Written evidence submitted by nef (the
new economics foundation)
In this short submission we answer in brief
the three particular questions included in the letter of invitation
for evidence. In addition we focus on the key areas of housing
and the government's agenda for the Big Society.
The manner in which the Spending Review was conducted
and, in particular, the decision-making process
Our concerns include:
(a) As we outline in our report "Where
did our money go?"i nef is concerned that there
is as lack of clarity concerning the full motivating factors behind
the public spending cuts outlined in the Spending Review. In particular,
and following the observations of the Bank of England included
in our report, that through a lack of obvious alternatives, public
resources will once again be called upon to meet the substantial
funding cliff faced by the main lending banks next year. It is
unclear to us, and we would ask the Government to clarify, whether
the scope and depth of spending cuts has been influenced by the
Government provisioning against the need to provide further support
to the banks in the face of their funding gap. Further to that
clarification, if the Spending Review has not been influenced
in this way, we would like the Government to clarify what plan
does exist to tackle the bank's funding cliff.
(b) Further we are concerned that the Spending
Review was conducted with far too little recognition of the equally
urgent need for immediate financial sector reform. The acknowledged
failure of measures to change prevailing behaviour in banking
and the failure of the banks to meet the borrowing needs of businesses
in the economy presents a fundamental challenge to the Government's
own logic. The Government states that it expects the private sector
to "take up the slack" from the shrinking of the public
sector, but it cannot do this without a banking sector prepared
to lend on the right terms and conditions. We believe that bank
reform must be prioritised and implemented if the Government's
strategy is to work on its own terms. We outline the priority
reforms necessary in our reports: "Where did our money
go?", "The ecology of finance", and
"From the Ashes of the Crash".ii
(c) We believe Britain could learn from and improve
substantially on the process of the Spending Review by drawing
on international and UK examples of best practice in Participatory
Budgeting. We would invite the Committee to look into what constitutes
such best practice and compare that with the process of the Spending
Review.
The decision to ring fence and partially ring
fence particular areas of public spending
Ring-fencing sets an import precedent. We believe
that active protection and development of particular sectors,
such as new green, low carbon infrastructure for Britain, will
be essential for recovery and the UK's transition to a more secure,
resilient and employment friendly economy.
The impact of the Spending Review on the long-term
growth potential of the UK economy
(a) We believe that jobs and economic activity
will come importantly from the "green collar" sector.
It is essential that everything be done to ensure that this sector
achieves adequate finance. On this basis the capitalisation of
the Green Investment Bank fell far short of the minimum thought
necessary, £6 billion. Overall, a broad consensus appears
to be emerging that the Spending Review has undermined the foundations
of the public sector without laying the foundations for dynamic,
multi-scale private enterprise. The first course of action, we
believe, was premature, in that the Spending Review failed to
look seriously at alternatives to cuts, such as an aggressive
pursuit of unpaid taxes, tax evasion and tax avoidance. The latter,
even according to HMRC, could yield additional public income in
the sum of tens of billions of pounds. Several estimates for higher
unemployment point to the broader impact of the Review on the
UK's economic prospects.
(b) nef believes the Government is seriously
underestimating the benefit that greater investment in renewable
energy industry could provide. nef research indicates that
a £10 billion investment in renewable energy could re-skill
1.5 million people, get 120,000 people back into work, and increase
the earnings of low-income workers by £15.4 billion. £10
billion to energy efficiency we estimate would create 60,000 long-term
jobs, £10 billion to onshore wind, 36,000 jobs.
HOUSING
What has been cut?
The Chancellor has proposed a cut of c 60% in
the annual value of the National Affordable Housing Programme
(NAHP) to save £1.7 billion a year, the equivalent of £6.8
billion over four years. There are over 1.7 million households
waiting for affordable homes. It is claimed that allowing social
housing rents to rise to 80% of local housing allowance maxima
will allow the programme to support construction of 150,000 new
homes over the four years of the spending review period. This
represents a reduction of 27% on an annualised basis as compared
with the 155,000 homes planned for the previous three year period.
At an average building cost of approximately £100,000 per
unit, this represents a withdrawal from the private sector economy
of £1.4 billion a year excluding any multiplier effects.
The industry multiplier is various estimated at between 1.6 and
2.6iii—taking the lower figure suggests a total withdrawal
of £2.26 billion a year or £9 billion over the four
year period.
What does this mean for the housing?
Our analysis indicates that savings in the NAHP
could be accompanied by steps to reduce the cost of land and the
cost of capital facing registered social landlords and if this
were done the government could very significantly increase rather
than reduce the number of social housing units built over the
next four years. This would provide a very significant boost to
the economy as well as alleviating the housing crisis.
In outline a combination of the following measures
are required to increase the number of social housing units:
1. Modifications to capital gains tax and planning
rules to help ensure more of the value created by planning decisions
benefits taxpayers and tenants:
(a)A higher rate of capital gains tax on land sales
where the price per acre is greater than £80,000 (say), the
margin over the standard rate to be hypothecated to a national
land fund which would use the money to subsidise social landlord
land purchases.
(b)New residential planning permissions to be granted
to registered social landlords only; they would be entitled to
sell on the land to other developers but would be subject to detailed
regulation on the extent to which they do this and on how they
use the profits
2. Measures to reduce the cost of capital for
new homes:
(a)Index-linked bonds to finance the bulk of new
construction
(b)Bonds designed with options which allow housing
benefit net of costs to be paid directly to bond holders.
If the cost of capital is reduced sufficiently
it may be economic to replace capital grants (to build houses)
with revenue grants (to support interest payments), substantially
reducing the cost to the Treasury in the short term
3. Measures to increase landlords' operating
surplus: a tier of housing between existing social housing and
the private sector, with somewhat higher rents and lower operating
costs than at present.
We are currently developing detailed recommendations
for government and the sector in this area and analysing the impact
on both the housing shortage and the economy (and thus public
revenues).
In a report to be published in November, nef
will set out an economically and politically viable way of
solving the housing problem—while cutting the deficit. We
would be happy to brief members on this research in more detail
should they be interested.
Suggested questions for members
(a) Could the Chancellor explain how he intends
to create jobs in the house building sector when he is withdrawing
£1.7 billion a year from the NAHP and planning a significant
fall in the number of new affordable homes to be built each year?
(b) The Chancellor is asking social housing tenants
to make up some of the difference by planning rent rises to 80%
of local housing allowance maxima. Is the Chancellor planning
equally demanding and enforceable contributions from property
developers?
THE "BIG
SOCIETY"
What has been cut?
The spending review has earmarked only £470
million over four years to help build the "Big Society".
The figure is expected to cover a £100 million transitional
fund to help community-based organisations make the transition,
funding for the National Citizens' service, and training and deploying
5,000 community organizers. This is compared with the total cuts
of more than £80 billion, including £18 billion total
cuts from welfare spending, and a 27% reduction in local council
budgets.
What does this mean for the "Big Society"?
The "Big Society" is a vital part
of the picture. It is supposed to step in to fill the gaps left
by a shrinking state. It presents an alternative to the post-war
welfare system, by shifting responsibility away from the government
and the public sector to individuals, families and communities,
through self-help, mutual aid, charity, philanthropy and private
enterprise. It claims to "empower" citizens to solve
their own problems nearer to home.
Poor areas, which already rely more heavily
on public employment, will suffer disproportionately. Women, who
make up two-thirds of public sector employees as well as most
unpaid carers, will take the hardest hit. Rising unemployment
(latest estimate is 1.6 million jobs lost across private and public
sectors)iv will have cumulative effects as people lose homes,
pension rights and prospects for improving their lives, as well
as earned income.
The newly unemployed will face a much tighter
and more punitive benefits system and drastically pared-down public
services. There will be more polarisation between and within neighbourhoods
as changes to housing benefit put the poorest to flight in search
of affordable accommodation.
These are the conditions in which the "Big
Society" is supposed to take root and flourish. Yet even
before the spending review, the small charities and community
based groups that are supposed to be its life and soul were already
painfully squeezed, as council grants and contracts were scaled
back. Against this background, they are expected to step in and
vastly increase their activities, to help rising numbers of poor,
jobless, insecure and unsupported individuals and families, who
face accumulating problems they cannot deal with themselves.
Suggested questions for members
(a) On the surface, the "Big Society"
may seem to make the scale, speed and manner of deficit reduction
possible. But do the spending cuts make the `Big Society' impossible
to realise in practice?
Who is nef (the new economics foundation)?
nef (the new economics foundation) is
an independent think-and-do tank that inspires and demonstrates
real economic well-being.
We aim to improve quality of life by promoting
innovative solutions that challenge mainstream thinking on economic,
environment and social issues. We work in partnership and put
people and the planet first.
nef works with all sections of society
in the UK and internationally—civil society, government,
individuals, businesses and academia—to create more understanding
and strategies for change.
November 2010
REFERENCESi Simms,
A & Greenham, T (2010) "Where did our money go?",
London, nef. Available at
http://www.neweconomics.org/sites/neweconomics.org/files/Where_did_our_money_go.pdf
ii Ibid. Nissan, S & Spratt, S (2009) "The
Ecology of Finance", London, nef. Available at
http://www.neweconomics.org/sites/neweconomics.org/files/Ecology_of_Finance.pdf,
and
Simms, A (2008) "From the Ashes of the Crash",
London, nef. Available at
http://www.neweconomics.org/sites/neweconomics.org/files/From_the_Ashes_of_the_Crash_1.pdf
iii By the Scottish National Government and by
Oxford Economics (cited by the Homes and Communities Agency).
iv Chartered Institute for Personnel of Development
evidence to the Treasury Committee as reported by the Guardian
2 November 2010
http://www.guardian.co.uk/business/2010/nov/02/one-point-six-million-jobs-cuts
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