As was publicised this week, new Prime Minister Liz Truss is looking to cut stamp duty in what’s being dubbed a mini-budget, according to a report in The Times.
The proposal has stimulated a mixed reaction, and I would add myself to the list of voices that oppose it.
Cutting stamp duty is symptomatic of the policies of multiple Tory governments now – an overwhelming focus on the short-term with no regard to long-term consequences.
We all know what the initial outcome of a stamp duty cut would be. After all, it’s not been long since the Conservatives last meddled with the tax, as then-Chancellor Rishi Sunak’s stamp duty holiday was in place from July 2020 to 31st March 2021.
Transactions would be boosted and house prices would continue to rise, as demand would continue to outstrip supply. While some buyers would get a discount now, house prices would flit even further away from average incomes, effectively blocking out investment from future first-time buyers and new investors. Would it be so bad for house prices to flatten for a few years, after this period of double-digit growth?
As much as it can seem like a boon to existing investors, runaway house prices are a problem – a home isn’t a normal asset and is fundamental for society to function. We need people of mixed incomes to be able to afford to live up and down the country without being swamped with endless debt like 50-year+ mortgages or having to pay escalating rents.
There’s the very real possibility that pumping up transactions would fuel a housing bubble, which could burst and place mortgaged homeowners in negative equity (when the cost of homes are worth more than their mortgages). If the housing market is constantly on stabilisers once they’re removed it could fall off the tracks. Homeowners tend to vote Conservative more than Labour, so the centre-right party has a history of doing all it can to pump up house prices for its own self-interest. But at some stage the Tories are going to lose an election and normality will resume. Then Labour’s going to have to deal with the consequences of years of Tory short-termism.
Another reason this policy is so frustrating is it’s another example of the Conservatives viewing tax cuts as some kind of panacea. These cuts don’t target those suffering from the cost-of-living crisis and only serve to inflate the housing market. Lost stamp duty receipts represents cash the government could spend on investing in the housing market for the public good, as measures like encouraging smaller housebuilders and self-builders deliver housing stock could improve supply issues in the market. It would be nice for creative measures rather than the blunt instrument of a tax cut.
If Truss decided to bin stamp duty she should replace it with something else, like higher annual taxes, but there’s been no talk of anything to replace the stamp duty receipts, and you suspect the Tories would see that as politically unviable anyway.
One saving grace is at least the Conservatives aren’t controlling the Bank interest rates, so rising mortgage rates should still have a cooling impact on demand. Notably Liz Truss talked up plans to curb the Bank of England independence in her leadership campaign, but that would be a controversial move that seems unlikely to happen. If she had a role in setting interest rates you’d have to worry she’d keep them lower to fuel short-termist debt-driven growth amidst rising inflation, considering this policy.
To summarise the Tories look to be going for the easy headlines with another stamp duty cut, though if there’s enough opposition perhaps they won’t go through with it. The one saving grace is if it happens perhaps there won’t be as big a rush to buy as last time they cut the tax – the Tories meddle with stamp duty so often that plenty would be fatigued by this latest change.