I built that (not really)

Photo credit: RailEngineer UK. Data source: ONS

My friend Anna’s house has roughly doubled in value over the past ten years. She hasn’t upgraded it, instead she has ridden the wave of London’s climbing house prices. In her case, she has also benefited from the building of Crossrail – a new railway line connecting the East and West of London which will dramatically reduce travelling time for London commuters. Her house is becoming ever more attractive because of population pressures, urbanisation and upgrading of public facilities around her. I like Anna very much, but she hasn’t created her own fortune. She has just been lucky. You may think ‘so what?’. Does it matter? Well, it does if her good fortune is someone else’s misfortune and if it creates structural imbalances in the economy. Her luck has a flipside and it is that housing (and land) has become a significant driver of inequality as well as skewed the way we invest. Economists also increasingly think that the busts and booms in housing are causing real economic fluctuations, not just asset bubbles: you may recall that the financial crisis of 2008 started in the housing market. So, the housing market – in the UK and many other rich countries - has a problem and it needs fixing.

Martin Wolf of the Financial Times published an article a few days ago (Reform council tax and close the generational wealth gap) arguing for a reform in the way UK houses are taxed. Currently the system is very regressive (richer people pay less as a proportion of their income or wealth) while a good system of taxation is progressive. If we can agree that we need a certain level of public funding for schools, roads, and health care then we should tax where it is least likely to hurt, both in terms of affecting behaviour and fairness. Taxing housing (land) has the potential to be good on both counts. If we want to change the housing sector, we have to recognise land for what it is: a scarce resource which produces economic rents (excessive profits). Rethinking the economics of land and housing published last year by the New Economics Foundation walks us through the history of housing in the UK and points out that land has become financialised; a speculative asset. Its primary purpose is to create financial gain, not to create the housing stock society needs. The authors offer a menu of options, all of them possible but none of them particularly palatable to politicians whose primary aim is to be re-elected.

Back to Anna: she is in a particularly fortunate situation because of the construction of Crossrail. As Crossrail in large part is financed by the public, she is in fact on the receiving end of a wealth transfer from the general tax payer. Her situation is not unique; there are many of us lucky enough to benefit from public investments. Indeed, it brings back memories of the point Obama tried to make in the 2012 election when he showed that businesses profited from publicly funded infrastructure (‘you didn’t build that’) but ended up being misquoted and ridiculed by his Republican opponents.

As individuals we should be ready to give the public sector credit where credit is due. And if we are lucky enough to enjoy the benefits of public investments, we must also be ready to reform the tax system to make outcomes fairer and more efficient. I’ll see if I can get Anna to agree with me when I see her next week.