Devolving residential property taxes would help tackle the housing crisis where it is most acute.
The Government announced last week that it would get directly involved in building more homes in London and the South East. This announcement is welcome given the desperate need for more housing in this part of the country, but it actually targets the symptoms rather than the roots of the problem.
In our report Beyond Business Rates, we show that local authorities would get a stronger incentive to allow new housing developments if they could retain the taxes generated by residential property, as well as taking charge of related housing expenditures.
So how does housing benefit and stamp duty revenue compare across the country? Here are some maps:
Source: DWP, benefit expenditures by local authority
As the maps show, housing benefit expenditure tends to be concentrated in and around London and in the big northern cities – Birmingham, Leeds and Liverpool on top – while stamp duty revenues are concentrated in the South of England. Last year £263 million was raised in stamp duty in the London Borough of Camden (the average English local authority raised £31 million), and £195 million was spent on housing benefit (£66 million was the local authority average). In the North, housing benefit is high but stamp duty low – last year £8 million was raised in Stamp Duty in Barnsley City Council, and £76 million was spent on housing benefit.
Looking at city-regions, the data looks like this:
Note: starred LEPs include only some constituent local authorities. More details here.
London and the South East account for over a third of housing benefit expenditure in England, but also generate more than half of stamp duty revenues.
This is no surprise. The strong demand for housing in the South East, driven by its dynamic economy and job opportunities, contributes to high house prices relative to income, which in turn increases the need for the Government to support those in lower paid jobs that cannot afford to rent privately. High property prices also mean that revenues from stamp duty in these areas are high.
If local authorities could retain revenues from stamp duty and were in charge of funding and managing the housing benefits system, they would have strong incentives to build more homes (and to seek efficiencies in the housing benefit system). Increasing the supply of new homes would reduce house prices, which over time would reduce the overall housing benefit bill, and the sale of new houses would also generate extra revenues from stamp duty and the New Homes Bonus.
By its very nature a more devolved system would not provide the same outcomes everywhere. In places where expenditure on housing benefit is primarily driven by a weak economy rather than a housing shortage, incentivising house building is less important compared to interventions to increase the earning potential of residents. But the devolution of residential property taxes would at least be an opportunity to tackle the housing problem where it is most acute – the Greater South East – and reduce the national benefit bill overall.
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