cut in Bank Rate to 0.25%, another £70bn of asset purchases including a limited tranche of £10bn corporate debt (QE4).

For purposes of simplicity, post-GFC UK monetary policy (MP) can be defined as MP = BR+QE, with both acting in concert.  The acronym, MP, in this post, is used in accord with that meaning. References to monetary policy relate to its more general non-time-bound meaning.

The impacts of MP, in practice, over time, have been and are affected by the complementing or offsetting impact(s) of fiscal policy (FP), as well by a raft of other macro-economic factors, some endogenous (internal) to the economy, such as productivity, others exogenous, such as changes in internationally-set energy prices impacting upon the domestic inflation rate.

Since 2010, with interest rates remaining at their ELB, and with discretionary fiscal policy contractionary in impact, and thus acting in an opposite direction to that of MP, QE has provided the primary, if not the sole, active policy mechanism or instrument to inject additional discretionary demand into the economy to sustain output and employment.

The Chancellor’s November 2017 letter confirmed that the QE asset purchase facility would remain in place during 2018-19. The BoE had still not sold back into the financial system any of the £435bn worth of the bonds that it has purchased under QE since March 2009. Maturing bonds are replaced or rolled-over. Such sales would take liquidity out of the financial system, tending to push up short-term interest rates, thus acting as a drag on expansion within the economy, all other things being equal.

The BoE jealously protects, however, its flexibility to reverse QE in the future, if its Monetary Policy Committee (MPC) considers that would be consistent with its primary price stability remit. The post-GDC QE programme remains very much unfinished business.

How QE works in theory 

The honest answer is that even the central bankers don’t really know for certain (see Table 1, https://www.bankofengland.co.uk/working-paper/2016/qe-the-story-so-far ). The main identified transmission mechanism assumes that asset-holders, following changes in longer-term interest rates induced by QE, switch from lower-yielding and safe assets into higher risk  asset classes more associated with increased real economic activity: the ‘portfolio re-balancing’ effect.

In that light, a Speech by Deputy Governor of BoE in 2012 suggested that as an immediate effect, QE1 had lowered long-term gilt yields by around 1% (100 basis points) between March 2009 and January 2010, and a 20% increase in their price. Investment-grade corporate bond yields, in turn, were lowered by about 0.7% (70 basis points), and high-yield corporate bonds somewhat more, by 150 basis points. Later QE rounds appeared to have been more muted in their impact on gilt yields, but this may have been due to other influences within the wider macro-economic environment, such as the intensification of the Eurozone crisis.

BoE-financed asset purchases increase the demand for longer-dated government gilts and other securities (5-25years); other things being equal, this should push up their price and reduce their yields (interest as proportion of price). The financial institutions selling such bonds to the BoE can then use the resulting receipts to acquire equities and corporate bonds. That they should do so rests upon impact of the QE process suppressing safe-haven bond yields, thus improving the relative the risk-adjusted returns of equities and corporate bonds, as an asset class.  Such portfolio rebalancing should lower the cost of capital for firms issuing new equity or bonds by increasing their price or value while lowering their prospective yield (increasing potential receipts at point of sale and reducing their interest cost over time), so encouraging business investment. The BoE back in 2012 noted that given that both UK new equity and bond corporate net issuance rose sharply in 2009 compared to the preceding 2003-2008 period, that this provided some evidence that this may have happened, not only as response to the cuts in BR (which made equities relatively attractive as an income-earning asset), but also because of the immediate effect of QE1 on raising the demand for equities relative to gilts through the portfolio balancing effect.

Rising equity and property asset values that makes their holders, whether they are Middle England homeowners, or owners of substantial equity holdings, or firms with such assets, feel richer and ‘confident’ than they would otherwise be, and so more inclined to borrow, to invest, and to consume more, can provide a related but indirect ‘wealth effect’ transmission mechanism into real economic activity.

The injection of liquidity into the financial system by QE should also increase commercial bank deposits. Financial institutions selling bonds under QE will tend to deposit their receipts with their banks and/or use them to purchase higher risk assets that, in turn, generate receipts for the selling counterparty to deposit with their banks. This increase in the short-dated liabilities of the banks should encourage them to expand their direct lending to firms and to individuals to secure a return exceeding the interest payable to depositors –  the ‘bank lending channel’.  Little evidence is reported, however, that this happened, or was even expected. Banks preferred in the wake of the GFC to increase their reserves to cushion future anticipated asset write-downs of bad debts, even if that impacted adversely on their profitability.

Bank lending to households and firms can, of course, in any case, be used to fund the purchase of existing assets for speculative capital appreciation purposes, rather than on new productive assets that can generate future additional output and income.  As noted above, rising asset values can impact on real economic activity, largely indirectly, through the wealth effect.

The aggregate and distributional impact(s) of monetary policy (MP), as reported by the BoE

That very tendency of post-GFC MP generally, and of QE especially, to increase the prices of equities and property assets, has given rise to concerns about its distributional consequences and their possible impacts) on widening both class and generational inequality, with Conservative Cabinet Ministers expressing concerns about MP policy decisions made by unelected technocrats that reward the already-rich.

A growing sensitivity of the BoE to such claims is clearly discernible in recent speeches by senior staff and within its research output. A, March 2018, Staff Working Paper No. 270,  modelled both the aggregate macro-economic and the distributional household income and age cumulative impacts of the reduction of BR from 5.5% to 0.5% between February 2008 and March 2009 with the introduction of QE1-3, claiming to be the first UK study to investigate the impact of monetary policy in such detail at the household level.

The methodology it applied, involved, first, modelling the aggregate impacts of MP on gdp, employment, wages, consumer prices, house and equity prices, using the main BoE macro-economic forecasting model. The counterfactual of what would happened if monetary policy had remained unchanged in response to the GFC was applied.   Then the estimated macro aggregate impacts it generated were then mapped to the micro balance sheets of individual households. This was done comparing data from the government’s Wealth and Asset Survey (WAS) for 2012-2014 and the Family Resources Survey for household incomes to earlier surveys, covering household:

  • interest payments and receipts;
  • employment income;
  • financial, housing and pension wealth; and on the:
  • effect of prices induced by MP on household real savings and debt levels, fixed in nominal terms.

The impact of MP on different households was then further mapped, according to:

  • tenure status;
  • whether members were in or out of work;
  • age cohort.

Andy Haldane, the BoE’s current Chief Economist, summarised in his April 2018 speech, How Monetary Policy Affects your GDP,  the results of that cumulatively across the 2008-14 period, graphically displayed across 24 charts.  The headline results reported included that without MP, the:

  • unemployment rate would have been four per cent higher, gdp eight per cent lower, and consumer prices 20% lower;
  • overall impacts of MP income and wealth terms on different cohorts of society since the GFC proved positive and significant in overall; the average mean income household benefited by an estimated £1,500 a year, and £9,000, (charts 7, 8 and 9);
  • overall distribution of income and of wealth, as reported by the 2012-2014 WAS, between the end of 2007 and 2014 remained broadly the same: in a nutshell, the UK’s unequal income and wealth distribution appeared to have remained largely unchanged by the combined impact of MP (see Charts 5 and 6).

Drilling-down on the distributional impact of MP:

  • half of the total income gains in real cash terms was concentrated to the benefit of the top two income deciles; but, in percentage gain terms, Haldane advised, they were ‘reasonably evenly spread out, despite being slightly lower for lower-income households and negative for the lowest income decile’ (see chart 10 and 11, respectively);
  • the young gained proportionately more from the positive modelled impact of MP on inducing lower unemployment and higher wages – an outcome related to the relative greater pro-cyclical propensity of the young to participate in the labour market compared to older age groups if provided with the opportunity, (see charts 14 and 15);
  • households around retirement age, however, gained the most from the modelled impacts of MP on their total wealth (see chart 16);
  • higher income decile households secured higher additions to their utility (welfare) than did lower-income deciles (chart 22), but the welfare benefits of having a job, and its associated job-satisfaction and self-esteem benefits, were concentrated in favour of the young (chart 23).

Haldane offered some additions. Notably, the social welfare benefit of enjoying improved levels of subjective satisfaction or happiness (utility) as result of having a job and/or improved job security, as well as from higher levels of income and wealth, was computed. Regression analysis was used to translate WAS-reported changes levels in household happiness into a notional-income equivalent. Reduced unemployment and arrears were found to have an especially statistically significant impact in explaining survey-reported changes in household happiness. Strikingly, a reduced probability of being unemployed was associated with a notionally deduced income-equivalent effect on household well-being of £7,300, compared to an actual reported average household income of £32,500.

Disentangling and quantifying the particular effects of QE must have presented an even more challenging task to the researchers.  Charlie Bean, the deputy governor of the BoE the time, in the speech referenced above, noted that equity prices did rise substantially during both the periods covered by QE1 and 2. This was no doubt related to multiple reasons, including the continuing impact(s) of BR being cut to 0.5% that by reducing bond yields tended to make financial investment in equities relatively more attractive.  His tentative conclusion was that equity prices probably rose by about 20% and 10%, as a direct consequence (my italics) of QE and Q2, respectively. This was on the back of the broad empirical fact that the introduction of Q1 and Q2 coincided with equity prices switching from a decline to growth trend, as well as on more analytic BoE econometric studies conducted at the time. The 2018-reported findings also stated that QE had the most modelled wealth impact on equities. Instructionally, lower income or younger households tend not to own equities  (as they don’t tend to own housing wealth): the Bank of England quarterly-bulletin,2012, Q3, noted the richest 5% of households owned 40% of financial wealth held outside pension funds.

Only one chart (21) out of 24 in the latest 2018 BoE published research, reported QE-specific results. That painted a rather rosy picture, denoting that the overall impact of QE across the income distribution was positive, with all ten decile household cohorts enjoying an estimated c.20% average cumulative rise since 2007 in average real net income. There was some variation; the second to fourth deciles benefited from slightly under 20% gains, while the top decile enjoyed 30%. In that regard, the health warning that the direction of a modelled impact, rather than its precise estimated quantification, is more instructive, remains relevant. The translation of higher levels of household income and wealth attributable to MP to additions to their social welfare was appropriately captured by the near-logarithmic (constant percentage increase) across the distribution deciles that the survey reported, Haldane concluded,  in preference to average cash increases per decile, invoking the diminishing the classical marginal utility of income principle that a unit increase in income is worth less to a rich person in marginal utility or social welfare terms than a poor one.

WAS is collected only from private households, excluding people living in publicly provided housing.  As the authors of the working paper recognised, using the household as the unit of measurement hides inequalities within households; for example, young adults living with their parents while saving to purchase their own home were not be separately identified in the results. This is relevant as although MP does appear – according to the research –  to have particularly benefited some groups, such as the established homeowners; other groups, including, tenants, or, indeed, the increased number of young people having to still live in the parental home (and not separately recorded) due to unaffordable housing entry costs, were likely to be disbenefited by the impact of MP on the house prices and rents.   For members of Generation Rent, such effects, could be very significant, indeed.

Putting on one side survey sampling issues and the sensitivity of the regression results to different assumptions and specifications, the specifications and assumptions of the BoE model, or any other model for that matter, may or may not have captured the interaction of MP with other macro-economic and other quite possibly unidentified influence and their (temporal) distribution over time. As the FT economics editor, Chris Giles, has pointed out with respect to the economic modelling of different Brexit options, economic modelling depends on a lot on things that we don’t know. The BoE model patently failed, to take a notable example, to forecast the GFC as its specification failed to capture the actual behavior and impact of the financial sector.

Nor should sight be lost that the BoE is evaluating its own conduct of MP. Take one possible instance of that: its Chief Economist chose to introduce (no doubt an important and welcome dimension to macro-economic analysis) the impact on individual social welfare of MP in his analysis of the distributional impact of MP, highlighting that these were positive, as reported above; but these welfare gains only partially offset and compensated for what must have been much larger losses in welfare that followed the GFC that could have, in part, been made worse by the prior pursuit of monetary policy combined with failings in financial system regulation.

That said, all policies will involve winners and losers, who, in theory at least, could be compensated. And, after all, the remit of the BoE is not to secure some desired abstract distributional result, but, rather, to secure a medium-term inflation target consistent with future sustainable non-inflationary growth.

When measured against that benchmark, how effective has MP been?

Understanding the wider picture

It is important not to lose sight that any modelled positive changes in aggregate macro-economic outcomes and in micro household circumstances that may be attributable to QE, at best helped to ameliorate – and not to reverse or to overcome – the deflating cumulative impacts of the GFC and the following Great Recession. A state of stagnation now shrouds the UK economy. Many individuals and households are worse-off than they were in 2007: an unprecedented post-war outcome.

That interest rates remain at their ELB nearly a decade later, reflects the empirical reality that the UK has still not had a proper recovery yet, nearly 10 years on from the GFC. Its muted,  uneven, and incomplete nature was spelt out in Speech by Andy Haldane, May 2016, Whose Recovery?  in some evidential detail. He catalogued that actual real per capita gdp has barely moved since 2007, while net national income (after taking account of remittances of income and profits to foreign countries) fell, and net disposable household income flat-lined. Real earnings remained five per cent below their 2009 peak in 2016, and, although the incomes of the poorest income deciles did rise, this was largely because of the redistributive impact of pensions and benefits.

Increases in income and in wealth over the course of the decade have been largely captured by higher income and older households; while the real disposable incomes of pensioner households rose by 9%, the incomes of working age adult households fell by 3%. The median income household enjoyed little benefit, mirroring a similar long-term trend in the US. Consistent with that, Haldane postulates that half of all UK households have seen no recovery in their real inflation-adjusted income since 2005 (although he was reporting in 2016 using BoE analysis of data available then, the economy subsequently has not showed signs of a material recovery, rather, if anything regressing further). Regional inequality – measured by gdp per head – also widened.

The real actual income of younger people fell further and recovered more slowly from the GFC than did older age groups. Although MP impacts on their employment income especially, as was reported and considered in the preceding section, may have helped them, in the sense that their economic position in its absence would have been even worse otherwise, that countervailing influence was not enough to prevent the economic position of that group worsening, when considered and measured over the course of the last decade.  The growth of self-employment, part-time-working, and zero hours contracts within the labour market, no doubt, was connected to that outcome. Total employment levels recovering to record new levels conjoined with downward pressure on wages and job security.

The different presentational slants of these two speeches by the BoE Chief Economist are marked, no doubt related to the different purpose and target audience of both. They are not necessarily contradictory, but it takes quite an effort to reconcile them. The connecting thread between them is that MP served to prevent the economic fall-out of the GFC from being substantively worse than it proved, on ‘an umbrella doesn’t stop but protects from the rain’ basis.  Economic conditions were maintained that allowed many to either return or to enter the labour market and so secure better incomes and enjoy welfare levels higher than would otherwise been the case in the absence of MP. What MP has not done is to put the economy on a recovered sustainable growth path.

Even more seriously that sin of omission is linked to one of commission or agency. Where liquidity created by QE flowed into the purchase of existing land, housing, and equity assets, combined with the impact of low interest rates, it will have tended to pushup such asset values, along with the corporate profits of companies in the property and financial sectors. Many middle-income deciles saw their wealth rise, even while their incomes stagnated. The entry of the young into owner-occupation became much more difficult – at least without a contribution from the Bank of Mum and Dad. The richest households benefited disproportionately from rises in equity values. Leaving aside the broad distributional tendency for MP in general and QE in particular to maintain the status-quo of the wealthy staying wealthy, the poor remaining poor, and those in the middle, and the young in particular, having to run faster to maintain their position, comes the rub.

The palliative process and effect of MP risks creating conditions conducive to another asset bubble-induced recession, which are particularly prolonged and damaging, rather than helping to build the foundations and providing the wellsprings of future sustainable and balanced growth in line with the stated macro-economic objective of the current government.

Conclusion: a problem of political economy

Intuitively it seems safe and fair to conclude that QE acting in concert within the wider MP response may well have helped to prevent the GFC from turning into another Great Depression.  Not an unimportant outcome, of course: at least, when taken on its own terms. On the other hand, its immediate effect in helping to stabilise an economy in systemic crisis may have initially served to obscure that BR+QE can be inherently inadequate to secure sustainable recovery when interest rates remain at their ELB for a prolonged period. The UK economy appears to be in a near-comatose state, where fitful recovery alternates with stagnation. MP appears to have become the economy’s ‘life-support’, which, if reversed, could tip it back into prolonged recession or worse.

This lends support to the growing body of informed opinion that the current macro-economic policy framework has been overtaken by events, and that it requires strategic reform if the economy is to provide the future growth, incomes and public resources that its population expects and will demand.

The centre-left leaning think-tank, the Institute of Public Policy Research (IPPR) in March published Just About Managing Demand.  This proposed comprehensive reform to the BoE mandate, including raising the inflation target by up to two per cent to allow the economy to ‘adjust permanently to a higher rate of inflation’, which would then allow interest rates to settle at a higher resting point, giving greater space for a rate cut to be made in response to a future recession. The fiscal rules would also be changed allowing fiscal policy to be used as primary activist policy lever in place of the ‘uncertain and unreliable QE’ to restore and protect levels of aggregate demand when interest rates are at their ELB, and where ‘government fiscal policy is believed to be overly restrictive’.  The independent remit of the BoE would be further extended to allow the MPC measured against its medium-term inflation mandate to decide when such a stimulus was necessary and its quantification. The BoE would also gain an added power to ‘delegate’ that economic stimulus to a new National Investment Bank (NIB) in effect, linking it the introduction of a more interventionist industrial policy.

Other more market-oriented economists, including ex-members of the Monetary Policy Committee (MPC), such as Andrew Sentance, argue that weaning the economy off the addictive, artificial and harmful prop of abnormal and ultra-low interest rates, requires that they should rise and QE be unwound. Capital could then gravitate and be allocated to where it could secure the best return; the historical process of ‘creative destruction’ could then re-exert itself. Zombie companies, such as many high street retailers, would exit the market, releasing resources to the growth sectors of the future, capable of  creating the new sustainable jobs that could replace the zombie ones extinquished.

The BoE faces a MP policy double bind, where interest rates need to rise to provide it with some reserve power to respond to a future recession or shock, but given the reliance of the UK economy on debt-financed consumption and high and rising house prices – at least in London and the South-East –  and the current context of Brexit uncertainty, such rises could risk precipitating a downturn turning stagnation into actual recession that may or may not be followed by either depression or by a new process of creative destruction and rejuvenation; or rather, by much the same. Who knows?

The macro-economic framework is in a state of limbo, therefore, where the BoE is unable to achieve its remit in an economically, socially, and, thus over time, a politically acceptable way, but alternatives are stillborn.  Something sooner or later will need to give.

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Economic policy, Time for a Social Democratic Surge Tagged With: Andy Haldane, Bank of England, Monetary Policy

Reforming the Current Macro-Economic Policy Framework

23rd May 2018 by newtjoh

Since the mid-nineties, the prevailing macro-economic policy framework – or ‘consignment’ as it sometimes called – has relied upon monetary policy to smooth the business cycle at a sustainable level of output and employment. In the UK, in 1997, it was given institutional backing, when the Bank of England (BoE) was given an independent mandate to achieve a medium-term set primary inflation target. The role of fiscal policy, in macro-economic terms, was relegated rather to the management of public deficits and debt.

This framework seemed to work during a period, often called the Great Moderation, when nearly all the advanced industrial economies, including the UK, enjoyed an unbroken period of steady sustained growth and low inflation. The business cycle appeared to have been all but neutered, if not banished.

That illusion was popped abruptly by the Great Financial Crash (GFC). The BoE in response reduced the base rate it charged for the use of its own funds from 5.5% in February 2008 to 0.5% in March 2009, when it also introduced the first phase of what has become known as the quantitative easing (QE) programme. £200bn of new money was electronically created and added to the BoE balance sheet to purchase long-dated government debt (gilts). This was in recognition that its main conventional monetary policy lever of base rate management had been rendered ineffective by short-term interest rates reaching their effective lower bound (ELB) – the point where reducing them further has little or no, and insufficient, effect on economic activity.

Rates remain at their ELB, reflecting the empirical reality that the UK has not had a proper recovery yet, nearly a decade on. Real gdp per head and average household income are barely above the level that they reached in 2007. The needed recovery in both growth and productivity is not currently on the horizon.

The macro-economic framework conceived during the Great Moderation – its application based on economic models that ignored the potential of liberalised financial markets to leverage debt – contributed to the GFC. It has been beached by the subsequent stagnation. In short, in its existing form, whether in design or operation, or both, it appears to be incapable of shifting the UK economy out of stagnation. It is thus unsurprising that policy attention is rotating back to the definition and ordering of the first-order principles of macro-economic policy, and to whether the BoE’s independent mandate should change.

The IPPR reform framework
A spring 2018 paper by Alfie Stirling, Just About Managing Demand, takes up that challenge. Produced as part of the centre-left Institute of Public Policy and Research (IPPR), Commission on Economic Justice , it reflects the view of the author, but follows the research and policy tramlines furrowed by the Commission; and no doubt will inform its final report.

Since 2010 monetary and fiscal policy has effectively pulled in opposite directions; monetary interventions injected demand into, while fiscal policy took it out of, the economy. The tendency of governments, with their short-term electoral horizons, to exhibit deficit bias, Stirling argues, has been supplemented by surplus bias: discretionary fiscal contraction or consolidation (fiscal austerity) is ostensibly used to reduce the deficit as a matter of economic necessity, but is effectively applied as a smokescreen to ‘shrink the state’ largely for ideological and political reasons.

The paper’s centrepiece proposal to overcome surplus bias, when interest rates are at their ELB, is to provide the BoE’s Monetary Policy Committee (MPC) with added independent powers to decide whether fiscal policy is ‘overly restrictive’ and in that event to set and quantify a rectification stimulus sufficient to substitute for the cut(s) in base rate cuts that the MPC would have otherwise made.

The operational implementation of that surrogate stimulus would then be delegated to National Investment Bank (NIB) – an institution presumably based on Labour Party proposals to establish a new National Investment Bank . The MPC to achieve its primary inflation target (as may be amended, as discussed below) would, in effect, align monetary and fiscal policy in default of the government.

A reformed and comprehensive set of fiscal rules, echoing and extending Labour’s Fiscal Credibility Rule, is also set out. The separation of current and investment public expenditure for control purposes (as New Labour’s Golden Rule did) would be reinstated. Five year rolling targets would be set for a zero-current balance, and for an operational debt target linked to a longer-term target level for debt.

Public investment (which supports long-term growth) would also be provided with a separate dedicated target, expressed as a minimum percentage of gdp over the same five-year rolling period. This minimum investment rule, however, would be subject to the proposed debt target; however when interest rates reach and remain at their ELB the zero-current balance and debt rules would be suspended, leaving the investment rule in place and operative.

The long-term debt target (which could be higher, lower, or the same, compared to a set baseline level) would no longer require the debt/gdp ratio to be lower at the end of each five-year Parliament. Rather it would be based on an assessment of the UK’s fiscal space – that is the scope available for increased public spending and/or lower taxes without threatening long-term fiscal sustainability and market confidence.

That assessment would be undertaken by the Office of Budget Responsibility (OBR) as a complement to its existing UK’s Fiscal Council (independent bodies set up by governments to evaluate fiscal policy),  remit. It would involve, a macro-economic ‘cost benefit analysis (comparing) lower levels of debt against higher taxes or lower levels of spending’. The OBR would also be given the independent authority to assess the long-term impacts of different investment projects on gdp in line with methodologies agreed with government and independent economists at different levels of debt.

It would also be mandated to conduct a review of accountancy classifications of investment, identifying areas where revenue spend on human capital, on software, or other sources of innovation and growth, in addition to capital expenditure on physical assets, should be counted as investment for expenditure control purposes. Borrowing that adds to future productive capacity of the economy or provides a revenue stream would not be subject to the zero-current balance rule. Borrowing by ‘independent’ public corporations – as defined internationally – for investment purposes would no longer be scored as government borrowing or debt.

Stirling highlights that recessions tend to recur on average every 10-15 years, with the next one expected before long. To prepare for that inevitable – although time-uncertain – eventuality, Stirling moots some more radical revisions to the BoE independent mandate.

The BoE’s primary inflation target could be increased by up to two per cent. This would be to allow the economy to ‘adjust permanently to a higher rate of inflation consistent with interest rates settling at a higher resting point above their ELB’. Unemployment and nominal (money) gdp targets, acting alongside, or as intermediate guides to, that target, could also be put in place.
These revisions would serve dual but related aims: pushing up interest rates above their ELB would enable the MPC once again to use interest rates management as an effective policy instrument to prevent or forestall a future recession; they could also prevent monetary policy being prematurely over-tightened during a period of above-target inflation, driven, say, by an external price shock, such as an oil price hike induced by international political instability.

In sum, changes to the BoE mandate could involve the toleration of higher future actual and expected inflation levels to get interest rates above their ELB and hence to provide reserve monetary firepower to counteract the next recession; but if they remain or reach their ELB, an activist fiscal policy of a path and magnitude determined by the MPC could then be deployed to overcome government surplus bias, as a more effective fiscal alternative to QE. Changes to the fiscal rule framework and to the classification of expenditures for deficit accounting and control purposes, if implemented in their entirety, could institutionally prevent the cutting of economically productive expenditures during a recession, while providing a target for their expansion across the economic cycle, subject to a long-term debt target, which, however would only apply when interest rates are above their ELB. Borrowing for investment by public corporations defined as independent in any case would not count against the deficit or debt total.

Political timing and feasibility
The package covers a lot of policy reform ground. It does come across a bit as a future strategic policy primer for the Shadow Chancellor, John McDonnell and his team; providing, perhaps, both its strength and weakness.

The next government would need to wrestle with the impact of Brexit on the economy and the public finances. Where not already ceded by the May government, fiscal demands on the current budget on ever-rising health and social care demands, local education quality and effectiveness, on training and apprenticeships, and manifesto commitments would have to be faced.
An incoming Corbyn administration would raise borrowing to finance its re-nationalisation, affordable housing, and industrial policy programmes, including the establishment of the NIB, where not shuffled off-balance-sheet. The political context can only be expected to be febrile in the first place – whether related to a Brexit-related hiatus and/or a media-hyping of the first ‘marxist’ Labour government – however unfair and politically-motivated that charge may be.

Making substantive changes to the BoE inflation, to the OBR fiscal mandates, and to the fiscal rules, all in parallel, could risk political over-load. And, to work and to stick, substantive changes to certainly the BoE and OBR remits could not simply be foisted on, but rather would require extensive consultation with, and the support of, the key institutional stakeholders involved. That would take time; as would the establishment of the NIB.

Although a Brexit-hiatus could precipitate a general election before 2022, it remains the due date. A freestanding NIB that relied upon the election of a Labour government in 2022 would be hard pressed to be operationally ready to expand lending on a scale sufficient to counteract any future recession much before 2025; that is unless the present Conservative minority administration decided to develop its own prototype, which it should, but probably won’t.

Changing the fiscal rules – and changing the BoE mandate even more so, as discussed below – would in themselves be political acts. The 1997 new Labour reforms to the fiscal rules and its establishment of BoE independence and were made on back of an already emerging strong technocratic and political consensus in their favour and were introduced within a supporting economic environment. The new economic settlement it represented – along with Gordon Brown’s self- denying ordinance to keep within Conservative spending limits – a tilt towards the centre ground and the assumption of the mantle of economic competence.

This time round, one can almost already hear the crescendo din already that would envelop the new government; that it only wants to change the fiscal rules to pass on the consequent debt burden to its successors for its own political purposes etc. Although is unlikely that Labour would be elected in the first place without a compelling economic and political narrative that underscored the necessity and desirability of substantially increased levels of public productive investment to spearhead the economy’s escape from stagnation, it is far from certain, however, that narrative would be sufficient to persuade the OBR to sign-off the government’s spending plans, whether in terms of the ‘fiscal space’ available for increased investment or their long-term fiscal sustainability.

Economically beneficial public investment also not only needs to be sufficient in volume, but efficient in selection, in composition, and in execution. Varying public investment levels for counter-cyclical stabilisation purposes could, however, risk a return to fluctuating famine and feast conditions, unconducive to such efficiency. https://www.asocialdemocraticfuture.org/investing-productive-infrastructure/ in that regard it proposes remedial reforms to the public expenditure and planning system that are designed to better reflect the long-term economic benefit of efficiently selected and executed infrastructural investment.

They include providing the National Infrastructure Commission (NIC) with a statutory remit to assist each government department to publish an annual Departmental Investment Plan (DIP). Each DIP should prioritise projects, according to their estimated economic and social return, incorporating auditable information on the methodology that it has applied to rank projects with reference to their expected economic return.

Such reforms could tie-in with changes to the fiscal rule framework that provide the OBR an added remit to assess the fiscal space available for increased public borrowing and debt. Splitting the function of assessing the micro-efficiency of individual projects from the more macro-task of assessing the overall fiscal space available for increased borrowing appears to align better with the respective roles and remits of the NIC and the OBR.

The point and sequencing of the proposed fiscal reforms referenced to likely future political and economic scenarios is not wholly clear. If Labour came to power in the aftermath of a Brexit hiatus it is almost certain that the economy would be in such a state that interest rates remained at their ELB. In that case, the new government could simply rescind the existing rules, and proceed to inject a fiscal stimulus financed by borrowing and begin to implement its industrial policy, including the establishment of the NIB. The OBR-brokered interaction between the investment and long-term debt rule in terms of assessing available fiscal space would come into play only when interest rates escape their ELB again.

The government would be able to call upon some substantive technocratic support to use fiscal policy as its primary instrument to escape recession. Prominent New Keynesian economists, such as Paul Krugman in the US, and Simon Wren Lewis in the UK, consistently made the case that monetary policy (MP) should have been complemented post-GFC, at the very least, by a fiscal stimulus, not contraction – a position that many mainstream other economists and organisations, including the IMF and the OECD have subsequently endorsed.

It could also point to empirical experience: the results of the Coalition’s conjoint reliance upon QE and fiscal austerity support the case that QE should have been, at the very least, combined instead with a conventional Keynesian fiscal expansion in public investment. Such an expansion where it utilised and safeguarded unused capacity within the economy could have protected and extended its future productive capacity, helping to lift the economic drag of falling and stagnant productivity.

A new Chancellor could also loosen fiscal policy in tune with the government’s own assessment of economic circumstances and requirements, without recourse to the MPC, as he could change the fiscal rules. In any case it would be unlikely that a newly-established NIB would be ready to spearhead the counter-cyclical response through expanding its ‘lending for business growth, housing, innovation, and social and physical infrastructure’ on sufficient scale to bring the economy back to a sustainable growth path.

For a new Labour Chancellor to press for a change in the BoE mandate, providing the MPC a power to initiate a fiscal stimulus, even though the BoE on number of occasions has disclaimed any wish to intervene in the direction and composition of fiscal policy, appears superfluous, save that it could provide an obstacle to future surplus bias if exhibited by a future government; that same government could then change the mandate again, however. Such a yo-ho would do little to bolster the credibility and purpose of an independent mandate.

Designing policy architecture to better prepare for the ‘next recession’ rather than escaping systemic stagnation now or, even worse, the prospect a Brexit-induced recession could therefore possibly put the cart before the horse. Without a period of economic expansion accompanied by rising pressure on wages and competition for loanable fund, neither interest rates nor inflation are likely to rise above their ELB to a point where rate reductions could be made to respond to a recession. The immediate policy reform priority is to escape stagnation in a sustainable way.

How necessary is (are) a BoE mandate change(s)?
A 2022 election could offer at least a time window for macro-economic framework reform to be considered and anchored to some semblance of a supporting cross-cutting and over-lapping political and technical consensus. On that score, the proposed reforms to the BoE’s mandate appear a rather tentative shopping list or one of possibilities. Many of the issues attached to raising the inflation target rate and/or providing it with a greater output and employment focus are not evidentially justified or explored – more attention is given to the proposal to empower the MPC to specify and delegate a fiscal stimulus to a newly-established NIB, as discussed above. The references, however, do provide a starting point.

With respect to raising the inflation target, the MPC has so far has recoiled from raising base bate above 0.5% This is despite headline inflation even exceeding three per cent – more than one per cent above its medium-term target – thus triggering the requirement for the BoE Governor to write an explanatory letter to the Chancellor. The majority assessment of its members has been that above target-inflation is mainly owed to conditions or factors external or outside (exogenous) to the domestic labour market, including rising oil prices and sterling depreciation linked to Brexit.

The BoE’s May 2017 Inflation report, in line with that, highlighted that the post-2015 fall in sterling was likely to keep domestic inflation above the two per cent target throughout the next three years, (author italics), further noting that where inflation settles once that upward pressure fades will depend on domestic (wage-related) price pressures, concluding that these were expected to build by 2020.

The MPC hitherto has been careful to apply its constrained policy discretion in accordance with its current mandate, focused on the medium-term not the short-term headline CPI inflation figure, so as not to chock-off any nascent or uncertain recovery, at least while spare capacity exists within the economy.

Given that institutional monetary policy context, what would be the economic point of modifying the primary inflation target to accommodate higher inflation and/or giving employment and output a greater weight within the BoE mandate? A slightly different answer to that of simply an interest rate buffer to counteract the next recession, which Stirling emphasises.

The underlying key problem is that the UK economy has failed to recover its pre-GFC secular real productivity and growth trend of annual average c2.3%-2.5% growth. The result: an unrecoverable massive 15-20% loss of potential GDP calibrated to the level it would have reached if that historic trend had been interrupted and thrown off-course by the GFC, the Great Recession, and then counter-cyclical fiscal austerity.

That lost stock of output and income foregone will rise further inexorably, if growth and productivity remain stuck in stagnation mode. In technical economic jargon the economy has suffered hysteresis (a change – in this case on UK gdp, whose initial effects persist, even when its proximate causes or source no longer exist).

A fiscal expansion combined with falling immigration that causing the labour market to further tighten and thus trigger wage inflation, but without it accelerating, could usher-in a new expansionary economic environment that could allow the economy to break out of that circle. How and by what mechanism(s)?

As labour inputs become relatively more expensive, investment in the upskilling of the indigenous labour force, as well as on additional and improved physical capital stock, should be encouraged, in turn, inducing an associated shift in the employment structure towards the formal and away from the insecure gig economy, pushing-up both overall (total factor) and labour (per unit period) productivity.

Infrastructural investment should also increase both the capacity of the economy and its total factor productivity; for example, improved connectivity should lower costs and expand the pool of labour that is available to work in higher productivity and thus higher paid jobs.

But if the MPC references the likelihood of rising domestic wage pressure to the current supply side-capacity of the economy, it risks taking the current compressed productive potential of the economy (for the purposes of MP) as an immutable given. The associated output gap (the difference between aggregate demand and the capacity of the domestic economy to meet it without inducing above-target inflation), has been significantly revised downwards since the GFC by the OBR.

The latest May 2018 BoE Inflation report appears to fall into that stagnation trap. Striking a more hawkish tone than its predecessor a year earlier, it notes that ‘labour demand growth remains robust with a very limited degree of slack left in the economy’ with productivity growth remaining muted, limiting ‘the pace at which output can grow without generating inflationary pressures is likely to be modest’, before diagnosing that ‘ongoing tightening of monetary policy (up to 2020-21) would be appropriate’ albeit that any future increases in Bank Rate are likely to be ‘at a gradual pace and to a limited extent’.

It is not altogether clear what that could mean in practice. It does suggest, on one hand, however, that the BoE does not intend to raise interest rates at a speed and magnitude sufficient for the MPC to draw upon a four to five per cent interest rate buffer to counteract the next recession, assuming that a Brexit-related one is avoided. On the other hand, even modest and slow rate increases could impede or even reverse the productivity-enhancing economic expansion outlined above.

In that case desired increases in personal and household income and improvements in public services will not be possible. Given the existing linkage between consumption and confidence to house prices in the UK, if rates were raised more substantively, such increases could even precipitate a home-grown recession, especially in a post-Brexit environment, which can only be anticipated to be uncertain at best.

Is increasing the inflation target to, say, four per cent, the answer, then? Raising the inflation target by up to two per cent could allow the economy in Paul Krugman’s words to ‘adjust permanently to a higher rate of inflation’, offering space for rate cuts to be made in response to a future recession. The ghost of accelerating inflation continues to lurk in the background, however. Economic actors might well take a supposedly one-off increase in the medium-term inflation target to be the thin end of a wedge that they should grab while they have the chance, resulting in insufficient passage of time for any productivity-enhancing adjustments to take root before pressures to tighten to retard insipient accelerating inflation become difficult to resist. It would also entail a quite marked discontinuity in the BoE mandate that could suggest instability and further changes, undermining its credibility.

What is not open to doubt is that allowing inflation to rest at a higher level would require – if international competitiveness is to be maintained – a commensurate increase in productivity across the tradeable sections of the UK economy; relying on sterling to depreciate in compensation instead, itself would add to domestic inflationary pressures.

Also, the Chancellor, facing higher public-sector nominal wage claims from health and other public-sector workers could well be forced to resort to fiscal drag and/or additional taxes to protect the current budget balance, dampening the translation of real wage into real disposable income growth in the process. Such dampening might well be desirable in terms of securing a shift in resources within the economy towards investment, but such suppression of real wage growth by stealth taxes cannot be expected to hold for any extended period.

An alternative might be to suspend inflation target temporarily while the economy escapes stagnation. It cannot be expected that the BoE would instigate such a change itself. But if imposed by the Chancellor, the effect would be nearly akin to abolishing the independent mandate of the BoE altogether.

Yet another variant could include raising the inflation target explicitly only for a temporary or time-limited period, on the basis that the retention of two per cent medium term target would conserve continuity. The aim would be to influence wage-bargaining behaviour so that real wage inflation tracks productivity, rather than inducing beggar-my-neighbour escalating, rises. That desirable outcome would tend to depend on, however, not only on the credibility of the new temporary, and necessarily, contingent target rule, but also on other emergent factors that may affect the labour market and wider economy. Perfect alignment of real wage inflation and productivity remains a heroic assumption.

Besides the existing inflation target is a medium-term one, although its precise time-span can be open to definition. The same desired end-result of a productivity-enhancing expansion could therefore possibly be engineered by more informal and less disruptive institutional means. The annual Chancellor’s letter to the Governor could be used to adjust the weight balance accorded to price stability and real economic activity, for instance. The MPC could continue to operate within its existing 1997-set medium-term two per cent target but with reference to a political tilt for it to be administered it in future with greater regard to employment and output considerations, as new economic conditions and times require.

An imperfect analogy might be a judge instructing the jury to decide a case on the balance of probabilities rather than beyond reasonable doubt. The underlying and overarching importance accorded to price stability would necessarily be diluted, however, with attendant possible implications for the credibility and certainty of the target. That said, a case can be made that the advantages of price stability was overstated within the existing framework and that events have tended to suggest that in some conditions its strict adoption can retard rather than induce strong and sustainable growth.

In that regard, tilting the MPC mandate towards output and employment considerations could also be achieved by moving to a nominal annual gdp target of, say, five per cent. This would combine or mix real output and inflation into a single target; it could be achieved by various permutations of both: for example, two per cent real growth and three per cent inflation, and vice versa. Such variability could gnaw at its overall credibility and certainty, however.

Or the target could be split equally, 2.5% for each; reducing uncertainty but at the same time also the flexibility that may be needed to allow the economy to recover its historic secular growth and productivity path. When taken in the round, as a 2013 Deputy Governor Speech on nominal income targets, pointed out, insofar that the existing mandate does take cognizance of output and employment objectives, many proposed alternatives can appear more different than they are actually are.

The issue really boils down to the relative weight that should be accorded to employment and output relative to medium-term price stability, for what period, and in what circumstances. Incremental evidence-driven change in emphasis subject to continual review might ultimately prove the best friend of radical reform.

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: 2018 Housing Policy, Economic policy, Macro-economic policy, Time for a Social Democratic Surge Tagged With: Alfie Stirling, economic policy, fiscal rules, IPPR

John McDonnell: Sinner or Saviour?

8th March 2018 by newtjoh

As the May government continues to lose credibility over Brexit, mainstream attention has unsurprisingly shifted towards the prospect of the self-declared anti-capitalist shadow Chancellor becoming the Britain’s most radical Chancellor since Lloyd George.

Respected journalists, like Philip Stephen (PS) of the FT, express animated fear that this self-confessed Marxist – if given the opportunity by a gullible electorate taken in his superficial adoption of a friendly old-fashioned bank manager pose – will then proceed to wreak unquantifiable damage on the economy, as he ruthlessly proceeds to dismantle capitalism, regardless of the consequences.

Is then McDonnell, Corbyn’s Stalin-in-waiting, or, is the near-hysteria about him rather a symptom of how far the parameters of accepted mainstream political analysis has shifted since the eighties?

Stephens squirms at Labour’s core manifesto policies to re-nationalise utilities and the railways, to impose higher taxes on the corporate sector and on the highest paid, and to further reform the banking sector. Most of all, he appears to take most umbrage at the commitment to ‘irreversible shift power backing to working people and their families’.

This he describes as a destructive throwback to the seventies, proclaiming with evident fear that with Labour polling close to 40% of the popular vote, turbo-charged by the support of young people in particular, Corbyn could ride a populist surge that then delivers the keys of 10 Downing Street to him.

The pendulum does, indeed, need to swing back towards ordinary working people, whether by hand or brain. Not least for many of the reasons that PS himself sets out.

That the incomes of most Britons have stagnated or fallen for over a decade while the incomes of FTSE 100 chief executives have quadrupled, that the industries targeted for nationalisation are run by ‘avaricious, rent-seeking oligopolies’,  and that the tax and spending policies pursued by the last two Conservative-led governments have rigged the system in favour of the affluent elderly, loading debt on to students and cutting services for young families, while the bankers who caused the crash are as grossly overpaid as they have ever been: a pretty over-powering case for radical reform, if there ever was.

Certainly, as south London suffers from prolonged water shortages caused by under-investment linked to excess profiteering by a privatised utility, the notion of re-nationalising such utilities appears eminently sensible: at least if it is effectively and efficiently planned and executed.

The real issue is whether a Corbyn-McDonnell Labour government actually could achieve such a shift of power and opportunity in favour of the many rather than the few.

This will require strategic pragmatism, rather than populism. The precise detail of the sequencing, funding, and organisation of any future re-nationalisation programme provides a case in point.

At another level, one risk is that Labour could exhibit the wrong kind of pragmatism, as suggested by their open-ended manifesto commitment to continue a poorly targeted Help-to-Buy programme: a clear example of reversion to Blairite triangulation.

That example of ‘bad’ pragmatism reflects a quite discernible danger that untargeted sops to young people, certain categories of professionals, and other groups – identified by polling as potentially sympathetic to Labour within political circumstances current at the time – and motivated by the pursuit and the maintenance of electoral popularity, will take preference over strategic and sustainable political advance.

In short, and ironically, a back-to the-future New Labour focus again on presentation rather than substance: a possible omen, the beloved Jeremy appearing at Glastonbury as the Tribune of the People taking the mantle of Tony Blair as the personification of Cool Britannia. Think about it!

Analysis and informed objective criticism is required, not polemical ‘marxist’ name-calling. Informed and influential journalists, such as PS, should be challenging – and even assisting -McDonnell in terms of developing the detail and rationality of his proposals in conformity with the twin and mutually supporting demands of economic efficiency and social fairness – or, is it, perhaps, the prospect of a shift back in favour of ordinary working people that is the real problem for Stephens and his kind?

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Time for a Social Democratic Surge

Can the UK long term stay in a CU outside the SM?

21st January 2018 by newtjoh

The Confederation of British Industry (CBI) through its director-general has indicated that it considers that long-term continuing membership of the customs union (CU) is in accord with UK economic interests, even though continuing CU membership would appear to preclude the UK from negotiating bespoke trade deals with third party countries outside the EU.

It is indeed doubtful that future gains actually realisable from any such future deals would offset the economic costs of the UK losing the advantages of SM membership, given the concentration of trade that the UK has with its european neighbours.

Certainly it is difficult to see how a hard border between Eire and N.Ireland could be avoided – a key plank of the brexit stage 1 agreement between the UK and EU – if the UK exits the CU.

But is it really possible for the UK to continue in the CU indefinitely, while in parallel disengaging from the the obligations and processes of the single market(SM)?

Cutting a complex and uncertain reality to its essentials, post-brexit UK regulatory autonomy appears inconsistent with it maintaining regulatory alignment with the EU.

In the absence of such alignment, it highly doubtful that ‘frictionless’ trading of both goods and services can be maintained even if the UK retains some sort of de facto CU membership.

The UK could offer to continue to ensure such regulatory compliance through domestic regulations and processes. But there would need to some assurance assurance and compliance system that would satisfy EU SM requirements, that would appear, inevitably, to involve continuing ECJ oversight or something comparable, at least well into the medium term.

Yet both the May government the Labour leadership appear still appear to seek bespoke bilateral arrangements where the UK could continue to secure the advantages of SM membership, while jettisoning perceived accompanying unwelcome requirements, including free movement, ECJ jurisdiction, and in the case of Corbyn, restrictions on state aid.

But the French President, Macron, has recently made it clear again that continuing UK access to the single market, including its financial services, requires the UK to continue to contribute to the EU budget and to acknowledge European jurisdiction, as well as honour free freedom of movement of labour and capital, if it wishes to continue to benefit from the free and frictionless movement of goods and services.

He also did hint that that some bespoke tweaks relating to how UK adherence to SM requirements could be interpreted or portrayed might possibly be on the table (one example could be on how EU oversight of UK regulatory compliance is defined), while reiterating that no fundamental breach to the institutional SM architecture would be entertained.

The UK tactical bet seems to be that the attractions and importance of the UK as a trading partner will trump the determination of the EU
to conserve the complete integrity of the SM and its rules during this year’s negotiations. That appears wishful thinking.

Such a misguided approach detracts from a UK negotiating position that is best capable of maximising UK benefit from a least economically damaging settlement.

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Brexit, Time for a Social Democratic Surge Tagged With: brexit, CBI, Customs union, single market

Corbyn and the single market

16th January 2018 by newtjoh

This week the leader of the Labour Party appeared to rule out any continuing UK de facto membership of the single market (SM) because it would prevent a future Labour government re-nationalising the railways, the water and electricity utilities, and the Royal Mail.

Corbyn appears also concerned that continuing UK involvement in the SM would likewise prevent the provision of selective state assistance or aid as part of a more interventionist industrial policy. This could possibly involve a state investment bank taking equity stakes in firms or supporting research and development expenditures, especially across new technology and medical research areas.

The detail of these plans, which were outlined in its 2017 GE manifesto , however, remain hazy, particularly with in connection with how will be financed without undermining confidence in the public finances.

Each element requires focused and objective debate and scrutiny measured against strategic social democratic ends. That requires potential and likely gains to be balanced against realistically-assessed costs. Otherwise Labour will risk being portrayed – not only by the Tories, but also by responsible and informed elements of the mainstream media, as economically naive, at best.

Crucially it is doubtful whether most – if not all – of Labour’s proposals will infringe current EU state aid rules, as discussed in , and https://d3n8a8pro7vhmx.cloudfront.net/in/pages/14074/attachments/original/1517224151/lexit_paper_finalONLINE.pdf?1517224151.

It is perplexing that at this crucial juncture in the brexit negotiation process that the leader of the opposition party is resurrecting a particular historic and ingrained left-wing concern about EU membership that is not informed by the actual underlying situation.

This is at a time when Labour needs to crystallise its brexit position in tune with the national interest, in order to effectively challenge and expose the government’s self deluding ‘let us have cake and eat it’ approach to the impending stage 2 negotiations.

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to print (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Brexit, Time for a Social Democratic Surge

Primary Sidebar

Pages

  • Consultation Responses
  • Economic Policy
  • Home
  • Investing in productive infrastructure
  • Wider Housing Ends

Recent Posts

  • December 2021 Kolkata
  • Pathways to London inclusive housing affordability
  • Johnson’s Social Care Plan: social democratic opportunity?
  • Starmer’s Story Must Be Labour’s Story
  • Covid: When Muddling Through Won’t Do

Categories

  • 2018 Housing Policy
  • Brexit
  • Consultation Responses
  • Covid
  • Economic policy
  • Health
  • Health Policy
  • Housing
  • India
  • Macro-economic policy
  • Social Care
  • Time for a Social Democratic Surge
  • Welfare State and social policy

Footer

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Copyright © 2022 · News Pro on Genesis Framework · WordPress · Log in

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.