Monday 13 April 2020

YPP's proposals - how to deal with the corona virus crisis

Joint effort by TBH and me, cross-posted from here.
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Our proposals would achieve various things which the government's do not:
- keeping households afloat;
- helping businesses stay in shape during the lock down;
- minimising the cost to the government/the taxpayer;
- recognising that rental values have - temporarily - collapsed.

David Ricardo came up with his famous law of rent in 1809, and it remains one of the most important and firmly accepted principles in economics. The law states that rental values are equal to the economic advantage of using one site over the marginal (rent free) site for the same purpose. In other words, the economic surplus from using one site over the cheapest available.

In this time of national lock down, the "economic advantage" of using one site over another falls to negligible amounts. Imagine you need to rent somewhere for the next three months- would you price central London over rural Devon? Normally, the market does - by a factor of many multiples. Today - we doubt it.

This brings us on to the Governments response to COVID 19- specifically the Job Retention Scheme (aka 'furlough scheme'), but we can include the business loans and a few other policies with the same analysis. For an initial period of 3 months, if an employee is furloughed, the employer must continue to pay the full salary (liable to PAYE as normal) and the government will later reimburse employers 80% of the salaries of furloughed workers (up to a cap of £2,500 per month) (from Taxation.co.uk).

The government initially said it expected 10% of businesses to take this scheme up, but recent figures suggest that more than nine million employees (about one-third of all employees) will be furloughed (from the BBC).

The monthly cost of a furloughed worker on an average salary (say £2,500 per month) can be estimated as follows (from Listentotaxman.com)
Employer pays £2,500 plus £244 Employer's NIC (unchanged)
HMRC receives £740 PAYE
HMRC then later refunds £2,000
Net cost to HMRC £1,260.
Net cost to employer £744
Net income of employee £2,004

Multiplied by nine million furloughed workers is a net cost to HMRC of £11 billion per month.

The scheme does not cover the self-employed, although the government has said that something similar will be introduced, this will add another £1 billion or £2 billion to the cost. HMRC also expect that there will be significant fraud and error involved (from The Guardian) which will increase the cost further.

So the Government (i.e. current and future taxpayers) is diverting massive sums of cash that could be used in other ways to ensure that affected workers can cope through the crisis. Lovely - except when you look at where most of this largesse will go. For most households, their single largest payment (after taxes of course) is to their landlord or bank in the form of rent or mortgage payments. The payments were negotiated and contracted according to Ricardo's famous law - that is - they reflected the economic surplus available at that time.

But the economic surplus has largely collapsed; and true rental values (or notional house prices based thereon) have also collapsed. So, of all the money being used by the government to keep furloughed workers going will end up in the pocket of landlords and banks, based on the fiction that the economic surplus and hence rental values have not collapsed, however temporarily.

So we are paying surpluses that don't exist to groups that in their role as rent collectors produce nothing. Are we mad? That is above the problems and fraud risks associated with the scheme.

The government has therefore come up with the wrong answer to the wrong question.

The question is not "How do we maintain landlords' and banks' unearned income?". The correct  question is "how much do people really need to live on as a bare minimum during the lock down period, assuming they have no rent or mortgage to pay?". There's no right or wrong answer, the lowest defensible figure is approx. £75/week per adult, just enough for food, utilities, broadband and mobile phone (there are arguments for higher amounts such as £100/week). People do not need extra for clothes, entertainment or holidays at the moment, for obvious reasons. People who smoke or drink will just have to cut back or dip into their savings.

Our proposals answer the right question - making sure funds are directed to where they are needed most in an efficient and simple way and at the lowest cost to the government (i.e. current and future taxpayers)

For the duration of the crisis:
• Suspend the enforceability of rent payments by all tenants: residential, commercial and retail  (except those largely unaffected by the lock down - such as supermarkets);
• Suspend interest charges on all mortgages: commercial, residential and buy to let, except for those businesses largely unaffected by the lock down such as supermarkets. (As a quid pro quo, any deposit or savings accounts currently paying interest will become non-interest bearing.);
• Allow mortgage borrowers to defer mortgage repayments if they wish;
• Offer a UBI of £75 per week to every legally resident adult in the country who is not already receiving welfare payments or a state pension in excess of that;
• The claims process should be as simple and automated as possible. All claimants should have to do is provide their National Insurance number and bank details. Payments can start almost immediately;
• To minimise the number of claims, the quid pro quo of claiming is that a claimant foregoes the income tax free personal allowance and the National Insurance exempt threshold, so would be paying approx. £75/week more in income tax and NIC. So the lucky majority still in paid employment have no incentive to claim, meaning that HMRC and/or DWP can process the neediest claimants first;
• The same general principle applies to Child Benefit and Child Tax Credit. HMRC pay a total of £30 billion a year for 12.7 million children (from HMRC Annual Report 2018-19). These could be replaced with a flat £45/week for each child (there is no reason for long-term unemployed parents to receive more than the short-term unemployed or furloughed parents);
• A family of four would therefore have a basic income of £240/week, which is surely enough for the basic necessities.

The total cost of YPP's proposal would be less than half the total cost of the furlough scheme, it  would cover the self-employed and it would place a much smaller drag on the economy. The saving to the taxpayer is broadly speaking equal and opposite to the fall in income that landlords and banks will have to bear in the interim. The homes they own and the stock of outstanding mortgages will still be there in a few months time - people's businesses and jobs might not!

The other important question is "how do we ensure that businesses survive the crisis?"

People need jobs to go back to once this is all over. Many businesses will run out of cash to pay salaries long before HMRC start paying out the furlough refunds. Those businesses will fold through no fault of their own, which will set off a chain reaction. It is madness to expect employers to pay the £744 a month cost of a furloughed employee (workings above) for nothing in return, which is the best case scenario assuming HMRC can implement the scheme very quickly.

We will just have to give employers the flexibility to put employees on temporary leave or ask them to cut their hours (with a corresponding salary reduction) with the guarantee that the old terms and conditions will be reinstated once the lock down is relaxed or lifted. This would be similar to Maternity or Paternity Leave. Yes, this will mean a fall in income for many, but there will always be the £75/week per adult and £45/week per child to keep them going.

Businesses would also be exempt from payment of rent or mortgages for the time being (see above). Instead of waiving Business Rates for a year for small businesses, there should be a general waiver of all Business Rates (except for businesses still allowed to trade as normal, such as supermarkets) for the months that the lock down continues. Large businesses are just as much at risk and provide as many jobs as small ones. Under YPP's proposals, businesses would just go into hibernation for a few months and can hopefully pick up where they left off afterwards.

15 comments:

Physiocrat said...

Rent, rates, mortgage interest and tax holiday for the whole country for the next few months. Money should be issued, not borrowed by selling bonds for the banks to buy with their own funny money. To jump start the economy, further money should be pushed in, backed in the way that the Rentenmark was backed in 1923.

However, I suspect that there will be fundamental changes. The main reason why the economy is the size it is is to provide work for the second person in the household so that the mortgage can be paid ie it is sucked up by the banks. Consequently, people have to be persuaded to buy stuff they don't really want, or need, or have space for, or have enough of already, and cannot afford and so have to borrow to pay for it. Put simply, it is for the benefit of the banks. Dante placed usurers in the Circle of Hell below the Sodomites, which is about right.

@Mark - please can you do a summary with bullet points for the LVTC web site?

Mark Wadsworth said...

Ph, will do.

"Consequently, people have to be persuaded to buy stuff they don't really want, or need, or have space for, or have enough of already, and cannot afford and so have to borrow to pay for it."

That's capitalism! Buying stuff you don't need with money you don't have to impress people you don't like.

Lola said...

Whilst I entirely agree with the basics and the philosophy of this plan, there are. I think, some issues.

Firstly, what is a 'mortgage'. Many businesses borrow money secured on real estate for investment into plant and equipment.

If you excuse banks interest payments what about retired people who rely on that income?

And a lot of mortgages are securitised. What about the bond holders? This income is often again underpinning annuities.

On which subject will the government be excused coupon payments on Gilts? Which again underpin a lot of annuities.

What about credit card and consumer finance debts?

I also think that rent and mortgage payments need to be cancelled - as in never collectable - during the lock down. That is no mortgage lender will be permitted to add this lost income (rent) to the debt. Also, for those on repayment mortgages what about suspending just the interest component? The repayment component is very low for 1st time buyers and relatively new mortgagees.

The policy as proposed is an excellent start but the details need work.

Physiocrat said...

@Lola
"Firstly, what is a 'mortgage'. Many businesses borrow money secured on real estate for investment into plant and equipment."
That is an abuse of credit. The plant and equipment the credit is given for should be the security. The banks should take the loss. Hopefully they will learn the lesson that land is not wealth

"If you excuse banks interest payments what about retired people who rely on that income?"
That was already largely wiped out by QE.

"And a lot of mortgages are securitised. What about the bond holders? This income is often again underpinning annuities."
"On which subject will the government be excused coupon payments on Gilts? Which again underpin a lot of annuities."
This illustrates the abstract and shaky nature of these arrangements, based on nothing more than confidence and trust. The government will need to step in with a rescue fund financed from general taxation.

"What about credit card and consumer finance debts?"
Lending is always risky. The lenders have had a good innings for the past 60 years.

"I also think that rent and mortgage payments need to be cancelled - as in never collectable - during the lock down. That is no mortgage lender will be permitted to add this lost income (rent) to the debt. Also, for those on repayment mortgages what about suspending just the interest component? The repayment component is very low for 1st time buyers and relatively new mortgagees."
Yes.

The financial system has been based on a mirage since the end of WW2. If the virus had not got it then something else would have done. The government now needs to create money galore, on the Rentenmark model. The bankers did not like the Rentenmark because it cut them out of the loop.

Lola said...

P. No. I do not think that the government 'needs to create money galore'. I think that in that way lies madness. It's money for nothing.

My points were made in order to promote discussion about the detail. In other words - and i agree that the banking settlement is rotten, and that goes back to the 1840's - MW and TBH's policy is heading the right way, but the detail needs addressing. There is nothing to be gained by destroying the structure of banks and so forth.

In re annuities, they were originally sold by government to finance wars - the Napoleonic wars for example. Gilts grew out of annuities which is why annuities have a high degree of annuities in their supporting funds. Also, just FYI, equity release mortgage form about 15% of Aviva's annuity fund. Hence the need for more detail in MW/TBH proposal.

Mark Wadsworth said...

L, fair questions, to the nitty gritty

1. "what about retired people who rely on that income?"

They get the state pension of average £160 a week. Interest rates for savers are so laughably low, it makes little difference. So I lose the 0.75% on my ISA? Big deal.

2. "Firstly, what is a 'mortgage'. Many businesses borrow money secured on real estate for investment into plant and equipment."

If it is secured on land, it is a mortgage. Same with equity release mortgages.

As a refinement, the exemption from interest or business rates does not apply to supermarkets etc who are trading as normal. It is quite easy to see whether premises are allowed to be used or not.

3. "And a lot of mortgages are securitised. What about the bond holders? This income is often again underpinning annuities."

Tough, they'll have to sit it out too.

4. "On which subject will the government be excused coupon payments on Gilts? Which again underpin a lot of annuities."

In terms of maintaining our good reputation as honest payer, probably best to keep paying. Those aren't mortgages anyway.

5. "What about credit card and consumer finance debts?"

That's not included, those aren't mortgages. People with a big car loan or whatever will have to negotiate for themselves. Ford Finance aren't collecting a social surplus, they are being paid for a shiny new car.

6. As a further tweak, assuming we go with the idea that employers can put people on shorter or zero hours for correspondingly lower pay (to keep businesses afloat), their workers' rent or mortgage payments go down pro rata. So if my employer puts me on two days a week, I take that letter to my landlord or bank and they cut rent or mortgage payments down to two-fifths of normal amount.

7. "Also, for those on repayment mortgages what about suspending just the interest component?"

That is what I meant. All mortgages deemed to be interest free for the time being. The principal amount is frozen, people can pay it off or not as suits them.

See also Phys' replies, which are similar to YPP's, but a bit more radical.

Ralph Musgrave said...

Good article that. An additional reason for creditors sharing the pain is as follows.

Any creditor (e.g. landlord or bank) can of course push a non-paying debtor into bankruptcy, but what's the point? The creditor will not get much for the debtor's assets in the present climate. Plus if debtor X was a viable customer for creditor Y before the Corona crisis, then there's a 95% chance debtor X will be a good customer AFTER the crisis. So if creditor Y does ruin debtor X, creditor Y is probably just shooting himself in the foot.

Lola said...

MW

yes. what I thought. But it they needed asking to have a coherent policy

RM

Quite. What generally worries/annoys me is the assumption by landlords / interest receivers and other rent (tax?) collectors that they are somehow immune (sic) from this crisis. Our financial pain is their financial pain IMHO. In other words the tenant may lose 100% of his revenue of which he pays say 10% in rents (probably more for a private tenants), it is therefore equitable that the landlord loses 100% of revenue as well, and is denied any special privilege for later recovery of the lost rent, as the tenant in the same way will not be able to recover his lost revenue.

Bayard said...

"If you excuse banks interest payments what about retired people who rely on that income?"

If you excuse tenants rent payments, what about retired people who rely on that income?

John McCone covered all this in his article about UBI. The cancel rents/interest payments model just leads to a banking collapse and fiat currencies becoming worthless.

Graeme said...

The car leasing market is an interesting case. The lessors cannot repossess vehicles and the retail and second hand car market is not operating. Should that be wrapped in your scheme?

Mark Wadsworth said...

RM, yes, I can't fathom what they are playing at either. You'd have thought that market forces would lead to a rent and mortgage freeze anyway.

Mark Wadsworth said...

G, that is up to private negotiation. A car is not social surplus so a car bought on tick is still a valid liability.

mombers said...

Will be interesting to see what rents are like now. ONS rental index is quite good I think, although March one will only be out on 22 April. Anything coming onto the market now will need to be for a lot less than a month ago, unless the landlord wants to spin the dice on getting a pre-COVID rent once normality returns. Void periods are a 100% loss so every week left empty means speculative rent increase has to be higher and higher

mombers said...

Anyone relying on rental income for a large part of their living expenses is taking a huge risk. Just like if someone is relying on dividends from a single company or even a handful of companies, a lot is at stake, you can get wiped out worst case a la Northern Rock etc. If you want to rely on passive income, you need diversification.

Lola said...

M. Correct. Diversification is key.