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The future of the economy is not yet outside our control

The Office for Budget Responsibility’s Fiscal Sustainability report, published this month, makes very depressing reading for anyone taking a longer look at the future of the public finances.  The Report, by the independent OBR (do we really believe that?) has forecast that public sector net borrowing would fall from 11.1% of GDP in 2009-10 to 1.5% in 2015-16 as government ‘fiscal consolidation’ (mainly cuts) is implemented, and that public sector net debt would peak at 70.9% of GDP in 2013-14 before falling back to 69.1% in 2015-16.
The new report looks to a much longer timescale, predicting greater pressures on the public finances in future decades.  Primarily as a result of an ageing population (the proportion of the population aged 65 and over is projected to rise from 17% in 2011 to 26% in 2061) and cost pressures on health and pensions, they say that unchanged policies would lead to debt continuously rising on an unsustainable upward path.  At the same
time, unchanged policies would lead to broadly stable revenues.
OBR say that additional fiscal tightening will therefore be necessary well beyond this Parliament.  On their central projections, government would need to implement permanent tax rises or spending cuts of 1.5% of GDP (£22Bn) from 2016-17.  They quote the same conclusion being made by the International Monetary Fund for western economies in their April Fiscal Monitor: “Although substantial fiscal consolidation remains in the pipeline, adjustment will need to be stepped up in most advanced economies, especially to offset the impact of age-related spending… From an even longer-term perspective, spending on pensions – and especially, health care – constitutes a
key challenge to fiscal sustainability.”

Tony Travers’ informative blog on the OBR report in Public Finance can be read here.
The crucial aspect of OBR’s analysis is the phrase ‘on unchanged policies’.  As David Blanchflower regularly and convincingly argues (for example here), if we want a better future we shouldn’t be starting here.  The ConDems austerity policies have led to a collapse in consumer confidence and rapid fiscal tightening has severely reduced the prospects for future economic growth, which would bring with it better revenues and reduced costs in unemployment.  He thinks double dip recession is still a possibility, depending largely on what happens in the USA.  Without Obama’s monetary and fiscal stimulus unemployment in the USA could already have been 25% rather than 10%, and similar, if smaller, impacts could be projected here.
The OBR report does not seem to assess the impact that fiscal tightening has on demand in the wider economy, appearing to believe public sector spending is only a cost burden, and that cuts in the public sector provide the room for increases in the private sector.  Blanchflower is particularly strong in showing that this is not the case.
It is interesting to note that in the OBR report the words housing and investment do not appear (at least not on my search).  Blanchflower has particular concerns about the potential increase in negative equity amongst homeowners if interest rates rise, but it seems a weakness that OBR never distinguish between different types of spending, and especially between capital and revenue.  To OBR, borrowing is borrowing and no
distinctions are made.  Gordon Brown’s first fiscal rule, that borrowing over the cycle should equal investment, with government income covering government revenue spending, aways seemed like a correct approach, and is a good place to get back to.  But it doesn’t tell you exactly how much investment there should be.  Construction has always been a sound purpose for public borrowing and the benefits have been described many times: reducing pressure on government revenue deficits, strong social outcomes and better underpinning of other public objectives (especially in health), and, crucially, a high multiplier in the private sector as the initial investment leads to increased spending in the wider economy.
We know it will take a generation of increased housebuilding to bring housing demand and supply closer to equilibrium.  There is no prospect of that whatsoever under current policies.  But it would be interesting to see what impact a major housing investment and construction-led economic stimulus, lasting for 20 years, would have on OBR’s dire long term projections for the 2020s and 2030s and beyond.  The economic future is not yet outside our control.

Blog Post

Housing demand: the good the bad and the ugly

<strong><span class="has-inline-color has-accent-color">Steve Hilditch</span></strong>
Steve Hilditch

Editor and Founder of Red Brick. Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone.

Tony obviously spent much of the weekend counting up the number of housing reviews and commissions taking place at the moment for his post yesterday. One of those he listed has already produced some interesting research for its launch event last week – the Institute for Public Policy Research (ippr) fundamental review of housing policy.

The project, led by Andy Hull, Senior Research Fellow ( will have four streams of work. It will look at housing’s role in the economy and how housing could play a less destabilising part in the macro-economy; housing supply and how to meet the projected increase in housing demand between now and 2025; housing allocation and use, and how to achieve a fairer and more efficient use of the housing stock we have; and housing management, looking mainly at the need to professionalise the private rented sector and encourage mixed communities.

The project’s first report on housing demand to 2025 presents a detailed model for estimating the number of households in each region requiring homes, which as they rightly say, should underpin the development of housing and planning policy. The model looks at how housing demand might vary according to changes in the growth path of the economy – the good, the bad and the ugly as they call their various economic growth scenarios.

This is a detailed and slightly techie read, but the headlines are clearly presented. Housing demand will outstrip supply by 750,000 by 2025 ‘equivalent to the combined current housing demand of Birmingham, Liverpool and Newcastle’. Between 3.3 million and 4.5 million additional households will be formed by 2025. Household growth will vary by region, with the fastest growth expected to continue to be in the South East and London, but even in the region with least pressure, the North West, the increase in overall housing demand relative to current demand will be in the range 9–15 per cent: ippr say there will be ‘a substantial imbalance in the supply and demand of housing in all regions’.

The demand for homes in the different tenures is seen to be closely linked to economic performance – the poorer the performance, the greater the demand for social rented homes. The demand for social rented homes (supply of which the government has just reduced to zero in the future) will still be high under all scenarios.

It will be worth keeping an eye out for further publications and events by ippr as the research progresses.