Popping bubbles and taxing mansions

Afternoon all,

Five sleeps to go…and finally the Budget speculation, at least, will be over. I hope to see many of you at our morning-after event. The Government’s proposal to end for-profit ticket sales met with mixed reactions this week – never fear, our Budget reactions will always remain free (but have been known to sell out).

I was slightly gutted to miss most of the epic Scottish victory on Tuesday but did instead get to sit in the middle while Zack Polanski and Jeremy Hunt traded blows. Thanks to the Today debate for having me.

Have a great weekend,

Ruth
Chief Executive
Resolution Foundation

Post the damn salary. Ever been frustrated when a job ad doesn’t include a salary? No this isn’t the start of an incessant ad on that podcast, much as all we enjoy hearing about many-hats Osborne’s experience of job hunting. But annoyingly it seems research is now on their side. This paper demonstrates that pay transparency in job ads doesn’t just help job seekers – it actually boosts pay, without any obvious downside for employers. When employers posted 30 percentage points more ads containing salary information, wages rose by as much as 3.6 per cent. Crucially, this didn’t impact pay dispersion, employment or vacancies. So, transparency works: workers get better information, wages go up, and hiring doesn’t collapse. Perhaps those Indeed adverts are onto something after all.

Trumponomics. Planet Money have a write-up on the viability of Trump’s plan to create a 50-year mortgage for American homeowners, who already get 30-year fixed-rate mortgages. Who thought Trump and Gordon Brown would agree on something? As the blog puts it, American “homebuyers are given an incredible ability to freeze their housing costs in stone and then refinance when it suits them”. The appeal is simple: longer duration means lower monthly payments and fixed housing costs. Harvard’s John Campbell calls it “not quite as outlandish as it sounds”, while Chicago’s Eric Zwick says it’s “a fine idea”. The downsides mirror those of 30-year mortgages, amplified: much higher total interest paid, slower equity building and, as a result, greater risk of negative equity. What it won’t do is solve housing affordability – by juicing demand without increasing supply, it could even push prices higher. Back to the drawing board – as long as the drawing board reads ‘BUILD MORE’.

Bubble trouble. The AI bubble talk has continued… bubbling away this week. Is it about to pop? This interesting substack unpicks why the (alleged) bubble might burst, and how it could play out. Their view is that, much like in the dot com bubble, the technological infrastructure being built is truly useful. The key is the price of “tokens”: the units of computation that labs like OpenAI use their models to generate. Labs are the wholesalers while companies who create the AI products *we* interact with are the retailers. Currently, lab companies are far from profitability as token sales can’t cover the costs of R&D. So, at the point that capital is unwilling to plug the gap, the price of the tech will recalibrate to reflect its true cost and the business value it creates – and the best products and business models survive.

Count me in. This paper takes a different angle on economic inequality by assessing economic inclusivity – that is to say, how widely people participate in, and share in the benefits of, economic activity. Using 13 indicators spanning employment, earnings, housing affordability, skills, and democratic participation, researchers classified British local authorities into four distinct clusters: less, more, average, and a “mix of extremes” (mostly London). Their analysis pointed towards the importance of economic inclusivity for public health: the least inclusive cluster had the lowest life expectancy and the highest variation in lifespan, while the opposite was true for the most inclusive cluster, pointing towards a double disadvantage among less economically inclusive areas. A new way to think about an old problem.

Something for the weekend | Back for more?

As we prepare to get stuck into policy weeds of the Budget next week, why in a bigger picture-sense are taxes going up?

In the tug of war between taxes, spending, borrowing and growth, something has to give. Taxes distort economic activity and are historically high (as a share of GDP albeit not on median earnings). But they nonetheless went up under the previous government and are set to go up under this one – because, right now, it’s the least ugly option in a pretty terrible beauty contest. Even if few are prepared to admit it.

Growth is everyone’s favourite get-of-jail-free card, but remains elusive with the OBR downgrading productivity growth forecasts to (we expect) 1 per cent. Still a damn sight more than we have had in recent years though, so we might need ambitious planning reform, higher infrastructure spending and a successful industrial strategy just to get there.

With borrowing costs higher than most advanced economies, tax rises remain preferable to borrowing. This isn’t because we should be at the mercy of bond markets. Higher borrowing is also bad for growth, especially at a time when it will mean slower interest rate cuts from the Bank. And this year we are set to spend £36 billion more on day-to-day services than we raise in tax, passing £1 billion of additional annual debt-servicing costs on future generations for not paying our way this year alone.

So why not cut spending? The real reason taxes are at a record high is because the state has reached a record size. We shouldn’t be surprised – the state pays the pensions of and provides the healthcare for a rapidly ageing society. Politicians have expanded its remit in other ways too, like childcare. Absent policy changes, spending would reach 60 per cent of GDP by 2070 while taxes would decline slightly. Cutting spending in the face of such a baseline would require drastic reconfiguring of the services we expect from the state or a public sector productivity miracle. So tax rises are coming – and this may not even be the last of it.

Chart of the week

There’s been talk of the Chancellor increasing Council Tax on mansions as part of her plans to raise revenue at this Budget. Current Council Tax (CT) Band F, G or H properties could be affected but the additional tax will only apply to the most expensive subset of these (if rumours are correct). This has sparked debate about whether some people who live in mansions are nonetheless strapped for cash (more or less than the Treasury…). So COTW has the answer – are expensive homes only lived in by people with high incomes? Mainly yes, but not exclusively. Of the almost 6 million people living in band F-H homes in England, 75 per cent are in the top half of the income distribution, and 35 per cent are in the top ten per cent. So any rise affecting top council tax bands would be a very progressive tax rise. And boy could CT do with being more progressive – as the red line shows, regardless of what band they’re in, the poorest pay much more as a proportion of income on CT than the richest.