Valentin Boboc is a senior economist at the Institute of Economic Affairs.
Readers of this publication are probably well aware of the ‘supply-side’ issues faced by the British economy. These usually cover areas such as insufficient housebuilding, systemic delays and budget overruns that dog new infrastructure and energy generation.
So whilst the general call for more supply-side measures remains, it is perhaps worth considering how the Government currently manages most economic problems through demand-led interventions.
Most recently, Chancellor John Healey proposed reviving the Help to Buy scheme, under the new name of ‘Your First Home’. Under the scheme, first-time buyers could purchase a home with a 2.5 per cent deposit, backed by an initially interest-free government equity loan of up to 20 per cent.
This is one of the most straightforward cases of demand management. The observed problem is that people cannot afford to get on the housing ladder. Given that prices have been increasing and housebuilding has stagnated for years (especially in the capital), the issue is clearly one of insufficient supply.
Yet the Government has diagnosed a shortage of demand instead. It has come up with a scheme designed to subsidise house purchases without taking any measures to increase the housing supply. Hence we should expect house prices to continue to increase, perhaps even slightly boosted by the government subsidy. The previous Help to Buy scheme increased prices in London and encouraged limited new construction next to the Welsh border, whilst doing very little to boost home ownership in already expensive areas.
Another industry that is regulated on a model of supply restriction and demand subsidy is childcare. Eligible parents in England may receive a fixed number of hours of free childcare every week. Evidence shows that this helps new parents, and new mothers in particular, to remain in employment. However, increasing numbers of eligible parents struggle to find childcare places due to inflexible childcare staffing ratios. Allowing the children-per-carer ratio to increase to the levels permitted in similar countries like the Netherlands would create new supply at no cost to the taxpayer, but this remains off the table.
Not all demand management takes the form of subsidies, though. Sometimes, the state must engage in some level of demand suppression in order to achieve its aims. For example, NHS waiting lists remain at all-time highs, and most measures revolve around curtailing demand for NHS services.
Some of these measures are direct, such as adding new mechanisms to manage patients in the community, rather than in hospital. One example of this is NHS England paying GPs small sums to seek specialist advice before referring patients to hospital. Yet data shows that most patients were using their GP’s specialist advice largely to supplement direct referrals, thus doing little to curtail demand for hospital referrals.
Some other measures are indirect and occasionally more poorly evidenced. Take, for example, a common argument in favour of the Sugar Levy. The levy aims to cut the sugar content of soft drinks, on the theory that lower sugar consumption means fewer cases of obesity and tooth decay, and so less demand for healthcare. The evidence for this, however, is highly disputed.
Is demand management always a bad idea? Most certainly not. Demand management can work well through prices that reflect scarcity. Road pricing comes to mind as a standard example, but so do electricity prices that encourage use outside peak hours, off-peak transport fares and water charges linked to consumption.
People keep their freedom to choose, but pay more of the cost their consumption imposes. Such policies can make existing capacity go further. Even so, Britain would still have homes, reservoirs, power lines and other infrastructure to build.
“Is demand management always a bad idea? Most certainly not. Demand management can work well through prices that reflect scarcity.”
Yes but that’s using the free market supply/demand/price mechanism under nobody’s control - which is why it works.
Demand management by the nitwits in Government (such as it is) manipulates and distorts the market mechanism for political/ideological aims, which is why it doesn’t work. But isn’t demand management part of the Keynesian theory of economics, which among other things says you can tax and spend your way out of a recession? Tax and spend is called “investing in the economy”. And no matter how many times this doesn’t work politicians keep trying it.
However, there is another thing. The NHS and other public services are not part of market pricing, so there is no market mechanism by which demand and supply mismatch can be corrected. Furthermore, absent market pricing there is no way of measuring whether the NHS in public services create wealth or destroy wealth. My money is on the wholesale destruction of our wealth. Exhibit A: iour £3 trillion national debt.
Lucid thinking and writing - thank you!