If you’re in a hole, start digging

So we’re in a double-dip recession and construction is to blame.

You don’t have to be part of the construction lobby or a Keynesian or even Ed Balls to think that something is badly wrong here. The coalition’s strategy of cutting public spending to reduce the deficit to pacify the markets to keep interest rates low to produce a private sector-led recovery is not working and it is way past time for Plan B.

As Jonathan Portes, chief economist at the NIESR points out, even those well-known socialists at the International Monetary Fund (IMF) are arguing for a balanced fiscal expansion. ‘In other words, the Fund wants us, for standard Keynesian reasons, to spend more on infrastructure (and housing) and increase welfare benefits for poor people (who will spend them), and pay with it by taxing the rich (those with a lower “marginal propensity to consume”. This would raise demand in the short term, without worsening the fiscal position.’

Despite all the talk about Getting Britain Building, the government has done the exact opposite. Construction on its own is now in a triple dip recession. The Construction Products Association says public spending cuts over the last 12 months are directly to blame for the 3 per cent fall in output in the industry in the first quarter that was enough to trigger the double dip and drag the economy as a whole down by 0.2 per cent. And while the government has cut the top rate of tax for the very rich it has continued to squeeze benefits for the very poor.

If construction got us into this it seems at least worth considering that it might be the way to get us out too. The government claims it sees this and has been listening to those like the CBI who have argued for sustained investment in transport infrastructure. The Social Market Foundation has a plan for cutting benefits for the middle class and well-off elderly to fund a £50 billion programme of investment in infrastructure. But for all the vague talk of pension fund investment there’s been precious little happening.

And neither of them mentions housebuilding: the form of investment which, next to repair and maintenance, will deliver the quickest boost to the economy and generate the most jobs. Not only that, but every home built generates £20,000 for the economy in increased tax receipts and savings on benefits.

This recession had already gone on even longer than the Great Depression of the 1930s and that’s before many of the public spending cuts have taken effect. As Tim Leunig, chief economist of Centre Forum, argues in the Telegraph, the two things that boosted the economy then were low interest rates and housebuilding:

‘Builders built more houses for people to buy. Private developers – mainly small-scale builders – built almost 300,000 houses a year, often bought by manual workers working in the new factories. Owner occupation was on the move. These were not large houses, but they were decent houses, and the vast majority survive to this day.

‘House building is job intensive. Every house we build employs the equivalent of 3.5 people for a year. Raising Britain’s house building levels from around 100,000 to (say) 400,000 would create 1 million new jobs in construction.’

Judging from his speech at the Home Builders Federation (HBF) this week Grant Shapps seems to think that all he has to do is sit back and wait for all his initiatives, from FirstBuy to NewBuy, from cutting red tape to boosting self-build, from the New Homes Bonus to extending the right to buy, to pay off:

‘We’re unfreezing the system. But we need you to go even further, faster. To work with communities to design sustainable local schemes. To react speedily when freed up land becomes available. To tell us what else we can do to help, to rip away that red tape. To usher in a new age of housing. An age of magnificent homes to match our ambition. An age that gives a boxed in community, a boxed-in generation, finally room to grow once again.’

Yet for all the rhetoric and all the new wheezes, housebuilding remains stuck at around half the level needed to meet demand and nowhere near his ‘gold standard’ of building more homes than Labour. Relying on big housebuilders that care more about rebuilding their balance sheets than building homes will not work. A serious programme of investment in building new homes and refurbishing empty ones could be channeled through smaller firms, housing associations and local authorities and combined with reform of the housebuilding industry. That would start to generate the jobs and deliver the boost for the economy we need at the same time as tackling the housing shortage. Borrow to invest, change the borrowing rules or try something new like quantitative easing for housing. We are in a hole. It’s time to start digging.

Is this a chink of light for housing to argue its case ahead of the spending review? Read more on Inside Edge, my blog for Inside Housing.