‘’No wind is fair to a man who does not know for which port he is making’’ (Seneca, AD1 to 65).
Assuming this is valid for governments too, is the coalition rudderless? The deficit is being brought under control; “public servants’’ are being reminded what that phrase means; quangos are being ditched; and the process of engendering a work ethic in millions stuck in the mire of dependency is at last under way.
What other policy strands will lead to sustainable recovery? One favourite is to coerce banks to resume lending. After all, government is a major shareholder in several of them.
Two years at the top of the national hate-list has made banks understandably reticent about mortgage lending. But they do themselves, and us, no favours by switching to the other extreme. In the pre-crisis years many lenders secured loans on anticipated, not current, asset values, thereby generating the very bubble that almost wiped them out when it burst. Loans of 125% of house prices were scarcely newsworthy in those heady days, and up-front deposits were an obsolete formality.
banks have created another round of borrowing
Oblivious to the middle way of evaluating borrowers’ circumstances, rather than ticking boxes, banks have created another round of borrowing. First-time buyers in London must now find over £50,000, a quarter of the average property value, just to raise their deposits. The result is that few prospective buyers can achieve home-owning aspirations, despite the irony that mortgages are more affordable now than at any time in the past dozen years, monthly payments now averaging only 27% of disposable income, according to Halifax’s latest assessment.
Entrenched social inequality, higher rents and ongoing uncertainty in the housing market are deeply unsettling. Confronting these is among the coalition’s most daunting tasks.
After years of fiscal tinkering, with taxes rising stealthily in pursuit of unbridled and unsustainable public spending, this is the perfect time for considering an alternative to such tired doctrines.
Mechanical recourse to even more tax hikes flies in the face of experience in Canada, Sweden, Hong Kong, Australia, Switzerland, South Africa and, of course, Ireland, whose low tax regime has proved its saving virtue. In all these countries low tax rates encourage enterprise and spending, while increasing the tax haul.
But a fundamental re-think involves more than reducing tax rates. When revenue authorities are bogged down in a system that has over 1,000 tax reliefs, and such nonsense as how to tax “disguised remuneration’’, childcare, holiday lets, Boris bikes and whether private bets made by an on-course bookmaker are part of his trade, some “blue sky” innovation is obviously needed.
Compare the manic complexity of all this with the simplicity of, say, a “flat tax” as operated in a dozen countries in Eastern Europe alone, or a tax on land values that could replace the regressively unfair council tax, stamp duty and inheritance tax, and would give local councils a massive incentive to make 700,000 UK properties, currently vacant, habitable. To their credit, senior coalition politicians appear to have seen the light and are advocating implementation.
The tax is based on the value of land alone – not buildings and improvements. Development is encouraged because it has no effect on the tax. In Denmark and Australia, where private homes are exempt, land tax is one of the main sources of infrastructure funding. Our Jubilee line cost £3.5 billion to build, adding £13 billion to land values along the route. Yet the £10 billion windfall that went into private hands contributed nothing to the cost.
The latest OECD study concludes that a shift from taxing employment to land values would boost economic growth. An annual tax of even 0.5% of land values would raise £25 billion.
“On such a full sea are we now afloat;
And we must take the current when it serves,
Or lose our ventures.”
(Shakespeare, “Julius Caesar”, Act IV)