Last week, we had a proposal to cap energy prices from Labour. This week, the Conservatives have brought forward their mortgage-underwriting scheme, Help to Buy (and let's not even mention the £700million waste on a negligible married couples' tax allowance). Elsewhere, my colleague Joe Hallgarten unpicked the Liberal Democrats’ proposal to universalise free school meals for infants. UKIP travelled policy-light as is the norm for the populist right but, nonetheless, managed to have an almightly public row over the use of a deroratory term towards women. It is difficult not to come to conclusion that abolishing party conferences might be a short-cut to better public policy. Ok, it’s not the fault of the conferences. It’s the desire of party leaders to please – without too much thought for ultimate consequences.
Price caps as a tool of policy mixed with fiscal support for mortgages came together quite vividly in the case of the Dutch housing market. Currently, 25 per cent of homeowners are in negative equity and prices have dropped by over 20 per cent from their peak. How did this happen? There were three main factors: rental protection (price cap), generous mortgage interest deductibility (fiscal subsidy for mortgages), and our old friend irresponsible bank lending. You can read more analysis here.
Controls discouraged investors from the rental market. That meant house buying became the norm. Besides mortgage tax deductibility made it even more attractive. On top of that, banks were lending 115% loan-to-value mortgages. If you imagine a rampant financial sector mixed with price controls and a Help to Buy-style fiscal incentive then that was the Dutch housing market. Labour isn’t proposing rental caps – yet. It has been mooted though so watch this space. Once you cap one set of prices, as I argued in a blog last week, why not others? Rent is a small hop, skip and jump away from energy prices.
There is a broad issue with policy tools such as fiscal interventions. Where you intervene using fiscal policy in a market (and every government intervenes in the housing market – eg capital gains tax exemption for first homes), you had better make sure it’s desirable to do so. Inflating house prices is not normally a good reason for intervention (there are exceptions and Help to Buy may have been more justifiable back in 2009). You might want to promote small business investment, infrastructure spend, or raise investment in research and development or human capital. These are all worthwhile interventions. Help to Buy is not in normal circumstances.
Caps as a policy tool are just as problematic. We have an immigration cap that has damaged our university sector and damages wider growth potential. We’ve had a welfare cap with all sorts of perverse impacts that end up costing even more even if the policy is justifiable as a legitimacy building device. And now we have proposed price caps on energy prices which will damage innovation and investment. The energy price cap will only be 20 months comes the riposte from Labour. Then why, other than politics, do it at all?
Caps are an extremely blunt tool in a complex policy making environment. They are easy to communicate but have a whole series of negative impacts. Are they ever justified? Rarely. A proposed cap on pay-day loan interest is probably one of the few examples where it could produce some positive impact – impulse debt is a market in which we may not wish to encourage investment or innovation.
Sound policy making has taken a battering this conference season. We are clearly moving into pre-election mode. Policy-makers and researchers should be on red alert.
Anthony Painter is Director, Independent review of the Police Federation. His new book ‘Left without a future? Social Justice in Anxious Times’ is now available.