Budget 2013: The chancellor must build, build and build

Housing development is a cost-effective way out of recession that doesn't suck in imports but tackles a number of problems.

Kevin Gulliver is director of the Human City Institute

Ahead of his third Budget, George Osborne’s economic strategy is being questioned by the International Monetary Fund. The upshot from Osborne’s austerity policies has been a flat-lining economy and the loss of the triple-A credit rating.

GDP figures for the final quarter of 2012 confirm that the UK is on the cusp of an unprecedented triple-dip recession. A lack of growth and industrial output at 1992 levels leave the chancellor with little wriggle room within his self-imposed austerity straightjacket.

The likely outcome from the Budget will be more of the same, with possibly a little tax cutting here and there and the odd rabbit or two pulled out of his Bullingdon top hat.

Greater downwards pressure on public spending and consequent reduced aggregate demand in the economy are probable. Further cuts in welfare, even before the ink is dry on the Welfare Benefit Uprating Act, are seemingly inevitable.

Economic recovery

Since George Osborne’s spending review in 2010, the UK economy has grown by just 0.7 per cent compared to the 5.3 per cent forecast at the time.

Most commentators across the political spectrum would prefer action to kickstart the economy; particularly through housing development. Even the CBI is calling for stimulation of the economy by building more affordable and social housing.

This is a cost-effective way out of recession that doesn’t suck in imports but tackles many problems: growing waiting lists, homelessness and overcrowding, aiding social and geographical mobility, and bolstering the construction sector. It also adds assets to the national balance sheet.

In contrast, further cuts in welfare will have a negative impact upon economic growth since those on low incomes and benefits tend to spend most of their income.

The proposed uprating of work-related benefits by 1 per cent annually over the next three years will suck much-needed demand out of struggling economies in inner city areas and remote rural outposts. It will also significantly increase the financial burden on social tenants, one of the main groups under attack by the government’s welfare reform programme.

Forthcoming research by the Human City Institute estimates that more than £3.5bn will be lost in purchasing power in social housing communities over the next three years as in-work benefits and stagnant earnings are eroded by inflation.

The research also shows how this projected fall in real terms income comes in the wake of at least a 10 per cent loss of tenant purchasing power since the credit crunch hit, equating to a total drop in real terms income of £3bn between 2008 and 2012.

This has resulted from above inflation increases in necessities – food, fuel and transport – which take up disproportionate amounts of tenants’ incomes.

Reforms of welfare already announced will remove a further £2bn from tenants’ pockets by 2015. So between 2008 and 2015, social housing communities will have seen their incomes fall in real terms by a total of £8.5bn. This is having a significant impact on the economy overall and is contributing to stagnant demand in already fragile local economies.

Even an inflation upgrading of work-based benefits over the next three years would have left most tenants on the margins but the proposed 1 per cent upgrade will see tenants’ purchasing power plummet.

To illustrate this, from now until 2015, the 1 per cent up-rating represents a weekly cash increase of £2 only on the current jobseeker’s allowance whereas food, fuel and transport bills are predicted to climb by at least £10 per week.

The attack on the living standards of tenants and disadvantaged communities will not help lift the UK economy out of recession; quite the reverse.

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