Category Archives: Economics

The principle of using housing wealth to fund social care is a fair proposal – just not in this form

‘Heartless, nasty and cruel’ said Tim Farron. An ‘incompetent U-turn’ claimed Ed Miliband. The outcry surrounding Conservative plans, branded a ‘dementia tax,’ to reform social care funded by pensioners’ property wealth culminated in the attempted reassurance by Theresa May that ‘nothing had changed.’ Even the most casual observer to politics will be aware that the party’s electoral success depends heavily on its core support of the elderly – the so-called ‘grey vote.’ An ICM/Guardian poll last month for instance demonstrated that 85% of the over-75s asked intended to vote Conservative. The problem which the country is now squaring up to, however, is the universally accepted notion that social care is underfunded. Following David Cameron’s victory in 2010, the following statistics were deemed a key issue for parliament – 10 million people in the UK are over 65 years old.  The latest projections are for 5½ million more elderly people in 20 years time and the number will have nearly doubled to around 19 million by 2050.

Funding, as we know, would have to be generated to pay for this by a) higher taxation or b) greater borrowing by government. Rather than simply funding this through a national income tax, the idea of drawing on the vast piles of accumulated wealth through residential property to fund elderly care is, on the surface, a sensible idea to partly redress the wealth disparity between young and old. Torsten Bell’s piece for the Resolution Foundation marked this as a turning point for ‘intergenerational fairness,’ given the faltering of past political attempts such as the mansion tax to swing the balance away from the economically active to the more affluent elderly.

The idea based around a false sense of meritocracy that one should not be penalised for ‘working hard, paying your taxes etc.’ is so deeply engrained in society that it fails to recognise the spectacular post-1980s boom in housing values which were caused by complex economics totally outside the control of the vast majority of the population. The reaction to this also highlights the anxiety in this country regarding the transfer of wealth inter-generationally. Assets passed down to younger family members are, aside from further inflationary schemes such as Help to Buy, the easiest path to future housing wealth and create a dramatic range in prosperity among the inheriting classes.

Resolution Foundation - ONS

source: Resolution foundation

The levels of fear which snowballed among middle-England pensioners over the weekend was the prospect of entire life savings and property disappearing down to the last £100k all through no fault of their own. The attempt by the Government to save vast sums of money on funding social care by having no cap on the upper limit was what proved so toxic.

A fairer idea would be to pool wealth from all pensioners with assets over £100k, either through a fixed sum or a percentage of total assets upon retirement or death which contributes to a national programme of social care (see Gordon Brown’s 2010 policy.) The same thinking can be applied to the often wasteful use of the ubiquitous winter fuel allowance and free bus passes for property-rich over 65s. It is misleading and outdated to cast all pensioners as ‘vulnerable’ and given that 76% of them own their properties, it is sensible to use this uplift in property value over the years to contribute to public services. What is clear, however, is the utter outrage this causes when put to the electoral test.

Brexit will prioritise robotics over human training

Last summer, the BBC aired a reality TV show Britain’s Hardest Workers: Inside the low-wage economy, which pitted 20 real-life jobseekers against one another performing menial, low-wage and demeaning jobs, each assessed and eliminated depending on their efficiency. Workers were given various tasks including picking vegetables, cleaning hotel rooms or sorting supermarket food deliveries in warehouses. Such examples bring an alarming reality to the era of zero-hours contracts and precarious work which provide a potent political rationale for widespread automation to liberate society from the grind of work.

Brexit was a decision taken on the basis of dramatically differing, often contradictory reasoning but one taken predominantly by an ageing, low-skilled slice of the population in the name of either controlling immigration or the perception of a reclaimed sovereignty. Now that the hourglass has been flipped, we await with trepidation as the impending negotiations unfold. However one recurring theme was played out over and over as the Brexit postmortems continued to be carried out all over the English periphery, that of identity derived from work.

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Britain’s Hardest Workers image source

Anger loosely directed towards the technocrats of the European Union for these failings to replace stable, skilled and locally recognised jobs with the drudgery of modern low-wage work is placed as blame for not limiting the brutality of the global market on domestic labour conditions. Up until this point, it has almost always proved cheaper, or more politically palatable to pay a human to carry out a basic task than invest in an automated equivalent. The idea that departing EU workers will leave jobs open for the native English to happily grab is one of the most serious on the long list of fundamental misconceptions at present. Both skilled and unskilled labour will not be able be speedily replaced by Britons since long abandoning the skilling up in manual tasks in favour of service economy jobs supplemented by reformed university courses.

For an industry such as construction, this has potentially catastrophic effects. As a recent GLA report stated, of the 348,000 construction workers currently in London, 27% are from EU countries. Early indicators are that migration from the EU to the UK is slowing post-Brexit and the present skills shortage has been well documented. Just as a rebalancing of the UK economy away from the City may be a very slim thread of positivity from this process, an obvious solution to this may be the opportunity to launch into a national skills programme for construction and manufacturing. However, as Sky’s Ed Conway recently pointed out, the government, or more specifically Philip Hammond, has for some time been mesmerised by the hypnotic lures of boosting economic productivity.

© Lindbäcks Group AB, Sweden

The most obvious route into this is automation. Laing O’Rourke recently built their own pre-fabrication facility with the help of handouts dating back to the coalition government’s Advanced Manufacturing Supply Chain Initiative (AMSCI). Such an operation is capable of churning out building components to create 10,000 homes per year. The take up of this process will, as ever, depend on subsidies and incentivisation through capital tax allowances which encourage R&D.

Building at speed for politically charged housebuilding targets may well fuse with a boom in investments in robot manufacturing. The widely influential Farmer report, stingingly titled Modernise or Die, supports calls for technological advancements to the construction industry. By moving construction away from its highly fluctuating manual labour market, Farmer argues that assembly line production with quicker outputs will stabilise the boom and bust nature of the industry.

Just as fruit picking will not be sufficiently replaced by human labour, UK-born construction workers are scarce and 20% of the existing workforce are heading into retirement within 5-10 years. Automation will continue to forge its way into political discourse as a way of relinquishing menial jobs from society. For construction however, technological improvements will come as a necessity to meet the swollen level of demand.

A five-point manifesto for next week’s Autumn Statement

Next week is an important one for the immediate future of housing. A government white paper on housing will be published alongside Phillip Hammond’s Autumn Statement within the backdrop of a looming Brexit-induced rise in living costs and a growing budget deficit on the horizon. Cheap credit however is likely to herald a new phase of infrastructure spending along with greater national investment in housebuilding.

Truth be told, if any of the following are put into practice it would be a fairly drastic departure from present housing policy but here are five recommendations nonetheless:

    1. Tackle land-banking once and for all.

    50% of new housing is built by eight FTSE-100 listed companies. Collectively they are sitting on land which could be used to build over 600,000 homes. Volume housebuilders are heavily responsible for the high cost and inaccessibility of land for housing development by refusing to build at a rate which would lower prices. Effective zoning or a land value tax would speed up construction times.


    2. Grow the Private Rental Sector.

    Inflationary policies such as Help to Buy do not help those without an adequate inheritance to get on the housing ladder. If we accept that home ownership is unreachable in the current system we must improve the quality of the rental sector. This is most appropriate in urban areas of high demand where lifestyles suit the facilities and flat layouts that PRS offers.


    3. Build more social housing.

    Housing benefit stands at £13bn a year. Most of this goes into subsidising the out of control rental market and does not provide security of tenure or a guaranteed quality of living. Conservative and New Labour governments have proved ideologically opposed to the mere idea of social housing however along with its numerous benefits is also extremely efficient economically. Social housing is generally cost-neutral after 30 years and generates long term income streams for local government or housing associations.


    4. Invest in skilling up the housebuilding workforce

    Technical colleges became stigmatised in the UK as they morphed into universities, providing courses which were not always linked to need in vital areas such as construction. Post-Brexit uncertainty over the capacity of long term migrant labour means we must return to the idea of apprenticeships as a way of ensuring adequate manpower for housebuilding.

    5. Promote open-source land data

    Local authorities do not have the resources to map out every square inch of their respective areas and assess suitability for development such as custom or self-build for example. We should be encouraging tech firms to embrace this and open up land ownership data to the public via a digital format. Thankfully plans to privatise the land registry are currently on hold and we must rethink the way we assess land for development, primarily by making it more transparent.

    Should London become a city state?

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    The term Ecumenopolis was invented by the Greek city planner Constantinos Doxiadis in 1967. It imagined a future world where urban areas combined to make a single, global state. This was refined to a European version- an amalgamation of London, Paris, Amsterdam and the Ruhr region of Germany into a powerful urban state. The idea of a cosmopolitan collection of global hubs with shared values fighting against its rural neighbours holds more relevance than ever in the aftermath of Britain’s decision to abandon the EU project.

    Since the early hours of 24th June, inner city Londoners have reacted angrily, howling in dismay at the parochialism of Britain’s rurality. The decision for the UK to leave the EU, leaving to one side the matter of Article 50 and the problematic nature of its initiation, will no doubt affect the likelihood for global firms to locate headquarters in London and distort the image of the capital as a progressive, incredibly open place to live. But should, as one of the many petitions issued recently suggests, London break away from its peripheral regions and form its own city state?

    The economic argument is relatively clear; London contributes more to the UK economy than Scotland, Northern Ireland and Wales combined and would have a GDP exceeding that of Sweden or Switzerland as it its own state. The benefits of such an agreement for London would be the ability to cut off tax revenues currently siphoned off to parts of the UK in more urgent need of investment. Infrastructure would focus on the global rather than the domestic, potentially enhancing London’s status as an international hub. Hong Kong and Singapore function as business-friendly global cities albeit with widely different political and social contexts. There is an argument to say that the UK’s dependence on the financial sector is largely due to London’s comparative success, meaning a clean break would potentially allow the rest of the country to focus more on manufacturing in order to restore some lost identity to northern towns.

    The question also remains as to where one would draw the line. ‘London’ is now an ambiguous entity of around 8 million people, spreading out and beyond the M25 with an electorate of varying economic opportunities and political tendencies. It is often forgotten that London has both Britain wealthiest and most deprived local authorities and a move to independence may well lead to these inequalities becoming more apparent. Barking & Dagenham for example voted in favour of Brexit in a 62-38 majority as opposed to Islington which voted 79% in favour of remain.

    Perhaps this binary question is after all missing the point altogether. The suggestion for London to become an independent state is not the result of lucid, strategic planning but a rejection of the rest of the country – an emotional reaction similar to that which has caused so much hatred and anger towards leave voters. Perhaps one of the most misleading and simplistic conclusions from the referendum is that of a rich, globally orientated London compared with an impoverished periphery. While elements of this have validity, it also fails to register the disconnection among London voters themselves and the levels of poverty within London which largely goes unnoticed on a national level.

    London is already an established international city, inhabited by a young, mobile population and the question of its independence from the rest of the UK was a valid one even before the wheels of the Brexit steamroller began turning. The political freefall which has taken place in Westminster over the past two weeks has compounded the emotional impacts of the decision, resulting in a reaction by global financial markets in accordance with the pre-referendum predictions. Dismissed as scaremongering over the course of the campaign, the moving of financial services jobs from London to Paris, Dublin or Frankfurt are now in uncomfortably plain view.

    This will of course please those aiming to ‘stick it’ to the establishment, a result stemming from the post-2008 condition which lingers on across Europe. Not only has the result of the referendum had a psychological effect on those EU citizens currently living and working in the UK but also created the potential for a less documented out-migration of skilled UK workers to Europe and beyond. 

    Whether or not this becomes anything more than fiction remains to be seen, but merely the level of discussion on this issue reveals the appetite for change in the capital.

    Charitable Germans?

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    As the Greek crisis seemingly draws to a close, having meandered along a seemingly endless path of conventions, meetings, summits and other opaque moments of EU congregation, one might allow themselves a moment of sadness to contemplate the end of a captivating yet undoubtedly sobering series of events. I for one do not (as this piece will demonstrate) claim by any means to be an economist, however the ‘Greek drama’ which has been running for at least five years now, punctuated in recent times by the refreshingly articulate political etiquette of Syriza’s leading figures Varoufakis and Tsipras, has lured previous bystanders like myself to peer in from the viewing gallery into the murky waters of European negotiations.

    Popular sentiment within Europe has branded Greeks as lazy, unable to ‘catch up’ with advanced economies of the Eurozone and generally agrees that Greece should return to the Drachma as soon as possible to avoid wasting any more relief funds perceived to be snatched from hardworking German taxpayers. The idea of the Greek government simply ending its protests and climbing aboard the bailout train regardless of its terms with countries still impaled on the spike of austerity such as Ireland, Portugal and Spain conveniently forgets the grim reality of the past seven years. As Varoufakis himself has repeatedly stated, since 2009 wages have contracted by 37%, pensions by up to 48% consumer spending by 33% and unemployment reaching a total of 27%, a figure closer to 50% for Greece’s youth. Reports of greek children fainting at primary schools from malnutrition, neo-Nazis intermittently running riot in downtown Athens and Greek pensioners unable to heat or power their homes have become all too familiar. Austerity has not worked. And yet the ongoing efforts to restructure Greece through reforms, while recognising the obviously legitimate need to reconfigure Greece’s taxation and pension system, tend to point to the weary subject of austerity.

    However Germany’s characterisation both domestically and in Europe as an industrious nation who has given away far too much of its taxpayers’ money to irresponsible Greece fails to recognise the fundamental structure of the EU and how it is geared in so many ways to benefit Germany. Germany is famously successful economically thanks to its export-driven economy and this idea of each country in Europe aiming to live up to or match Germany’s power in this regard is in essence flawed by the simple fact that it is impossible for all nations to have export-led economies. A weak euro, a currency which has declined by 12% against the pound over the past 12 months, allows dominant countries such as Germany to offer cheaper goods and services such as cars, appliances or pharmaceuticals to global markets encompassing around 60% of its total exports including countries such as China and the US. Yields on German bonds are extremely low when compared with countries such as Italy, Spain or Greece which allows the German economy to borrow money far more easily than its suffering southern counterparts, fuelling yet more growth. Combine this with a decline in oil prices and the German economy has had a relatively painless experience within the context of the European crisis post-2008.

    Various games on either side have rather blatantly exposed the calculated nature of the ECB and the IMF’s policies, figures derived far more from political motivations than pure rationality. On Friday the ECB provided Greece’s main banks with €1.8billion of relief funds, a figure which came with the convenient caption of reminding Europeans that this was only sufficient to last until Monday, after which the banks would literally run dry, therefore artificially attempting to create a run on the banks over the weekend in order to stimulate a response from Syriza. The crucial point here, as Channel 4’s Paul Mason describes, is that Greece’s banking system cannot be controlled, interrupted or taken over by its own governmet, given the straitjacket created by the ECB. Where the UK intervened with RBS and Northern Rock in 2008, Syriza is powerless to act while living with the looming cloud of the ECB’s Emergency Lending Facility to pull the plug and witness a total collapse of Greek banks. Alexis Tsipras bizarrely attended a finance summit in St. Petersburg and was photographed speaking in an amicable manner with Vladimir Putin. In a less than subtle remark, Tsipras was quoted as saying “As all of you are fully aware, we are at the moment at the centre of a storm, of a whirlpool, but we live near the sea so we’re not scared of storms. We are ready to go to new seas to reach new safe ports.”

    Whatever the conclusion on Monday to final hopes for a deal to be struck, as much as Syriza have been ridiculed by the incumbent European elite, the behaviour of Germany, the IMF and ECB has been borne out of a reluctant admittance of the consequence of Greek exit rather than acting in solidarity with the original principles of the European project.