The Institute for Fiscal Studies wants to ramp UK house prices even higher

Next week we will see the UK Spring Budget and it has provided the Institute for Fiscal Studies to demonstrate their usual dislike off tax cuts. But before we get there I have spotted something in their report which is pretty shocking.

But simply cutting the main rates of these taxes would represent a missed opportunity.

Okay so what should the UK do?

For example, stamp duties on purchases of properties and shares are particularly damaging taxes and should be towards the front of the queue for growth-friendly tax cuts.

Yes so asset price pumping from the IFS and by mistake I first typed pimping which actually is accurate too. We had a recent trial run for this via the post pandemic Stamp Duty holiday introduced by Chancellor Rishi Sunak. Below is an LSE analysis in 2021 of this impact of this.

It is generally well understood that stamp duty impacts house prices – and of course that house
prices modify the receipts obtained. Importantly the average house price in England in March 2021,
at £273,000, was almost 10% higher than in March 2020. In the previous year, prices had only risen
by 3%.

It is rather typical of this sort of analysis from the LSE that we see claimed Wealth Effects.

A recent report by CEBR which uses government estimates of elasticities suggests that if the holiday
were to be made permanent there would be a roughly 2% increase in housing wealth because of
house price increases (CEBR 2020). More generally, the CEBR report suggests that such an extension
might actually increase overall tax revenues, not just through higher house prices but also through
the knock-on effect of increased housing wealth on consumption.

As an aside the research shows that the North has more to worry about this than the South if the pandemic experiment is any guide.

Price rises have differed very considerable between regions. For the period April 2020 – April 2021,
they rose most rapidly in the North East (almost 17%) and Yorkshire and the Humber (around 12%),
and least in London (3%) and the South East (5%). Southern regions have in general experienced
lower increases than the rest of the country.

Eventually they are forced to address what for me is the elephant in this particular room which is that the claimed “Wealth Effects” are at the expense of first-time buyers and those trading up.

There are thus well evidenced concerns that an extended holiday would tend to increase house
prices and reduce affordability. So the government might well benefit in terms of revenues, but
some of those trying to enter owner-occupation might be disadvantaged.

You may have spotted the framing here where house price rises are permanent and so they suggest are wealth effects. But the poor punished first-time buyer only “might be disadvantaged”! When it is the most certain outcome of the lot.

Also we have had a post pandemic surge in house prices as only yesterday I noted that we have had only minor house price falls to follow the surges ( 10% reported by the LSE paper but remember it was followed by even more rises). So all those “wealth effects should have seen an economic surge.

As this report says, that adds up to anywhere between £1.8- £2.7bn being injected into the economy
– probably more by the time you add the multiplier effect.

Except over the past year our economy has not grown at all. The real world is often rather inconvenient…..

The first rule of OBR Club strikes again!

If we return to the IFS paper it rather inadvertently strengthens the argument for the first rule of OBR Club that the OBR is always wrong.

Borrowing in 2023–24 is now on course to be £113 billion, which would be £11 billion below the £124 billion forecast by the Office for Budget Responsibility (OBR) in the November 2023 Autumn Statement.

Actually we do not even get beyond point one without another example of forecasts that have proven to be not only wrong but actively misleading.

A reduction in forecast borrowing would doubtless be welcomed by the Chancellor, but we should remember that as recently as March 2022 the OBR was forecasting borrowing in 2023–24 would, at £50 billion, be less than half what we now project.

If the OBR was an archer not only would they miss the bullseye they would miss the target and have the spectators running for cover. There are two very important points to note from this.Firstly the ridiculous nature of setting policy on the basis of such forecasts and yet our media and establishment do. Let me give you an example from the 17th of November 2022 when I pointed this out.

It has all come from this as reported by the Financial Times back in mid October.

The Institute for Fiscal Studies has said a £60bn fiscal tightening will be required to make the sums add up, implying that Hunt will have to go much further in reversing tax cuts, raising taxes and cutting spending.

Remember the fiscal “Black Hole” that the IFS,OBR, Bank of England and the media were hollering about? Where did it go as after all we have had very little economic growth since. Plus the whole situation is rather incestuous as these bodies rather than being independent as it may appear are in fact made up of the same type of people  as I pointed out about the OBR back in November 2022.

 If you look at the 3 members of the Committee you see that 2 are from HM Treasury. This is the sort of thing that only the state can get away with which is claiming to be independent of HM Treasury and then taking back control.

Actually the third one was maybe even worse as Professor David Miles voted for more QE just as the UK economy was picking up in 2012/13.

Oh and I was saying all this back then.

 Now we see that our fiscal policy looks set to tighten into a slowing economy as well which compounds the problem.

Comment

If we look at recent UK economic history we see that bodies like the IFS and the OBR have made things worse rather than better. That “black hole” analysis from late 2022 led to a fiscal tightening which contributed to the present recession. That adds to the way that what I would describe as the same old establishment crew at the Bank of England raised interest-rates too late and thus helped create a recession. If you think that through logically you see that interest-rates can do nothing about what has already happened and should instead by aimed at the future. Also tax policy was a rear gunner as well. Yet on BBC Breakfast this morning I heard the presenter describe the IFS as “well respected”. By whom please?

Also there is the issue of the house price pumping and punishment of the young of a Stamp Duty Cut. The head of the IFS Paul Johnson has form in this area via his botched 2015 Inflation Review.

“In 2013, the UK Statistics Authority de-designated the RPI as a National Statistic and the Office for National Statistics introduced the new CPIH measure to include owner occupiers’ housing costs. In my view, it is time for the UK government to take the next, logical step and stop using RPI in any element of the tax, benefit and regulatory systems.”

I am not sure how much more wrong he could have been! Notice how he has punished the poor receiving benefits as well as taxpayers by recommending using a much lower measure of inflation. Also “to include owner occupiers housing costs” was misleading and frankly has turned into a lie as the Imputed Rents used in CPIH have been vert different to house price rise as we have already seen via the LSE analysis I looked at above. Yesterday the Household Cost Indices provided an eloquest critique of his rejection of mortgage costs.

 Unlike CPIH, the HCIs are based on the payments approach, which includes changes in mortgage interest payments. These are the actual costs paid by households out of their disposable income, rather than imputed rents, which are a proxy for the cost of consuming shelter as a housing service.

Or in practical terms.

Taken together, OOH costs increased by about 23% in the year to December 2023 according to the payments approach, contributing 0.8 percentage points to cost inflation over the same period for an average household.