Planning and the supply side of the economy

Editorial note: Supply side week

Supply side liberalisation should be at the top of any government's agenda. It is particularly important during a recession when economic resources need to be re-allocated towards alternative uses and the skills of the unemployed start to deteriorate. In these circumstances, high taxes, the welfare system, labour market controls and planning regulation can all be impediments to employment - with the least productive suffering most. In its first few months, the current government has compounded the errors of the previous government by making productive employment and enterprise even more difficult. In this series of blogs, IEA experts suggest another path.

There is so much wrong with the UK planning system that it is difficult to know where to start. There is much to be said for a private approach to planning and the use of economic mechanisms to deal with externalities from development – especially with regard to small-scale development. However, I shall leave that aside and focus on the difficulty of getting planning permission under the current system.

Our planning system

  • Restricts severely the supply of land for development.
  • Includes ‘town-centre first’ restrictions that prevent the development of ‘out-of-town’ retail space.
  • Includes height controls which act to restrict office and residential supply.
  • Has perverse incentives whereby local authorities cannot benefit financially (from tax flows) arising from new development. This makes NIMBYism a one way bet.
  • Uses a very bureaucratic system for processing applications with a high degree of bureaucratic discretion and almost no use of economic mechanisms to establish preferences for development as opposed to conservation.

This leads to some of the highest property prices in the world in all sectors which has an effect on labour mobility as well as business expansion in retail, industrial and service sectors. All these problems reduce growth and prevent resource re-allocation in recession that follows a boom. Just to give one example, retail space per head of the population in the UK is approximately 23 sq ft per capita as opposed to 53 sq ft in the US where land markets operate more freely.

There may be legitimate concerns about environmental issues. These would best be dealt with, in my view, by more private planning mechanisms and the use of more economic incentives within the planning system. However, these environmental issues are overstated. We currently have 1.2bn sq ft of shopping space in the UK: the square footage of the Isle of Wight is 4.1bn. So, we could fit all the shops in the UK into 30% of the IOW. Only 10% of the UK is built-over space – and this figure includes parks and gardens. In any case, more development would lead existing developed areas to be less congested and could lead to the development of better transport to areas that currently are not well served. The environmental issues do not just run in one direction.

The problems of lack of permitted development impact indirectly on the supply side of UK economy too:

  • It fosters quasi-monopolistic groups and can indirectly help create ‘clone towns’.
  • It militates against the independent sector – and new entrants – and therefore competition and innovation.
  • Productivity growth is impeded, through several mechanisms. These include the problems of businesses not being able to obtain the best property portfolio for business purposes; the full adoption of modern logistics is impeded (because much of the retail stock is antiquated); the retail sector is a sub-optimal size; retail prices are higher than they would be if commercial property space was cheaper; labour mobility is reduced.
  • Business people are more likely to become property entrepreneurs who are involved in the economically wasteful activity of gaming the planning system. 
  • The construction sector is sub-optimal as people are prevented from buying the housing space and so on that they would like if there were fewer restrictions.

In summary, no supply side liberation will be complete unless we ease planning restrictions. This can be done directly but should also be done by the back door of radical fiscal decentralisation.

What has been interesting over the last few months has been the reaction to the Coalitions relatively mild reforms to the planning system. It is quite common to hear academics and local government officials talking of a vacuum and an inability to plan ahead. Now that there are no longer clear directions, and targets, from the centre, its as if no one knows what to do. The idea of actually making decisions locally doesn't seem to have sunk in yet.
I would remove all stamp-duties, business rates and ludricous planning laws that require social goods to be created as part of any development and favour a transparent land-value tax based on the rental value of the established property or realised value once the land is developed chargeable per sq. metre. A rate set by the local authority. This would create a counter mechanism that made over-development less attractive and sought maximisation of value where re-development or no development existed. In terms of controlling zonal development and town planning would be that tiered rates could be set depending on classification of land usage. Placing this mechanism in conjunction with council taxes so that increases in business rates countered council tax rates would remove the NIMBY element.

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