This week's Conservative party conference attempted to respond to the challenge on living standards thrown down by Labour the previous week. But neither Help to Buy nor the married couples' tax break adequately address the problems
Two key themes emerged in debates at this week's Conservative party conference. What impact will changes in families’ incomes have on the next general election? And how can the coalition show it is serious about raising living standards?
This focus on living standards makes sense. Many households are on a financial knife edge. Concern has been expressed over food, fuel and utility bills, HMRC debt recovery procedures, increasing rent bills and future mortgage rates.
Indeed, research by the StepChange debt advice charity has shown that 30 per cent of households have no spare cash at the end of the month. Eight per cent of households spend more than half their incomes on total debt repayments and the average household pays nearly £200 per month in interest payments.
Longer term changes are taking place too. The population is ageing. Retirement at 60 (or even 65) is becoming unlikely. Families are bearing more of the risks associated with ensuring a good income in retirement and protecting against economic shocks.
The equity in the family home is expected to help support incomes in later life. New technologies and global competition are changing the world of work and increasing pressure on wages. Younger people are beginning their working lives with student loans and costly forms of unsecured debt are being more widely used.
Yet it was on developing a policy response to these questions where the conference debates were weakest. The right questions were being asked about family incomes and living standards, but the wrong solutions proposed.
Take the idea of bringing forward the mortgage guarantee part of the Help to Buy scheme. This not only fails to address the real problem in the housing market – constraints on supply – but shows how little the broader attitude to debt in the UK has changed since the global financial crisis.
It reinforces a model of growth driven by consumption funded by household borrowing, which requires ever increasing capital gains on housing assets or increasing real wages. It does not address the big question of how to ensure sustainable growth in household incomes in the long term.
The idea of a tax break for married couples is equally bad policy. Even supporters of this giveaway recognise it will not encourage people to get married. This is a £600 million promise that will do no good. It will increase complexity in the tax system, increase the penalties facing second earners when they go to work and be completely out of step with the direction of travel in tax systems worldwide.
When it comes to income taxes, for example, in 1970 it was possible to assess these taxes on a family basis in two thirds of OECD countries but in the 21st century this has fallen to around a third.
In 2010, when the Spending Review was launched, a spokesperson from HM Treasury said: 'Anyone who thinks the review is just about saving money is missing the point. This is a once-in-a-generation opportunity to transform the way that government works.' Yet the debates this week show how far the coalition has to go to achieve this vision.
By focusing on short term political priorities the government has failed to capitalise on its opportunities over the last three years. It must not waste the next two.
Patrick Nolan is chief economist at the Reform think tank
