The £28bn row crystallises a big economic policy dilemma facing the UK

Debate around how to fire up growth seems unable to reconcile two mutually inconvenient truths. But a meaningful growth plan depends on doing so 🧵 Inconvenient truth #1.

We have a large national debt and it's risky to allow it only to flatline between crises and ratchet ever upwards

For all the fiscal rule haters, fiscal sustainability is a real thing. We can't just wish it away

Immigration and housing is political 🧨

There's been some hyperbole about today's +670k immigration and housing costs. But DONT PANIC! Here's why:

1st look at the past 24 years. Generally population has grown slower than housing stock. Houses per person are +2.7% over 2000-22 Today's immigration numbers were well above the ones in the ONS population projections, so that's caused pop per dwelling to rise in 2022-23 (blue line), but not by much.

And experts see these numbers dropping back to previous projections (method/sources at the end)

After the election there's going to be a fiscal hole to fill. How big though?

A *very* fag-packet calculation suggests whoever wins needs £30-40bn just to keep the show on the road - unless something turns up

Some thinking aloud...🧵 1st some assumptions. In March HMT had just a £6.5bn margin against its debt falling target

For simplicity, assume no change to that in 2028-9. Assume too that the next gov keeps the 5-yr debt rule. Also assume nothing changes in the underlying forecast or debt service costs

Back in 2021 i did a TBI paper with @timbolord and Brett Meyer mapping the politics of climate change. Is it a Brexit-like wedge issue?

There was always a risk that someone would try that gambit. But not very obvious it’ll work. 1st take a look at these trends in concern…

https://twitter.com/hzeffman/status/1704179144727150607

High and converging levels of concern about the problem across social classes, age groups and urban/rural.

Not obvious what anti-climate electoral strategy works from that

Good to speak @CommonsTreasury about wealth and intergen inequality today with David Willetts and Resham Kotecha of @SMCommission. An edited 🧵of my comments

First up is the likely impact of last year's events on aggregate UK household wealth: it will be big My paper for the LSE wealth tax commission on the drivers of the huge surge in wealth of the past 25 years gives some pointers as to what we can expect

wealthandpolicy.com/wp/BP122_Sourc…

Haldane's proposal of dumping government debt rules and letting borrowing be constrained only by public sector net worth surely right in principle.

But is it viable in practice? Are there simpler ways to get to a similar destination? Four drivers of changes in assets/liabilities are worth thinking about:
1. Natural assets
2. Countercyclical fiscal policy
3. Land
4. Fixed assets like transport, energy, health infrastructure

Politically the story of the budget seems to be:
-game the 5-year debt/deficit rules to do temporary spending splurges today
-juice the next parliament for permanent future policy liabilities enabling announcements today
-leave departmental spend plans unsustainable from 2025 🧵 Childcare was arguably the Chancellor's biggest move today. But the full cost only hits after the current spending review period.

Tying up cash from 2025 gets the government an announcement today, rather than helping boost departmental budgets after 2025

Is the Chancellor's plan to tackle inactivity through a £1.8m lifetime pension allowance fighting a problem that's already over?

Latest LFS micro data shows that flows into retirement in Q4 dropped below their pre-pandemic average It's just one quarter's data of course so should treat with caution, but it's currently looking like we should see the 'great retirement' as a blip rather than a structural shift.

What about the broader picture of flow into inactivity for any reason?

It's always good to see someone actually try to stack up the case for a housing shortage as @CPSThinkTank has done today, rather that simply assert it in commentary.

But that demonstrates just how weak that case is. Quick comments on their key points 🧵

cps.org.uk/wp-content/upl… I set out the evidence on the role of supply in driving house price growth in a paper for @housingevidence back in 2019

housingevidence.ac.uk/wp-content/upl…

Today, here is the CPS authors' case against. How convincing are these?

This picture of rent affordability since late 70s is one of the starkest in social policy. Housing costs are swallowing up a vastly higher proportion of incomes than in the past

But what's driving this and what are the solutions? Today's @jrf_uk report offers some answers The erosion of 3 big forms of subsidy for renters have revolutionised renting over the past 45 years.

Most obviously, social housing has shrunk from 31% to 17% of the stock, but the subsidy on each home has also fallen

Dreadful @thetimes leader. Hard to know where to begin with these banal assertions. But let’s just take one point… This assertion that ‘government takes up national wealth’ is wrong and economically harmful. How should we think about it?

1. Start with deciding what things we all want to consume - e.g health care, schooling - these will be ‘taking up wealth’ however they’re paid for

New @InstituteGC paper today argues for a long-term strategy for the household energy crisis.

Freezing prices amounts to crossing our finger that something will turn up - it can’t be more than a stopgap measure

institute.global/policy/staying… First of all a freeze is extremely expensive. That’s unavoidable and indeed desirable in the short term, but not sustainable in the longer term, as @PJTheEconomist has been saying

30% bill cut on top of the planned £400 over the winter amounts to an effective ~45% bill cut for the typical family

Interesting to compare to Lab/Lib Dem freeze option - effectively a 50% cut on current price cap projections for winter. But…

https://twitter.com/TorstenBell/status/1562797671785541632

What happens when we get to April? At a 5k cap the Lib/Lab option is a 60% bill cut vs RF’s 30%. The former expensive but the latter insufficient in that scenario imo

Governor of @bankofengland's speech yesterday was about something under-discussed but profoundly important for the biggest policy questions of the coming decades - especially net zero, wealth inequality, retirement

It's going to drive our politics for good or ill... 🧵 @bankofengland's new research suggests the 'underlying' real interest rate (R*) has fallen ~2ppts since the mid-80s, from ~2% to ~0%

That's been a massive driver of wealth accumulation and intergen inequality for ~30 years. See this from @resfoundation's excellent report today

Taxes are 'very high' says @KwasiKwarteng. Tory leadership hopefuls are falling over themselves to shed the Johnson-Sunak fiscal legacy. That threatens to detonate the party's 2019 electoral coalition

NEW blog: Tory tax row and its political implications institute.global/policy/leaders… Tax as a proportion of GDP is heading above 40% compared to just 36.7% in 2019.

But that's not because HMT is raking in more money than planned - the Johnson-Sunak fiscal legacy is one of raising £50bn to fill the £50bn permanent hole created by Brexit and Covid

Living with covid is one thing, living with #LongCovid is something else. Digging into @ONS prevalence survey, the numbers don't look great

Looking at time since infection we can see if people whose activity has been impaired owing to pre-April 2021 infection are recovering... If they were, those lines would be sloping downwards. But they're worryingly flat, suggesting that people affected aren't recovering very fast if at all

Latest data suggest 1.15m people have long covid bad enough to impair activity to some degree. That's up from 620k last April

Home ownership remains well below its mid-2000s level fuelling intergenerational tension

Our new @InstituteGC report today shows how the UK mortgage market is unusual internationally, resulting in unnecessarily volatile home ownership... institute.global/policy/home-ow… Rates of home ownership have seesawed in recent years with 3 big phases:
- Rapid growth up to the early 90s
- Stagnation until around the financial crisis
- Collapse until 2016.

With inflation surging how is the cost of living squeeze going to affect different household?

Inflation is pretty evenly felt right now (albeit we don’t know whether this is representative of the cheapest items). But in April that will change sharply with lowest-incomes hit hard Taking everything into account, lowest income decile is now facing a 4% income squeeze for 2022-3 compared to the year before. More like 2.5% for the better off. These are big numbers.

Fair and nuanced write-up of the housing story in @TheEconomist today on changing views in government about the drivers of house prices. Great to see. I'd make a couple of points...

economist.com/britain/2021/1… First it's good to see these essential numbers getting some attention. Assessments of housing adequacy have been based on partial and tangential data for too long but these are the core metrics we should monitor

Jonathan Van-Tam framed it as a race between the new variant and vaccine rollout. But perhaps we should think of it as 404 different races - one for each local authority in the UK.

Our new analysis today looks at how exposure varies across England
1/13
institute.global/policy/levelli… We know that some areas have been hit much harder by past waves of Covid than others. But the silver lining is that population protection in those areas is higher now so any third wave *should* be smaller in areas of high past infection
2/13

3 things about Gove's very interesting speech that I find puzzling.

1) Can more 'deep expertise' in policymaking be a solution if 'elites with different social and political values' are the cause of Whitehall's alienation from the 52%? 2) If you want to so more policy evaluation, why would you want 'less reliance on social science and more on physical science'? This is, er, what social scientists do...?