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Trust in bricks and mortar

17 October 2011

2:11 PM

17 October 2011

2:11 PM

If George Osborne is serious about growth, a relatively easy decision awaits him: to
stimulate the economy by spending more on housebuilding. David Cameron knows there’s a problem, and during Tory conference announced a "Tory Housing Revolution" to tackle the failing
housing market, and plans to boost Right to Buy and release more land for house building that will deliver 200,000 new homes and create 400,000 jobs. All welcome, suggesting the government has
recognised the role that housing can play in creating growth. But if the Treasury is looking to stimulate demand in the short term, there’s still much more that could be done.

Investment in housing can happen fast. Analysis of major house builders shows that land banks are already healthy, with planning permissions for between 188,000 and 250,000 new homes. An injection
of finance to get these sites going will create jobs quickly, put money into the hands of construction workers that will increase demand and encourage more production in the crucial supply chain.

This compares well to the other forms of stimulus sometimes mooted: cutting income tax, VAT or National Insurance contributions. Sure, these may increase the amount of money in people’s pockets,
but an increase in spending won’t necessarily follow. Some, if not all, could be saved or used to pay household debts, while any spending that does occur may be on imported goods, delivering less
benefit to the UK. So every pound spent on housing will mean a greater stimulus than a pound spent cutting taxes. As more jobs are created through the housebuilding, welfare payments will fall and
more tax will be paid. It could be a double whammy for the Exchequer.

In the longer term, additional house building improves economic growth potential by maintaining skills in the construction sector that would otherwise be lost. We know from the last recession that
these took over a decade to recover. And with youth unemployment almost topping 1 million, boosting a sector that is a significant provider of apprenticeships will help provide opportunities to
young people out of work. Increased housebuilding could also improve labour mobility, useful in both upturns and downturns.

It all makes sense. Government spending to jump-start house building could raise demand quickly, while helping to build a stronger economy for the future. It should be an attractive option for the
Chancellor in the Autumn Statement if he is serious about growth.

Vicky Pryce is Senior Managing Director of FTI’s Economic Consulting practice and was formerly Chief Economic Adviser at The Department for Business, Innovation and Skills (BIS) and Joint Head
of the Government Economic Service. She recently spoke at an event organised by Shelter, the housing charity, where she presented a paper on this issue.

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