5 November 2019

Labour’s home insulation plans are so much hot air

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On Sunday Labour announced ‘Warm Homes for All’, touted as ‘the largest scale upgrade of UK housing since post-war reconstruction’. The accompanying press release promised that Labour will create 450,000 jobs by installing energy saving measures such as loft insulation and double glazing, renewable and low carbon technologies in almost all of the UK’s 27 million homes’.

To be fair, independent research has identified the energy efficiency of the UK housing stock as relatively poor, and any sensible proposals in this area should not be dismissed out of hand. But Labour’s plans simply don’t fit the bill.

The price of all this is as good a starting point as any. Labour says its plans would cost an eye-watering £250 billion, spread over a decade, although ‘only’ £60 billion would be financed by increased central government borrowing. The bulk of the difference would be covered by savings on household bills which are then used to repay the government.

These numbers don’t make a lot of sense. Even if the UK housing stock is less energy efficient than in some other countries, it is still an awful lot more efficient than it used to be. The scope for additional gains is surely limited. And even if Labour’s figures are correct, they beg the question of why the government needs to get involved at all, if there are indeed such large savings to be made.

Perhaps some people lack the resources or access to borrowing to meet the upfront costs, but grants and subsidies to improve insulation in older homes have been available for many years now. It is certainly not obvious why the government should be offering interest-free loans to those who can afford to fund the work themselves.

What’s more, the Shadow Secretary of State for Business, Rebecca Long-Bailey, has claimed that the £60 billion would eventually pay for itself in the form of new jobs and higher tax revenues. That is, to put it politely, an extremely heroic assumption. Apparently, there’s some serious financial modelling behind this. I’d love to see it. What, in particular, are they assuming for the knock-on effects as the additional spending ripples through the economy (the so-called ‘fiscal multipliers’)? These would surely have to be implausibly large for the spending to be self-financing.

The suggestion that this programme would create new jobs is itself dubious. It might be helpful for Labour to brush up on the concept of ‘additionality’, which is the extent to which something happens as a result of an intervention that would not have occurred in the absence of the intervention. In this case, would the updating work have taken place anyway? And might the increased employment in the construction industry simply be offset by reductions in employment elsewhere?

There are some red flags in the detail too. In particular, Labour has stressed that this project will create hundreds of thousands of good unionised construction jobs. Does this mean that only people employed by large unionised firms will be able to work on this project? What about the many independent contractors and self-employed? Will this project be used as another clumsy tool to manipulate labour markets?

Above all, there are better ways to tackle both climate change and fuel poverty. It would make more sense to ensure that the cost of energy fully reflected the environmental impact, for example through carbon levies, then let the market work out how best to respond.

The interaction of other taxes and benefits could do with rethinking too. Domestic customers pay a reduced rate of VAT of 5% on their energy bills, which is a disincentive to economise. There may be a case for raising this rate, with the most vulnerable people protected with an increase in the subsidies that they already receive.

That’s perhaps too bold for any party to consider now, but market-led solutions are far more likely to work than a massive programme of state-directed double-glazing.

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Julian Jessop is an independent economist