Penfold Associates

The one-year Spending Review is necessitated by the Coalition Government’s enactment of fixed term Parliaments, making sure that an official spending plan is needed to cover the period from the end of March 2015 to the June 2015 general election date.

The Chancellor has extended the austerity programme for at least another year beyond his original 2015 deadline with a further £11.5Bn cuts. Local government faces another 10% cut and the Chancellor’s measures aim to ensure that council tax will be frozen for 2014/15 and 2015/16. There will be a 1% cap on public sector pay rises, an end to automatic increments, and 144,000 job losses in the public sector. There will be further cuts to welfare benefits and an overall cap for some elements of the welfare budget (including housing benefit and disability living allowance but not the State Pension). Overseas aid, the NHS and the schools budget remain protected while defence and counter-terrorism get special treatment.

A total of £50Bn investment in “new” infrastructure projects was announced although most of the spending on headline projects such as HS2 will come in later years.

The main elements of the review affecting housing are:
• Extension of the Affordable Homes Programme with £957M pa from 2015/16 to 2017/18 and £400M “affordable rent to buy” scheme (£3.3Bn overall to deliver 165,000 new homes in total)
• Social housing rent guideline of inflation (the lower CPI, not RPI) + 1% from 2015/16 until 2024/25
• Review of Government property holdings with HCA given role of sole disposer from 2015/16
• Additional £150M for Enterprise Zones and £102M to speed up delivery of large sites
• £160M to complete the Decent Homes Backlog Programme
• Allowing HCA to charge for regulation
• Extra £200M budget for Troubled Families

The Spending review does not deliver the level of investment that the housing crisis demands. It is a small element of the overall infrastructure investment plan and that plan is not sufficient to trigger the level of growth the economy needs. The Chancellor does not seem to accept that housing investment is a key driver of growth and that it is the fastest element of infrastructure spending to actually get on-site. His preferred intervention is the Help to Buy scheme which is likely to trigger increased demand rather than increased housing supply and is quite likely to start another house price bubble – it is George Osborne’s own variation on sub-prime lending! The Help to Buy initiative is judged as being virtually unique by Jonathon Portes of NIESR in that it has created a consensus across the economics profession that it will not have a significant effect on housing supply.

The Institute for Fiscal Studies (IFS) points out that the Spending Review still leaves a shortfall of £6Bn pa which implies that an incoming Government in 2015 will have to make further big reductions in welfare programmes or raise taxes. IFS suggests that the Coalition decision to protect health and education spending is putting an unsustainable burden on other departments (and it would seem probable that there is scope for efficiency savings in the protected areas too). For instance, DCLG will have suffered a 60% cut between 2010 and 2016 with a consequentially severe impact on local government services. IFS also says that the £50Bn infrastructure investment programme for 2015/16 is actually a cut in real terms and less than the average achieved before the 2008 banking crash. Infrastructure investment will fall as a proportion of GDP from 1.6% in 2014/15 to 1.5% in 2015/16 and continue to fall in the next two years.

The Labour leadership attacked the Chancellor for the stalled economic recovery and for not hitting his deficit reduction targets. Labour has said that if it wins the 2015 election it will conform with the approved plans for current expenditure limits but would boost investment in infrastructure. Hopefully, that will mean investment in housing across all tenures that increases supply enough to make a difference.
Kim Penfold
June 2013