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notes_on_real_life

Migration intricacies

In a wistful reflection, the cartoon character 91热爆r Simpson described alcohol as "the cause of all life's problems - and the solution to them".

An estate agents' officeThese days, migration gets similarly ambivalent billing, receiving the blame and the credit for so many of the things we observe: for some, it's caused higher unemployment. For others, it's made our economy strong.

And for some, it's Polish construction workers who've done more than anyone to help us build homes. For others, migrants are the ones who are taking homes away from us.

And it is the impact of immigration on the housing market which is the subject of , which uses government figures to argue that inward migration requires us to build an extra 200 homes a day for the next couple of decades.

It's worth making clear what 200 homes a day means. If we build at that rate for the two decades, at the current target density of 40 homes per hectare, the area covered would be 19 kilometres by 19 kilometres.

A map that illustrates the size of 19x19 km)One wouldn't want to down play the impact of that portion of the UK being given over to new housing. Every hectare is a struggle for a planning authority somewhere. But it is also worth looking at , and marking out an area of 19 by 19 kms to see what it means in the context of the UK as a whole (or take a look at the graphic on the right).

But there's no doubt that the issue is one that raises passions. And the reason why we can simultaneously hold optimistic or pessimistic views about migration is that its effects are often quite complicated.

On jobs, there is no lump of labour in the economy to be parcelled out, so while migrants probably take some jobs that would go to domestic labour, they equally create other jobs that would otherwise not exist.

And on housing, migration can be complicated too.

Of course its right that the more people there are, the more properties we need. So migration does exacerbate a shortage of housing.

But if we don't have enough properties, migrants can also help ease the shortage.

Migrant workers in EnglandFor example, I recently met a Bulgarian family - three of whom were working - in a small one-bedroomed flat in an expensive part of London. Now, I'm not sure how typical that is, but if migrant workers generally are happier to squash up to save money than the British, what would happen if they left?

Arguably, you would release a one bedroom flat, but lose three workers. If the flat was taken by a single British person, the London economy would still be down two workers. Employers might soon say, they need more building in London, to accommodate more staff.. Even if there are spare houses elsewhere.

I have no idea how significant this effect is, though my impression is that the very reason why some crowded parts of the economy have grown so reliant on migrant workers, is down to their willingness not to undercut British wages, as much as to undercut our requirement for a bedroom per person.

Of course, it could go differently. Migrants might settle in the areas of the country where there is spare room to build homes, or even where there are spare homes. In this case, the migrant demand may not put as much pressure on the housing market in the crowded areas.

And then, there are other complexities.

Migrants are not one group, but many varied groups.

A suburban homeAnd some migrants will undoubtedly go native, and soon aspire to a large suburban house with garden, where they don't have to share rooms. That'll add to the pressure here.

But if prices go up, and British folks decide to buy homes to retire to in Bulgaria, that'll subtract from the pressure here.

It's a difficult subject this... even 91热爆r Simpson would struggle to cope with its intricacies.

notes_on_real_life

Property market

Some of you might have seen , in which the .

Under a front page banner 鈥淲hy property is a good bet鈥, and with an inside title, 鈥淪afe as Houses?鈥, you might get the impression I am someone who thinks this is a good time to buy.

Although the contents of the interview itself is rather less prone to casual mis-interpretation, I wouldn鈥檛 want anyone to think I was one of those people who thought prices can only rise.

I try not to make predictions about house prices. It鈥檚 always a hostage to fortune, and anyway, my view of the current level of house prices is of no special value at all. However, my extreme care to avoid saying the words 鈥淚 suspect house prices will probably fall鈥, should not be interpreted as meaning they will go up. No-one should buy on the expectation they can make continued exceptional returns. And they should probably be prepared to make some exceptional losses.

What you do get from the Times article is a more subtle reason for at least some people to buy houses, even if the market looks inflated by speculative froth. It is not to make a profit; it is to act as an insurance policy against the difficulties you might find yourself in, if by chance house prices go up even further.

Let me explain.

Suppose you know you want to own a home in 2010 for example, and you do not own one now. You have two choices: you can wait until 2010, or buy immediately.

If you wait and the market falls, you may well be able buy a house more cheaply than you鈥檒l get it now. But if you wait and the market rises, you may be priced out or not get what you want. You face a risk 鈥 you are exposed to the vagaries of house price fluctuations.

However, if you buy now it鈥檚 different. You鈥檒l pay a high price, but there鈥檚 no more house price uncertainty. You can stop worrying about house prices. You'll kick yourself if prices fall, but you will still have the same house you鈥檝e bought, at the same price you paid.

And indeed, if you are upwardly mobile, and want a bigger house in 2015, you may still be someone who benefits from falling prices not rising ones, because if they go down, you may be able to trade up more cheaply than you would have done before.

I always like to say, I鈥檇 happily watch the value of my flat fall to 50p, if I could then trade up to live in Buckingham Palace for a tenner.

In general though, the argument is that owning a house is a hedge against house price fluctuations. And that鈥檚 not a bad reason to own a house. And a far better reason to have one right now as the market hits a high, than trying to make a killing on property investments.

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Was it a con?

The political debate on the Budget has quickly settled on one issue: did the chancellor try to sell his Budget as a tax cut when in reality it is not?

Yesterday, I said that he had not hidden anything: the fact that it was neutral was mentioned in the Budget speech, and the big tax rise was also there for all to hear.

But if didn't hide anything, he didn't quite highlight things either.

A casual listener yesterday could have been forgiven for thinking that it was a tax-cutting Budget in the way the chancellor delivered it. That impression might have been reinforced by his claims this morning that it is a tax-cutting Budget. The sheer importance of the abolition of the 10p tax rise - which is more or less a straight swap for the lower basic rate - might have been given more prominence in a speech that was not designed to disguise the true effect of the Budget measures.

Overall, in 2009/10, when most of the measures take effect, the Budget takes 拢125 million away from us. That's not a tax-cutting Budget.

The personal tax package - NI, income tax and credits - is a giveaway. But it's more of a giveaway because of the tax credit rises, than because of the income tax changes.

We'll get chapter and verse on all of this from the later today, when they give us their post-Budget analysis at lunchtime.

But the chancellor can at least reject the idea that the Budget tax rises were hidden away in the small print. He did mention them in his speech.

Of course, the charge that Mr Brown is trying to con us is resonant because the Treasury has been less than open and objective in its presentation of the Budget in other respects.

Just three petty examples that sound small but which appear deliberate:

1. Listening to the speech, you would be left with the impression that child benefit was rising significantly. It was mentioned twice. The chancellor said: "I have focused support on families by raising child benefits and child tax credits..." In fact, no extra cash is scored to child benefit at all, as the real increase in the benefit only bites in April 2010. Despite the fact the chancellor said it grows in "successive stages".

2. The Treasury documents furnished us with examples of families which gain from the changes. But they could not - even when pushed - furnish us with an example of any family at all who loses. Even though their own analysis shows there are some. This could not be said to be unspun clarity of exposition in describing the effects of what was being proposed.

3. In his speech itself, the chancellor chose to mention the cash borrowing figures from 2006/7 to 2011/12. For that 2006/7 year, he could tell us that he was borrowing less than he thought back in November. But when it came to the more important measure of borrowing, the current balance, he missed out 2006/07, and gave us the data from 2007/8. Is it a coincidence that on that measure of borrowing, the 2006/7 data has turned out worse than it he'd told us back in November?

Looking back on it today, I know I made some arithmetic mistakes in the rush to produce post-Budget analysis. But it would be much easier for those of us covering Budgets if we didn't have to spend so much uncovering them first.

small_change

New alignment

One more thing about this budget... we shouldn't underestimate a significant point being reached: the alignment of the national insurance and income tax systems... under the old system, you didn't pay national insurance on income over about 拢35,000 a year. Then you started to pay top rate income tax on income over about 拢38,000. Now we know that the NI will stop where the higher rates starts.

It was a point that then shadow chancellor John Smith wanted to reach 15 years ago, going into the 1992 election. (People thought the idea lost Labour that election!)

In addition, we also lose the 10p band of income tax, so the tax system does look a bit simpler and more logical.


UPDATE 2100: One clued up reader points out that I'm wrong to say that Gordon Brown has done what John Smith proposed in 1992. Smith actually proposed scrapping the upper earnings limit on an employee's national insurance contributions, whereas Brown has just brought them into line with the top tax rate - a slightly different thing. I stand corrected.

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Six Budget thoughts

1. There will be losers - even if we can't identify them easily, as it's a complicated package.

2. It is a watered down version of the Tory and Labour strategies for greenifying the tax system. By 2010, green taxes rise by 拢1.4bn, which is used to pay for other personal tax cuts. All three parties now have policies to take us in that direction.

3. It's a substantial budget. Many of the tax measures have been announced over a three-year period. There will be no need for the next chancellor to have a budget for a while!

4. It is the umpteenth budget in a row, in which the chancellor has had to confess that his public finance projections are worse than he thought they'd be! For yet another time, getting his key measure of borrowing - the current balance - into surplus has been postponed until next year. It always seems to be next year.

5. The spending side is tough, as expected. Gordon Brown will see spending grow at about 2% above inflation, instead of the 3.6% they've been used to in the last seven years. It'll feel like a cut.

6. The chancellor does now find himself reforming his own reforms of the tax system. The 10p income tax rate was his idea, he took credit for introducing it, and now takes credit for abolishing it and using the money to cut the basic rate of income tax.

Overall though, this was an ingenious and mega-package of measures, with huge political impact, that managed to use no new resources at all.

small_change

Who's paying for it?

This is a complicated package of national insurance and income tax changes - whopping changes in fact.

Gordon Brown has abolished the lower starting rate of income tax - 10p rate - that鈥檒l raise him eight and a half billion pounds which he uses to cut the basic rate of income tax and this costs him nine and a half billion So, effectively he鈥檚 a billion adrift... This will have a huge political impact but it鈥檚 only cost him a billion pounds to cut the basic rate of income tax by two pence.

At the upper end, who's paying for it? Better off people, basically. He implements this alignment of the top rate of income tax with where you stop paying national insurance.

notes_on_real_life

Burying the Lyons review?

When I heard that the Lyons review was to be published today, I wondered whether they were trying to bury the Budget with the Lyons review, or bury the Lyons review with the Budget.

I think I know the answer. Whitehall loves reviews of local government - but hates them to go anywhere.

counciltax203.jpgIndeed, a little known fact, the Lyons review itself was launched the day the last big review of council tax ended. Which was just ahead of the last election.

If politicians duck the issues of local government finance, it's because the public appear to scream more loudly when changes in council tax affect them, than with other taxes.

Which is a bit odd, as council tax raises less than 5% of the total tax take, and housing is not exactly overtaxed compared to other things we buy. And at least houses can't escape tax - we know exactly which council they sit in.

So why do we hate it? Probably because it's the only tax sent to us with an annual bill. So it's very visible.

Plus, having any tax on property allows newspapers to run lurid headlines - "Now they want to tax home improvements."... "They're taxing you for living in a good neighbourhood"鈥 "They're taxing your beautiful view... "

Of course, taxing all these things that make up the value of a property, is kind of what property taxes do. But it sounds awfully unappealing.

But above all, we appear to dislike taxes that are not related to cash. We know we can pay income tax, cos it's taken out of some income. Or VAT, cos we're at the shops spending money. But council tax gets levied on people even if they have only a modest amount of cash to pay it.

This mostly affects elderly people living in large houses, and it's never seemed much consolation that they can trade down to smaller places, or claim council tax benefits.

So, for all these reasons, the unpopular tax gets ignored. In the hope it'll go away. We shy away from even having a revaluation, evidently preferring to not to tax your scenic view, but to tax the scenic view you had in 1991.

We're not alone: Famously, Ireland was using 100-year-old property values into the late 20th century. Holding out that long just makes the eventual revaluation all the more painful.

Which is why our local property tax in one form or another is reviewed, re-assessed, occasionally replaced, only to find itself back, and unreconstructed.

Can the Lyons review do any better than those that have gone before?

notes_on_real_life

End of an era...

This is a more important Budget than usual.

Not just for the obvious reason, that it probably marks the end of an unprecedented ten year reign at Number 11. But also because it shapes the rest of the parliament. A three year comprehensive spending review is underway, and the chancellor has to reveal now the total amount the government intends to spend right up to 2011.

And all the evidence is that the squeeze starts here. Unless the chancellor wants a significant rise in taxes in the next few years, which he doesn't, the growth of public spending looks set to be held back, well below the growth rate of the economy.

In the Pre-Budget Report, Mr Brown pencilled in spending growth for the three years 2008/09 to 2010/11 of 2.0%, 1.9% and 1.9% respectively. He's bound to confirm figures close to that tomorrow, when the policy is set.

It'll probably feel like a cut in spending, certainly relative to the last few years.

It means that in his last Budget, the chancellor looks likely to revert to his earliest form - because before "Brown the munificant" handed out big doses of cash to public services, he was "Brown the Iron Chancellor", tough on spending. A form he is now trying to rediscover.

On one issue at least, Mr Brown will be able to make a boast. Over his ten years, he has met his famous Golden Rule, only to borrow for investment spending.

Sure, he wouldn't have met the rule without fiddling a bit with the timing of the economic cycle, (or without measuring his borrowing not in billions of pounds, but as a percentage of GDP, which gives more weight to the early years of surplus).

But at least he will be able to say that on his definition, over one complete economic cycle that coincides with his period in office, he invested about six billion more pounds than he borrowed.

Mind you: that is running it pretty close to the wire. Over the ten years he has spent 4.3 trillion pounds.

notes_on_real_life

Real cost of 2012?

Just after London was awarded the 2012 Games, there was a nice letter to the Today programme asking if we could allot a couple of hours a week to negative whingeing about the Olympics, so that we could at least enjoy the honour of having the games the rest of the time.

I find myself agreeing with that sentiment, as I listen to the downbeat media commentary around.

The truth about the budget of the London Games is that it's nothing like as bad as it looks.

It is simply not correct to say the cost of the games has gone up "yet again".

It is not correct to say the costs of the games are "out of control".

It is not correct to say the cost of the games has quadrupled or tripled.

It is even incorrect to say the cost of 拢9.3bn is the cost of the Olympics at all.

So what is correct?

(I apologise if the next few paragraphs have more figures than you really want, but I think it is important to make clear where the costs were, and where they are.)

The costs everyone talks about are those for building the facilities and re-developing the games site. This is said to have quadrupled from 2.4 billion to 9.3 billion.

However, the 2.4 billion figure is wrong, as is the 9.3 billion figure.

Always added to that original 2.4 billion was an extra billion pounds of spending on local regeneration. So the 2.4 should be counted as 3.4.

And that original budget of 3.4 billion has now risen to 7.5 billion, not 9.3.

The 9.3 includes stuff - like security, VAT and some extra bits - that were always accounted for separately from the 3.4 billion.

So in other words, the original 3.4 billion has in fact risen by 120%. Or, a good journalistic way of saying a cost has risen by 120% would be to say it has "more than doubled".

That might sound like costs are "out of control", but when you take into account that 2.7 billion of that 7.5 billion is a contingency for unforeseen costs, you realise that we can't say costs are out of control yet. We don't know whether they'll go out of control, we are simply making sure we can cope if they do.

It is true that the full cost of the construction and security and some other aspects of the games is 拢9.3 bn, but that includes 拢840m of VAT payments which goes back to the government, and hence should be disregarded.

However, the real problem with the casual use of phrases like "the cost of the Olympics" is that it overlooks an important fact: these big numbers are not the cost of the Olympics at all, but cost of constructing of a town in a desolate East London site of 2.5 square kilometres; a town which will be temporarily used by the 2012 games.

To disregard the value of the site at the end of the two weeks sports festival is to disregard the whole point of having the games in London at all. If I buy a 拢100,000 house to host a party, I'd be a bit silly to say the party cost me 拢100,000. Because I've got a house at the end of it.

The site will not be owned by the taxpayer. Developers will sell portions of the housing and the other facilities (the developers are spending several billion of their own on top of the 7.5 billion) but there should be some value to the taxpayer at the end of the process.

As it happens, the budget for running the games itself - the two week sports festival - is 拢2bn. That has not changed and is not included in the 9.3 billion. No-one really talks about this two billion as it will be financed by private sponsorship.

I am sorry if all this accounting is a little tedious. I'm sure we will have plenty to complain about as the games progress to 2012. it would be surprising if we didn't, given that it's such a large project.

(And there are already aspects to moan about - the new security budget of 拢600m in the 9.3 billion for example has risen from the original bid, and yet security was hardly an unforeseen need back in 2005.)

But let's not exaggerate how bad it is.

notes_on_real_life

Economic froth

I鈥檓 getting a little worried that the UK economy has overheated a bit and is getting frothy. Should I be?

Here are some reasons to be concerned (unrelated incidentally, to the ) and then a few thoughts as to why I could persuaded to be more cheerful.

houses.jpgWhat has worried me most is the behaviour observed in the property market in general, and the buy-to-let market in particular.

I鈥檓 currently making a four part series for Radio 4 on housing (The Price of Property, Tuesdays at 9am; listen to the first episode here) and we have found a lot of spontaneous comment about the so-called 鈥渂uy-to-sit鈥 phenomenon: people buying rental property, but not bothering to rent it out, because they are only interested in making large capital gains on their property.

As it is not possible for house prices to meet that kind of expectation sustainably, (the long term record is for property prices to rise about 3% ahead of inflation), I can only assume many of these investors are going to be disappointed at some stage.

They will then either have to find tenants (pushing down rents) or will sell. Either way, their behaviour might have quite an effect on the property market.

I am equally struck by the comments of a couple of people involved in private equity. They assure me that a lot of mad prices are being paid for companies.

Both these phenomena seem to indicate a that certain exuberance has taken hold. If either is indicative of a more general mood, we probably ought to be worried.

I鈥檓 not a particular devotee of the late , but I have to say his book is a very enjoyable read, and it seeks out the common features of different episodes of mass financial insanity, and he mentions financial innovation and the quest for leverage (or debt) among them.

It would be worth all buy-to-let investors looking at it right now. For example, I was at the 91热爆buyer Show last week, in London鈥檚 Excel exhibition centre. There, I saw billboards proclaiming that houses double in value every six to seven years, offer 45% returns and are a safe investment. If these look too good to be true, it is because they are.

Incidentally, a small warning of how things can unravel is emanating from the US in problems being felt by what is called the sub-prime mortgage market, (these are mortgages lent to riskier borrowers, and represent about a fifth of the market) where lenders are reporting disturbingly high levels of bad debts.

However, here are some reasons to be cheerful.

I鈥檓 willing to be persuaded that whatever the specifics of buy-to-let or private equity, the UK economy generally may not be too frothy at all.

After all, there can be small bubbles in a calm pond. And in the economy generally, things look less worrying. We saw that after the dotcom spectacle when the UK economy pulled out despite a huge equity crash.

Also encouraging is the fact that Britain鈥檚 debt boom seems to have peaked 鈥 at least the consumer credit side has slowed down; and so far, the banks are making large enough profits to be able to write-off a big chunk of bad debts without falling into crisis themselves.

Unemployment is not rising and even if it begins to, there will probably be some reverse migration to dampen the impact here (as some central Europeans will inevitably choose to return home if getting a job in the UK proves tough).

Inflation is not as high we had feared it might be a few weeks ago, so if the economy dives, there is room for the Bank of England to cut rates and stimulate the economy, an option that was not available in the late 80s, when we had a recession, but were also trying to beat down inflation.

So, I鈥檓 currently not sure where I stand. I wrote a couple of weeks back, that there鈥檚 a lot of happy talk among economic forecasters.

Maybe they鈥檙e on to something 鈥 or maybe they鈥檙e on something...

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