Kwarteng’s plan causes growing pains

Posted: September 23, 2022 | Author: julesbirch | Filed under: Budget, Cost of living, Housing market, Stamp duty | Tags: Conservative Party, Kwasi Kwarteng |Leave a comment

Originally written as a column for Inside Housing.

So, after 10 years of redistribution and socialism under David Cameron, Theresa May and Boris Johnson, now we know what a proper Conservative government looks like.

The biggest package of tax cuts seen in 50 years will cost a cool £45bn and overwhelmingly benefit the highest earners: someone on £1m a year will be around £55,000 better off next year.

The benefits get progressively smaller the less you earn: someone on £20,000 a year will gain just £218 while someone on £200,000 will gain £4,333.

And there is nothing so far for the very poorest: no more help for renters and no boost to Universal Credit.

Instead around 120,000 claimants face having their benefits cut unless they find more part-time hours from January.

There may be some announcements still to come in an actual Budget to follow this Growth Plan, including vital decisions on whether to unfreeze Local Housing Allowance and the benefit cap, but the contrast could hardly be more stark.

On energy costs, chancellor Kwasi Kwarteng confirmed plans for price guarantees to limit bills for households and companies that the Treasury estimates will cost £60 bn in just the next six months.

He said typical households would save £1,000 and the most vulnerable households £2,200, which includes £1,200 in one-off payments announced by his predecessor Rishi Sunak. However, prices are higher now even after the guarantee, and there was no announcement of what will happen next year.

The chancellor largely ignored calls to tackle the energy crisis at source by investing in a national programme of investment in improving the energy efficiency of existing homes.

There was £1 billion over three years to support new obligations on energy companies to help households in the least energy efficient homes reduce their bills and £2.1 billion over two years to help local authorities, housing associations, hospitals and schools invest in energy efficiency and renewable heating.

However, this is peanuts compared to the cost of the price guarantee and it is not even clear whether this is new money.

The biggest measure with a direct impact on housing was the widely-trailed cut in stamp duty. This will be permanent rather than a time-limited ‘holiday’ as in previous announcements.

The threshold for the tax will double from £125,000 to £250,000 for home movers and rise from £300,000 to £425,000 (on properties worth up to £625,000 rather than £500,000) for first-time buyers. The cost is estimated at £7bn over the next five years.

In theory this should help more modest earners but most of the benefits will go to buyers (and sellers) in London and the South East.

As an illustration, someone buying a £400,000 house will save £2,500 if they are a home mover and £5,000 if they are a first-time buyer. It is not yet clear whether the cut will also apply to landlords and second home owners like previous stamp duty holidays.

The government’s argument is that the cut will boost growth by generating an estimated 29,000 extra house moves a year and supporting jobs and businesses like estate agents and builders that rely on the property market.

However, that is tiny in the context of the housing market as a whole and critics argue that the cut will simply be capitalised into higher house prices, moving the housing ladder further out of reach for first-time buyers and holding back growth in the longer term.

For most home buyers, savings on stamp duty will be rapidly wiped out by rising mortgage costs. Interest rates rose this week and are likely to rise even further once the Bank of England digests this week’s tax cuts – and those tax cuts will in turn give higher earners even more money to invest in property for themselves and their families.

Apart from tax cuts, the other element of proper Conservatism is supply side reform. The programme of freeports put forward by Rishi Sunak has been scrapped in favour of much bigger investment zones featuring time-limited tax reliefs and planning liberalisation to accelerate development including housing.

In what is essentially a more pro-business version of levelling up, planning applications will be streamlined and ‘legacy EU red tape’ (which seems to mean environmental and habitat regulations) disapplied while there will be full stamp duty relief for purchases of land and buildings for new residential development.

An annex to the Growth Plan lists 24 illustrative sites that may be included plus 38 local authorities that have expressed an interest. These include councils in Kent, Essex and Bedfordshire but none in Tory heartlands.

This is far from the first time that a government has tried special development zones as a route to growth and their record is at best mixed. It also remains to be seen what will happen to existing levelling up programmes.

However, there is also a signal of wider planning reform to come in proposals to accelerate housing delivery that appear to apply to the country as a whole. The Growth Plan says that:

‘Later this autumn, the government will set out its vision to unlock homeownership for a new generation by building more homes in the places people want to live and work and by getting our housing market moving. This will boost growth across the UK helping more people afford to live near good jobs. The government’s full proposal will be set out in due course.’

Quite what this means remains to be seen. Taken literally it would be a huge change.

A proper Conservative government might look first at the planning restriction that is most vilified by the right-wing think tanks that seem to have drawn up so much of this one’s agenda.

But protecting the green belt remains a manifesto commitment and much more modest planning reforms proposed under Robert Jenrick had to be scrapped after a Tory backbench rebellion.

With tax cuts delivered, will the government really allow more housebuilding in the areas where core Conservative supporters already live and work?

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