27 June 2023

Want to grow the economy without boosting inflation? Start with stamp duty

By Alex Morton

The UK economy is in poor shape, and the Government is desperate for any measure that boosts the economy without driving inflation. The Government argues that tax cuts or cost-of-living measures are risky because they pump up demand and inject more money into a system that’s already chasing too little supply. Fortunately, there is one option available that is neither too expensive nor too inflationary: cutting residential stamp duty (SDLT) – also seen as one of the least fair taxes.

Currently there is a temporary reduction in some aspects of stamp duty until 2025, but overall stamp duty remains at very high levels (until 1997 it was just 1%). 

Residential housebuilding is already falling, and rising interest rates will constrain it further, which will shrink the economy – not just consumption, but the supply of new homes. The NHBC found that registration of new homes fell by 40% from Q1 2022 to Q1 2023. Savills found completions fell by 20% in Q1 as housebuilders slowed their output. Falling new build supply will hit growth without helping lower inflation. It will also send yet another signal to younger people (anyone under 40) and their increasingly worried parents (almost anyone else) that this Government seems unserious about housing supply. If the Government pledges 300,000 homes a year, but delivers half of this, this will have serious economic, social and political costs, exacerbated by the fact rent rises have now hit 5% and appear to be accelerating. Falling output will hit GDP – a fall of 100,000 homes would cut GDP by 1%, (and wider indirect impacts, since each home built generates around three jobs). 

Cutting stamp duty will boost supply by boosting transactions

As the economy wobbles, transactions fall. Already last year, Savills predicted transactions would fall to just 870,000 in 2023 due to economic turmoil and higher interest rates. Given the Bank of England’s actions last week, this is likely to now be an underestimate. Unfortunately, the level of transactions in this country correlates with the total number of new builds. Until Help to Buy, which skewed buyers toward new builds, there was a fairly steady link of around 1 new home built for every 8.5 transactions. (See this Centre for Policy Studies report here). Now that Help to Buy has been removed, this historic link is likely to be renewed. So any fall in transactions will see a similar fall in new housing supply. If transactions fall by 20%, you are likely to see, fairly quickly, new housing supply fall by 20%. 

This makes perfect sense – fewer people buying homes means a smaller market for house builders, and so they slow down producing output to match this new, slower speed at which they can sell. The reason that housing supply is falling is linked to the fact that April 2023 saw transactions already 32% lower than in April 2022. Output is likely to keep falling.    

Reducing residential SDLT can be done at a relatively low cost 

By reducing residential SDLT, you can boost transactions. Indeed, one report found that a 1% drop in the rate of SDLT increased transactions by some 20% – while others such as the IFS put it at 10%. Unlike many other forms of tax, residential stamp duty can be avoided by behavioural change – remaining in your existing home – even at the cost of wider economic growth. This is why stamp duty is so opposed by economists from left to right, through centrist outfits like the IFS. 

Residential stamp duty is not even a major revenue raiser. The total cost of residential stamp duty was £10.2bn in 2021/2, of which 55% was for first properties, so around £5.6bn for primary residences. If house prices drop 10% or transactions drop this becomes roughly £5bn.  

Reducing SDLT from the current rates would likely be the most simple and cost effective way to boost transactions. The easiest thing to do would be to remove 3% from the entire system as set out in the table below. The system would remain sharply proportional – in fact the top rate would go from just over twice as high as the lowest rate to four times higher.

Existing rateProposed rate
Under £250,0000%0%
Share from £250,001 to £925,0005%2%
Share from £925,001 to £1.5 million10%7%
Anything above £1.5 million12%9%

On a totally static basis, this cut might be expected to reduce the revenue by some 45% at most, to around £3bn. However, if this 3% cut increased transactions by, for example, 30%, using the more conservative IFS assumptions, this would bring in another £0.9bn, meaning a total cost of around £1.7bn with revenue falling from £5.4 to £3.9bn.   

This would avert a fall in GDP and employment

If transactions rise by 30% from Savills predicted 870,000, it would mean an additional 261,000 transactions, which given the 8.5 transactions to homes ratio, means 30,000 extra new homes, and using the other data, safeguards nearly 100,000 jobs and boosts GDP by 0.3%. Indeed, because these are private homes which deliver Section 106 payments, this will also boost affordable housing and actually increase homes by more than the initial 30,000 – making the jobs boost more than 100,000 and averting a decline in GDP of perhaps 0.4%. 

Stamp duty is preferable because by spurring new housing supply, it generates fairly large supply-side benefits for a low cost. All tax cuts generate a mix of both supply-side benefits that lower costs through higher production but inflate demand through higher consumption. Stamp duty – for a cost/injection into the economy of £1.7bn or so – generates the maximum of supply-side benefits for minimal inflationary impacts (indeed, it might help keep housing costs and so inflation down). 

This helps those most affected by the cost of living 

Some of those in the overheated and expensive South of England, the so-called Blue Wall, may need to move house as interest rates spiral. But stamp duty seriously impinges this. A family moving to a home worth £600,000 from a house worth £800,00 would pay £17,500 in stamp duty, on top of other costs and disruption. If they want in future to try to move back to their existing £800,000 home, this will incur a further £27,500 in stamp duty, giving a total of £45,000. The family will feel stuck. They cannot afford the increase in repayments, yet they cannot afford the stamp duty involved in moving down then (hopefully) back up the housing ladder. 

The £45,000 cost of such a move would hugely erode – or even wipe out – any savings on mortgage payments if they downsize for a few years. But under the new rates that were proposed above, the hypothetical family’s initial move would cost £7,000 and a second move back up the chain would cost £11,000. This cuts the costs of moving from £45,000 to £18,000, or by 60% – making the whole process far more affordable and spurring more transactions as a result.  

Older households, who might otherwise choose to free up equity and release family homes to the market are put off by the high tax bill on top of the inevitable stress and strain of moving. Younger households who need to move up the chain to a new property will also see the cost of doing so reduce through the stamp duty cuts. It will have a broad impact. 

Cut stamp duty now to get ahead of the curve

Action is necessary now to try to avoid an outright recession. Cutting stamp duty gives the Government a chance to actually get ahead of the curve rather than falling behind. Had interest rates risen last Autumn, we would be in a better place. 

The Government is unlikely to reverse its position that now is not the right time for substantial tax cuts. However, a £1.7bn tax cut to stamp duty, backed by almost all economists, would not drive inflation. 

But for it to have a serious impact on housebuilding, any cut must take place now. Delaying until the Autumn will mean the impacts on new build statistics or economic growth will not be felt until it is far too late, and at that point the construction sector may well be in such a downward spiral that nothing can lift it out. The Government should act now, before the summer recess, to cut residential stamp duty sharply. This would also pave the way for a future pledge to maintain the current temporary stamp duty changes at the appropriate time – but the first thing is to try to stabilise new build supply. 

For a fairly low and marginal cost to the Treasury, and with no real inflationary impact, cutting stamp duty would likely boost the economy, employment, and housing supply by tens of thousands, and generate genuine supply-side benefits. There is no time to lose.

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Alex Morton is Director of Strategy at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.