As pressure mounts on Chancellor Philip Hammond to deliver a budget on 22 November that is simultaneously bold and safe, Oxford Saïd academics discuss their hopes and fears.
Housing: radical action is needed to tackle 'national emergency'
Andrew Baum, Visiting Professor of Management Practice
The Government’s recent listening and decisions on housing are welcome and point in the right direction, but they lack ambition and don’t go anywhere near far or fast enough. This is a national emergency.
Statistics suggest an annual shortfall in UK housing supply of around 100,000 homes. The most commonly quoted figures are that the number of UK households increases by roughly 240,000 per year (mainly due to people living longer, relationship changes and new single person households – contrary to popular belief, immigration accounts for less than ten per cent of this growth). Even in the best years, we only build about 140,000 new homes (usually way fewer) – hence the 100,000 annual shortfall.
The real crunch is that this undersupply has been going on for the last four decades, so the total crude, accumulated shortage against household growth is now around 3-4 million homes – and rising. Remembering that we need 240,000 per year just to stand still, build rates would have to increase massively to make any significant inroads into the backlog. Allowing for property’s lack of price elasticity (and our addiction to its wealth-generating features), to make a real impact on prices, as many as 500,000 extra homes per year might be needed.
The impact of Britain’s decision to leave the EU makes it harder than ever to predict the exact balance between future demand, supply and the economy, but Britain has simply not been building enough homes for decades. Something has to change. The longer we leave it, the tougher and more expensive it will be to tackle.
So what should the Government be doing?
• Use £5bn as a public subsidy to encourage private investment into affordable homes. Abandon localism; be prepared to use compulsory purchase powers
• Set up a Government-sponsored National Housing Service, under a Minister for Housing with Cabinet status. Make legal, financial and regulatory changes to create flexible, lifetime tenures that allow people to move between different housing offers.
• Hold a fundamental review of Green Belt protection
• Continue Help to Buy but only as part of a package of measures to boost supply and access to home ownership. On its own, it just stokes up demand and price rises.
• Take ‘Housing first’ action to eradicate rough sleeping; support innovation in construction technology (e.g. offsite modular manufacture); and create urgent plans to meet the housing and health needs of our ageing population (e.g. more downsizer homes).
Retail: ditch ‘dysfunctional’ business rates and stimulate consumer spending
Jonathan Reynolds, Academic Director of the Oxford Institute of Retail Management (OXIRM) and Associate Professor in Retail Marketing
The retail sector in the UK is sensitive to the outcome of this week’s budget in two ways: directly, through its impact on the sector’s cost base (which, amongst other things, reduces potential funds available for reinvestment by retail businesses themselves), and indirectly in terms of the effects on consumer spending. But it may be a case of ‘jam tomorrow, not jam today’.
Impact on the retail sector’s cost base
The September inflation figures suggest an estimated quarter of a billion extra costs through business rates from next April, according to the British Retail Consortium. It has been clear for some time that this relentless ratcheting up of business rates is the sign of a dysfunctional policy instrument. Reducing or even freezing the business rates multiplier would be welcome, as would changing the basis to the more representative Consumer Price Index (CPI). This could happen in the Budget, but longer term changes to the system are believed to be on the horizon, although this will not help pay next April’s bills. This is particularly the case for smaller retailers, where the Association of Convenience Stores reports that over 100 local authorities have yet to distribute discretionary relief to firms. Longer term, the impact of the digital economy requires retail firms both to reinvest in the skills of their existing workforce as well as to recruit more appropriately skilled workers. Greater flexibility in the use of the apprenticeship levy, for example, would allow more successful adjustment to new labour market realities.
Impact on consumer spending
Indirectly, a weaker growth outlook for the UK heralded by the fastest rate of decline in discretionary consumer spending since 2009, and the inability of retailers to further absorb inflationary pressures from post-referendum currency change, will add to existing uncertainty amongst consumers. This will affect spending levels, especially in the post-Christmas period. Measures which keep tax low and stimulate spending are needed, but this is in the light of a manifesto promise to increase, rather than freeze or reduce, tax thresholds.
Venture capital funding: don’t cut EIS tax relief but do tighten eligibility criteria
Thomas Hellmann, Professor of Entrepreneurship and Innovation
The Chancellor should resist the temptation to chase headlines with a cut in tax relief for wealthy investors in the Enterprise Investment Scheme (EIS), but I hope he does announce reforms that will tighten up eligibility criteria to avoid wasting taxpayers’ money.
In the run up to the Budget this autumn there has been increasing speculation about cutting ‘tax relief for the rich’. Specifically there is talk of changing the EIS which provides up to 30% tax relief for investing in venture capital trusts. Such a move might have popular appeal – surely the rich don’t need such a generous tax break? – but the overall result is likely to be a reduction in investment in deserving entrepreneurial ventures – a bad idea in the current economic environment.
My recent research shows that so-called angel investments play a key role in promoting entrepreneurship, precisely by generating intergenerational transfers from more experienced wealthy investors to a younger generation of entrepreneurs. This research provides a rationale for investment tax credits, much along the lines of the EIS programme. In fact, recent findings by researchers at the London School of Economics show that the EIS programme provides a substantial boost to the capital of entrepreneurial ventures.
A better and much-needed reform to EIS would be a narrowing of the scope of eligible companies, to ensure that the relief is only applied to truly entrepreneurial and innovative ventures. Tax credits are always difficult to implement, because there are just too many clever tax advisers finding ways to redirect funds towards safer but less innovative ventures that have little economic benefit for the broader economy. Tightening up eligibility criteria may sound like a boring technical adjustment but it is really important: not doing so is likely to lead to a substantial waste of taxpayer money.
So if the Treasury truly wants to look after the long-term competitiveness of the UK economy, it may have to sacrifice a few soundbites and instead go for sound logic. Now that may be an entrepreneurial idea by itself!