The Difference between Demand-Side and Supply-Side Subsidies - Essay Example

Question: “Using historical and recent examples, explain the difference between demand side and supply side subsidies. What are the economic justifications for each? Illustrate your answer with supply and demand diagrams”. Introduction Housing markets around the world have some peculiarities, and UK is not exempt from it. Housing sector does not function as effectively as the society expects. Due to this, government is expected to interrupt to correct these disorganisation and to make sure that housing markets’ function in a better manner. This may require direct provisions of housing and offering of subsidies either from the demand or supply side. (King 2009:80). One of the guises where the government intercepts in housing markets is by offering subsidiaries to households and landlords. This is mainly to make the housing sector more affordable, to support landlords to construct more or better quality residences, or to make sure the housing stock is of adequately high quality. (King 2009:80). Subsidy means the ways and means to make housing more affordable and cheaper than it otherwise would be. Hence, the subsidies will indirectly reduce the cost of housing and probably will facilitate more households to have access to it. As per Oxley and Smith (1996), housing subsidies mean an implicit or explicit flow of funds encouraged by the government activity which minimises the cost of housing construction or consumption else the cost would have been still higher. (King 2009:80). The demand -side subsidy is one where the government will subsidise the private sector mainly through improvement grants and housing allowance, and owner occupiers through many guises of tax exemptions and reliefs. The supply- side subsidies include rent control where the landlords could not raise the rent beyond the limit set by the government or to increase the income level so that savings can be made which can be used for housing. The rent loss to landlords will be compensated by the extension of tax relief for owner occupiers and extending government grants to housing associations. (King 2009:80). Types of Housing Related Subsidies and Tax Rebates extended in UK http://www.jrf.org.uk/sites/files/jrf/housing-taxation-systems-full.pdf Demand Side of Housing Subsidies Capital Grants: This type of subsidies meant to be granted to households directly or paid to service providers directly in lieu of the households. One-time subsidy is given for the building, purchase or completing either an existing or new housing unit or to rehabilitate the existing houses. Within the government’s budget, these grants are usually funded through an unambiguous appropriation process which throws their total cost translucent to the general public. Capital subsidies can range from a decent amount to the whole price of a home. (World Bank Institute 2003:1) The main objectives of the capital subsidies are as follows: To shift the accountability of the construction of houses to the private sector instead of government. Curtailing all the indirect housing subsidies thereby granting to one-time grants. To initiate open mechanisms for choosing recipients footed on their annual income and through the savings’ contribution. The main drawback of the capital grant is that it is more complex in nature, and need required institutional capacity. However, capital grants are being used by the concerned government in the aftermath of natural calamities like in backing relocating initiatives and in substituting the housing financing schemes. Capital grant schemes can be more efficient both in loose and tight housing markets as they can be employed either to rehabilitate or purchase the existing houses or to construct new houses. Where, there is a well –developed private sector, capital grant scheme functions best as it would readily rehabilitate or supply the house units. Further, through a well set up housing finance systems, capital grant scheme can be successfully advanced as market-rate loans, which are reasonable to consumers. (World Bank Institute 2003:2) Housing Allowance A housing allowance is an usual subsidy offered to renters or house owners to counterbalance some of the housing costs. It can be of two forms. Under one form, the beneficiary will receive a fixed grant footed on the current prices existing in the housing market, and the beneficiary has to pay the only the balance amount of total cost minus grants received. Due to this, each house owner’ payment will rest upon how triumphant it is in seeing it as an economic unit. Thus, this rule-based system offers house owners a mighty enticement to go for the best available housing deal. Under the second form, the household has to pay a fixed amount towards his own housing costs in spite of the aggregate amount of its rent. Then, the difference will be paid by the government, and this is known as a ‘burden limit’, the volume of the subsidy will differ footing upon the household’s share of contribution. A housing allowance may take many guises like maintenance fees and reimbursement for utilities, or it may be reimbursement of gross housing expenditures. (World Bank Institute 2003:2). Supply Side Housing Subsidies by UK Government From 2004-05, rent rebates and government subsidy for rent rebates are no longer part of rent subsidy. £ million 97-98 98-99 99-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Housing Rebates 4307 4225 4143 3956 3377 3297 3395 3702 3013 2903 3091 £ Million UK Housing Rebates - Supply Side http://www.communities.gov.uk/documents/statistics/pdf/1095351.pdf If one look at the above graph, Housing Subsidies have drastically fallen down 98-99 to the lowest level 2006-07 and with a slight recovery in 2007-08. Demand Side Demand side housing subsidies include the government policy to increase the income level of the households and providing household vouchers. The demand-side subsidies are usually resorted by governments to enhance the access to housing facilities to the poor. Demand side schemes route grants directly to the household, mainly through financial grants or cash-like allowances. In transition economies, demand side subsidies have been employed to safeguard households from escalating rents when these nations are in transit to market-oriented systems of housing provision. To increase the effectiveness and transparency of housing subsidies, demand-side subsidies have been used. Demand-side reliefs seem to be competent since they offer a high magnitude of consumer choice, which assists to accomplish a great level of satisfaction among recipients at the minimum possible costs. Demand side subsidies are offered directly to beneficiaries, and these are more opaque than supply side subsidies. (Kastura & Romanik 2002:3). Total Capital Expenditure Spent on Housing by UK Government – Demand Side Subsidies £ billion 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (F) Housing 3.562 3.865 4.304 4.796 4.641 5.008 4.213 Source:http://www.communities.gov.uk/publications/corporate/statistics/financialstatistics192009detail?view=Standard The above graph explains how housing subsidies budget expenditure has dwindled by housing -related tax expenses, and this exposes the magnitude to which the UK government has exonerated itself from the business of offering housing subsidies while at the same time expanding the beneficial tax treatment. Political aspects of Housing Subsidies Housing subsidy is being provided by the government not because of any political ideology, or it is not based on the popularity response by politicians to catch votes. The main object of housing subsidy by any government as it understands the importance of a home or shelter to the residents, the well acknowledged significance to the society and the significance to the economy. (UN Human Settlement Program 2005:87). Politically, conservatives first conceived more liberal housing policies and passed public housing under the 1919 Addison Act. 1923, the Neville Chamberlain subsidies were meant for chiefly for the development of private houses for sale. Further, liberal housing subsidies were offered by the Labour Government in 1924 through Wheatley Act. However, 1932, for political reasons, Hilton Young, a Tory Health Minister, put all the housing subsidies in hold except for slum clearances. In 1924, the Noel Skelton, a MP from Scotland defined that the “property –owning democracy ‘was his party’s primary goal. (Ball and Holliday 2002:61). Economic aspects of Housing Subsidies Due to economic changes, the homelessness and Right to Buy legislation bestowed to the balance of social rented housing schemes, which again ushered concentrations of exclusion and poverty. When the housing policies adhere to the grain of economic change, they are most successful one. Neighborhood regeneration policies have frequently generated unsatisfactory outcomes since they have been beleaguered by adverse economic scenarios. Homelessness and housing benefit legislation offered protection to the huge number of people who are impacted by economic recessions. The interface of housing policies with economic reorganisation became more complex and resulted in obviously different affluences for neighborhoods. The unsound housing market can aggravate macro-economic volatility and influence competitiveness. In contrast, macro-economic policies will be more effective, if there is a flexible housing sector thereby facilitating mobility. In the coming decades, for the housing system to function smoothly, the following four key requirements are considered to be essential. For changing shocks and economic conditions, housing policies must exhibit robustness. In response to economic needs, it must be flexible. To accommodate the demographic changes, it must be able to respond to. It must acclimatize to increasing objectives for both demand and the capability to fine-tune existing stock and keep up neighborhoods. Both economic and social context has impacted the nature of housing system and of housing policy. Moreover, the housing policy is restrained by macroeconomic volatility, which has inconsistent effects on the housing system since the significance of debt and wealth within it. (Communities, UK Government 2006). Lessons from the Past Housing Subsidies Right to buy housing schemes have increased the magnitude of the house –ownership largely in UK. Homelessness and housing benefit legislation offered to offer protection to the huge number of people who are impacted by economic recessions. Due to liberalisation of the mortgage market, borrowers had a lot of preferences. When the housing policies adhere to the grain of economic change, they are most successful one. Liberalisation and deregulation like the right to buy have helped the growth of owner-occupation in UK from 58% to 70% of households. Restructuring of housing subsidies have yielded more advantages. For instance, in 1975, about 80% of the housing grants were of supply-side subsidies, which are meant to offer inexpensive homes. However, in 2000, about 85% of the housing subsidies were of demand side with Housing Benefit emanating as the major grant. Due to asset restructuring process, the housing association has usurped the power and authority from the local housing authority where housing association becomes the provider of new social rented housing. (Pattison 2009:60). Current Housing Subsidies in UK Social Housing – the main objective is to offer housing facility that is affordable to citizens who earn low income. Through state subsidy, rents are maintained at low levels. To make sure that the rents are maintained at affordable levels, the social housing sector is presently administered as a stringently distinct scheme of rent control. Housing Benefit If a citizen falls under a low- income group and whether he is unemployed or employed, and if he needs any monetary assistance to defray either the whole or part of his rental obligations, he can apply for housing benefits’ scheme. If his income, investments and savings fall below some level, and if he pays rent and whether he is either employed or unemployed, he is eligible to claim housing benefits. However, if one’s annual savings exceed £ 16000 or if one lives in his close relative house, or if he is a full –time student unless if he has kids or disabled or if he has to be sponsored in the UK or an asylum seeker, he is not eligible to claim HB. (Dir.gov.uk 2011). “Local Housing Allowance (LHA)” LHA is a scheme which deals with arriving out the Housing Benefit (HB) for those who rent a house from a private house owner. Based on the area in which an individual resides and the size of the household are taken into account by the local authorities to arrive at LHA rates, which can be met with HB. Under the LHA scheme, HB is paid to the landlord who in turn will pay the same to the tenant. From April 2011 onwards, there are major amendments in the LHA scheme like introduction of maximum weekly rates ranging from £250 for property with one room and up to £400 for property with a four bedroom. The main objective of the changes in LHS scheme is to provide a sustainable Housing Benefit scheme to the resident to reside in homes within their reach and to usher a fairer scheme for low –income citizens. (DWP.Gov.uk 2011). Housing Benefits for Students- Housing benefit cannot be claimed by a student engaged in full-time degree level or higher. However, if a student is engaged in a part-time education and if his age is under 19 and he is studying a course below a degree level, he can claim the housing benefits. (Adviseguide.org.uk 2011). Restrictions on HB A rent officer will decide the quantum of rental benefits to an individual who pays rent to a private landlord. If a tenant pays rent to any local authority or to a housing association, rent fixation is not restricted by a rent officer unless the rental officer views it as excess than one’s need or one is paying unreasonably higher rent. The minimum amount of rent paid per week cannot be less than 50 p. (Adviseguide.org.uk 2011). Affordability Housing policies should make sure that accession to financial support or well-mannered affordable housing for households who are not able to access through the regular market. This can be accomplished through a blend of means-verified housing subsidies and benefits for affordable construction of houses thereby showing more significance to the variety of local requirements. It is important that housing policies are drafted in a style that supports mixed communities and shuns barriers to poverty and mobility traps (OECD 2011:79). Land Supply Issues Local authorities in each council have to make a housing land availability assessment every year to supervise the supply the housing lands in their provinces. The study is carried out in association with the statutory undertakers, house-builder’s representatives, local housing association and infrastructure providers, mainly to facilitate the authorities to have development strategies and for its review. The main objectives of the study are – - To offer a common statement on the availability of land for development, for management purposes and for development planning. - In scenarios, where no adequate supply is recognised, then to state the initiatives to a local planning authority in addressing the deficit. The study will also supply information on the number of completed houses, the availability of lands on the previously developed land and the availability of land on sites subject to flood perils. (Wales.gov.uk 2011). For commercial property, the average vacancy rate was about 7 to 9% between 1998 and 2005 whereas the vacancy rate for housing property was at 3% in the same period. If viable commercial land is allowed to be used for housing, then, housing supply could be potentially increased. (CBI.org.uk 2011). The Localism Act 2011 This act will migrate the authority from UK central government back into the hands councils, individuals and communities. The above act ushers more liberalisation thereby cutting down the authority, controlling powers and bureaucratic authority of UKs central government. Through the above act, the UKs central government liberalises by reinforcing more confidence on individuals, local councils to take charge of their own activities and will decentralise the authority both outwards and downwards to the lowest level which includes professionals, neighbourhood, individuals and communities as well as local institutions and councils. The matters relating to housing is now vested with local authorities through the Act, and local councils have been toothed with the authority to manage better their housing stock by fine-tuning to the local demands. Through the Localism Act, now councils are empowered with to take a decision about How best the homeless people in the neighbourhood could be helped. To decide about the strategy to be pursued to manage the housing waiting lists. To decide about the tenure of the tenancy that best suits to the household’s demand. This act empowers more authority to local council the manner in which the social housing funded. The council rental revenue collected is now vested with the local councils. Now, councils are empowered with more authority so that council can decide about how best to expend their finances in their local area and also offer a more stable and predictable basis to plan their long-run investments (Communities Gov UK 2011). Growing private sector rented market As per HM Treasury (2010), the new coalition government has promised to supply up to 150,000 new affordable houses by 2014-15. Thus, new affordable homes will be finance by capital investment and by permitting landlords to charge higher rents –up to 80% of market rents as compared to current 60% of market rents. Thus, Housing Associations in UK continue to provide the lion’s share of new affordable housing. (OECD 2011:76). However, this is less than the past levels. Further, it is not clear whether the new government will provide funding and subsidies to cater the above target. As per DGLC (2007), it is to be observed that local councils were discouraged to invest in housing since 1980s, especially by ring-fencing the HRA (Housing Revenue Account) which gathers and reallocates the proceeds throughout the UK from revenues from sale of dwelling houses and rents under the Right to Buy. Due to dismantling of HRA, the house building by local authorities is now almost virtually stopped; hence, the Housing Associations are likely to protract to offer the majority of the new affordable houses. As per Pretty and Hackett (2009), 50% of the new houses are currently constructed by private house-builders under Section 106 agreements for Housing Associations. (OECD 2011:76). Cashing in more private financing for the construction of affordable homes would facilitate the government incentives to be better aimed on the provinces where social returns are probably to be high. Funding for new construction is made more problematic due to reduction in public grants, which financed about one-third of the new affordable housing. As per Pretty and Hackett (2009), now Housing Associations have to issue equities or bonds to fund their projects. As per Whitehead and Williams (2009), bond financing has helped to raise adequate funds as the Housing Act 1988 has set the formal structure for the introduction of private finance in social housing funding. As per Elphicke (2010), the Housing and the Regeneration Act 2008 facilitates the registration of for-profit –organisations as Housing Associations from April 2010. (OECD 2011:77). In what ways can housing organisations develop their business plans to reflect changing outworking of supply side and demand side subsidies The new business plan would include the following: Government and financing agencies like banks should support first-time buyers of houses in UK by facilitating low deposit mortgages. The lenders should work with the government and insurance industry to conceive a feasible mortgage insurance scheme if other incentives and subsidies cannot be worked out. As a replacement of housing subsidies, the government should facilitate the first-time house buyers to source their deposits by accessing their protected savings in pension funds. By supporting existing homeowners who want to migrate, government and private sector should keep the market moving and housing lenders should accord top priority to give publicity to mortgage products for homeowners who have negative equity. The government should facilitate to see that SME house builders are afforded with availability of development finance by making finance available through Project Merlin. Government should help private sectors in UK housing by introducing the changes in planning rules from conversion of land from the commercial purpose to the residential purpose so that there is adequate available land for the residential purpose .This will bring down the price of the land and to that extent, subsidy can be minimised. Government should make sure that the planning setup facilitates the growth of new homes. It is suggested that the National Planning Policy Framework hold its mighty “pro-growth” policy and should closely supervise that the local authorities concentrate on the new type of subsidies like “New Homes Bonus.” As a substitute for the house subsidy, the UK government should enhance the feasibility of new housing developments by minimising the regulatory controls on house constructions. Instead of capital grant, government should push citizens to save from the stage that they enter into the employment market. By promoting long -term savings vehicles, DWP should think of more supple savings’ schemes. Government as an alternate to capital grant should make sure the financial regulatory reform does not impact the accessibility of mortgages for house construction. As an alternate to the subsidies, HM should endeavour to enhance the stamp duty in the long run. (CBI.org.uk 2 011) Conclusion The new coalition government in UK has decided to minimise the subsidies granted especially to social housing providers to construct and renovate social housing and let the lower- income tenants receive the Housing Benefit directly to offset the burden of higher rents. The new government also introduced a new reasonable rent regime where social sector rents on re-let and new homes may be enhanced up to eighty percent of market levels –thereby facilitating an enhance borrowing and hence more investment. Housing subsidy is essential so as to provide affordable dwellings at less than market prices and also rents should essentially engross some iota of subsidy. The subsidy amount from government can be minimised by employing the alternate sources of financial support like s106 agreements with developers, making availability of cheap land, conversion of commercial land into residential land and transfers from other tenants through more general rent enhancement. It should be remembered that poor housing would enhance education and health costs ; minimises productivity and employability ; is connected with anti-social demeanour and crime; results in family breakdown and affordable housing or housing subsidies both supply side and demand side is more significant to UKs economy as it would hamper social disorder and chaos. The recent financial crisis had direct bearing the private funds available for housing in UK as banks have tightened their rules for extending mortgages for new housing. It is to be recalled that social investment by UK government in affordable homes’ pedals in extra private investment in the housing market and would increase the aggregate housing supply. It is to be remembered that new UKs coalition government has promised to create 150,000 affordable houses within this parliament, and this could not be accomplished unless more relaxation in rules relating to availability of funds to housing market is made. Any new housing scheme of UK government should encourage more revenues and hence end in an enhanced borrowing power as an alternative for housing subsidies under the new affordable rents’ regime under the current coalition government. The present coalition government wants to limit the housing benefit bill as it feels that it will a disincentive to work. However, if subsidy support from government declines, there is an increased risk and there will be a decline in private finance available for the housing sector in UK. Further, there will be fewer re-lets as there will be slower turnover in housing in the social sector and this will have great effect of the welfare cap on social sector households in UK. Thus, affordable housing investment is a must in UK to help and the broader economy and to maintain the UKs government growth agenda by assuring more market housing, a vibrant labour market, and more employment for UK as a whole. Housing subsidy, whether it is demand or supply side remains as necessary evil for the triumphant delivery of the overall economy. Without adequate subsidy, affordable homes in UK cannot be achieved and the UK has the greatest need for the subsidised housing mainly to help the poor, downtrodden people. (Whitehead & Travers 2011). List of References Adviceguide.org.uk. (2011). Help with Your Rent- Housing Benefit. . [online] available from [accessed 31 December 2011] Ball, S & Holliday, I. (2002). Conservatives and the Public Since the 1880s. London: Routledge Taylor & Francis Group CBI.Org.uk. (2011).Unfreezing the Housing Market. [online] available from < www.cbi.org.uk/.../cbi_unfreezing_the_housing_market_november_...> [accessed 31 December 2011] Communities, UK Government. (2006). Lessons from the past, challenges for the future. [online] available from [accessed on 31st December 2011] Communities, UK Government. (2011). The Localism Act 2011. [online] available from< http://www.communities.gov.uk/localgovernment/decentralisation/localismbill/> accessed 31 December 2011 Dwp.gov.uk (2011). Impact of changes to Local Housing Allowance from 2011. [online] available from [accessed 31 December 2011] Kastura H M & Romanik CT. (2002). Ensuring Access to Essential Services: Demand-Side Housing Subsidies. [online] available from [accessed 30 December 2011] King, P. (2009). Understanding Housing Finance. London: Taylor & Francis. OECD (2011). OECD Economic Surveys: United Kingdom 2011. Manila: OECD Publishing. Pattison, B. (2009). Prospective on the Future of Housing: A collection of Viewpoints on the UK. London: BSHF UN Human Settlement Programme. (2005). Financing Urban Shelter: Global Report on Human Settlement. New York: UN Habitat Wales.gov.uk. (2011). Housing Land Availability in Wales [online] available from [accessed 31 December 2011] Whitehead C & Travers T. (2011). The Government Needs to Invest in Affordable Housing in London. [online] available from < http://eprints.lse.ac.uk/38044/1/blogs.lse.ac.uk-The_government_needs_to_invest_in_affordable_housing_in_London.pdf > [accessed 31 December 2011] World Bank Institute. (2003). Demand-Side Subsidies for Housing. [online] available from [accessed on 30 December 2011] Read More