Monday, 10 June 2013

Constructing a time for change

We have all become experts on the economics of recession, even my daughter can wax lyrical on about the benefits of quantitative easing and the need for fiscal measures to reduce government debt, but the big new thing is ‘structural change’.  The Greeks have been told to embrace it as have the French but what does this mean and how might it apply in the UK?
If any economy were to exist without government interference and regulation it might in theory be 100% efficient, but there would be unacceptable abuses of wealth and power that would lead to social and political instability that would create its own inefficiencies. So over the years governments and other organisations have layered legal frameworks over the way we all make, spend and invest money, this generally helps to regulate markets but over time creates unwanted complexity that distort markets and drives down efficiency.  Taxation is a great example of this, when the first legislated income tax were levied on the British in the 1799 no one could have envisaged the tangle of tax legislation that we have today, the current income tax rules stretch to 17,000 pages of legislation!  Every so often it becomes necessary to clear out unwanted or unnecessary legislation – this is one form of structural change.  The second type of structural change is the execution of an industrial policy or plan.  Nick Ridley famously said that the job of the Industry minister was to shut down the ministry, how wrong he was, reducing red tape and easing over regulation is important work but there needs to be a plan for our economy.
A tortuous route to recovery
In the UK, the last purge of regulation was in Margaret Thatcher’s time when whole industries we privatised, state owned housing was sold off and the City was deregulated.  We are need of a similar dose of medicine today, but where to start.  The coalition government has started to tackle Welfare and need to have a look at Health and Pension spending, and there seems a growing consensus in all political parties that nothing should be ‘off-limits’; even Ed Balls thinks we need a cap on Pension spending.  With so much to do the government should focus on only the most inefficient markets. 
Housing and construction is and obvious example of a market that has become grossly inefficient, where we still have inflated house prices and a lack of liquidity in the market.  The housing and property markets are hamstrung in two important ways.  Firstly accounting rules require that any property owned as an investment is valued regularly and these valuations are based on the recent letting prices, this means that landlords are incentivised to keep properties empty rather than rented out at lower prices. If one links this market distortion to the bureaucracy around ‘change of use’, (changing the use of a building from commercial office space to residential) we have a structural problem that means that many buildings are left empty and rents are inflated, which also drives up the overall cost of housing in the UK.  Deregulated the property industry to allow a free market in property value and ease the change of use criteria we could increase the rented market and bring house prices down generally.  This is an alternative to the lunacy of Tim Boles (the housing minister) and George Osborne who are intent on driving up house prices by making cheap credit available to new house buyers – many of who will be landlords and investors.  Rather than perpetuate the structural inefficiencies in this market we should deregulate to increase supply and competition; resolving these issues in our £5.2tn housing market would have untold benefits for the economy, including:
  • Improved mobility of labour and a less pronounced north south divide
  • Increase consumer spending as a % of national income
  • Lower indebtedness (lower mortgages)
  • Increased pension contributions

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