Planning system and economy

Hassan Yakubu The UK already ranks highly on many measures of economic dynamism, but there is no room for complacency and there remain significant areas of weakness that must be addressed. This plan addresses particular challenges in the form of a planning system regarded by many as one of the most significant constraints facing the economy, bringing delay and inflexibility ....’ HM Treasury (2015) Fixing the foundations: Creating a more prosperous nation, Cm 9098, HMSO https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/4 43898/Productivity_Plan_web.pdf To what extent do you consider that planning system is one of the most significant constraints facing the economy in the UK? The planning system is crucial in ensuring an enhanced quality of livelihood for citizens. It is for this that Kate Barker asserts that “Its outcomes influence the quality of our urban environment, the price and size of our homes, the employment opportunities available to us, the price of goods in the shops and the amount of open space we have in our towns and countryside”(Barker, 2006). In essence all these constitute the economy. Hence, the effectiveness of the economy is influenced by the workings of the planning system. For this overarching objective to be effectively delivered, the new National Planning Policy Framework (NPPF) circumscribes this system in a presumptive target in favour of sustainable development so as to ensure that it delivers a responsive and competitive economy, vibrant and healthy communities and protection of the natural, built and historic environment. Throughout UK planning history, the system has worked in diverse ways all aimed at delivering this primary objective of a healthy economy. Firstly, the system has worked over the years at correcting market failures in the housing market. It has sought to provide decent housing for the masses at affordable rates. The first town planning act of 1909 attests to this early preoccupation of delivering housing due to the realisation that decent housing for the workers who drove the industrial revolution was crucial to the economy. This has remained a priority objective of the system. Garden cities and New Towns are some of the policies that have aimed at the achievement this objective. Another objective of the system, has been to contain urban growth. As a consequence of continual expansion of urban areas, such as London, measures such as the Restriction on Ribbon Development Act,1932 and the Green Belt policy from 1947 were put in place to curb urban sprawl. The green belt policy, a prominent element of the system has been in place since. Presently other measures such as strict development control are employed to achieve this objective of urban containment. 1 Hassan Yakubu Lastly, the planning system has an objective of providing public goods in the form of infrastructure that ensure functioning of the economy. Critical infrastructure such as energy, transport and sewerage systems are planned for by the system. A lot of progress has been made in achieving these set objectives of the UK planning system to ensure a healthy economy. However, concerns have been raised as to its efficacy in attaining these objectives and whether it performs poorly and consequently stifles the economy. This observation, somewhat justified, is as a result of the workings of the system and its impact on the subsectors to which these objectives are targeted. To a large extent, the planning system stifles the growth, development and competitiveness of the UK economy. Discussing this will involve a critical look at how the system, in pursuing the above objectives impacts the economic agents who constitute the economy. At the basic level of economics these agents are individuals and firms(businesses). Individuals are affected directly among others through the housing market in terms of affordability and location. Businesses are affected through access to space for offices, factories etc. as well as location. These two fundamental economic agents interact in the market place(city). The interaction between these agents comes at a cost – transaction costs, which the planning system itself is constitutive. Thus in arguing that the planning system constrains the economy of the UK, the discussion will concentrate on the housing market, businesses, cities and transaction costs of the system itself. The discussion however will commence with space - land, as it is the basis upon which all these agents act. The Planning System and Land Land, regarded as the most elementary of economic resources is a key factor of production in the economy. Being a natural resource, its supply is perfectly inelastic as the amount of land is limited to that available on earth. However, as a factor of production, it can be combined in diverse ways to produce output hence use is the the only means to control its “supply”. The particular use to which it is put determines its value. In the UK, nationalisation of development rights (circa 1947) gives local authorities the mandate to determine use thereby indirectly controlling the supply. A number of mechanisms are employed to achieve this objective. These have often targeted restricting growth of urban areas. Environmental designations of land, national targets on development in brownfield land, Town-Centre-First (TCF) policies, housing density targets and lastly the green belt are some of such policies(Barker, 2006). 2 Hassan Yakubu The most prominent of these supply controls is the green belt policy that delineates a ring of undevelopable land around cities beyond which they cannot grow. By doing this, the supply of land for development within the city is strictly controlled(P. C. Cheshire & Hilber, 2008) forcing density through small plot sizes and high rise building. Currently green belts account for 13 percent of England. The immediate downside of this restrictive control of land supply is that rents are extremely high and keep on increasing. For instance, retail land in Britain is estimated to be 5-10 times more expensive than that in France and Germany. Also, unlike countries such as France whose land markets tend to conform to standard models (like Von Thunen - where rents decrease outward from the urban core), that of the UK does not conform. Contrary to these models, the further away from the centre the costlier rents are. With high rents other sectors of the economy that rely on land like housing, retail, manufacturing and business experience carry-on costs affecting long-run productivity and competitiveness which will be discussed in subsequent sections of this paper. Other costs that constrain the economy relate to the environment. With high rents, this same planning system through policies such as the New Towns encourages housing development beyond the green belt. The downside of this is that infrastructure such as transport networks have had to be extended beyond the city using scarce resources. In relation to determining land use, the system hinders the ability of a more diversified economy. Restricting the kind of activities possible in rural areas to only agriculture despite its seeming decline hinders investments that could possibly promote economic growth. Given all these issues with planning and land it is argued that the solution to an efficient land market that will eliminate these problems lies in the planning system itself. Kate Barker suggests in her review of the UK planning system(Barker, 2006) that effective use of urban planning tools will lead to more land available to respond to the projected increase in demand for land. From the above discussion, the planning system through restrictions in land use and supply creates the first layer of hindrance for a healthy UK economy. The Planning System and Housing. Everybody needs shelter against the vagaries of the weather. It is regarded as a fundamental human right in most countries. Generally, the performance of the housing sector is a measure of the health of the economy(Glossop, 2008). This is because the prices of houses have a direct 3 Hassan Yakubu impact on consumers and businesses alike through changes in consumer spending, investment, the financial system, inflation and interest rates(Regeneris Consulting & Oxford Economics, 2010). This role is corroborated when HM Treasury declares in its housing policy review thus: “Achieving a more responsive long-term housing supply can play a major role in helping people meet their housing and asset-owning aspirations, as well as helping deliver macroeconomic stability and more flexible labour markets”(HM Treasury, 2005). Housing in the UK is a critical issue that has been on government agenda since the industrial revolution. Its notoriety as being complex and sensitive draws a number of comments such as that of Financial Times journalist Martin Wolf who declares in the issue of February 5, 2015; “This is a really big issue. That is, of course, why no politician dares touch it.” The problem with the sector is two fold. It is one of supply and of affordability that has often been christened the “affordability crisis”. Supply of housing in the UK has been dwindling since the 1970s when the highest ever amount of 380,000 new housing stock were built which is now down to about 140,000 annually(DCLG, 2015). The latest housing stock figures(March, 2014) stands at about 23 million in England alone(DCLG, 2015). However, as compared to other developed countries, supply has not been very responsive for the last 10-15 years. It is reported that the supply is half as responsive to that of France, a third as that of the US and a quarter that of Germany(Barker, 2004). This limited supply in housing has been largely attributed to constrained supply of developable land. As stated before, the planning system is responsible for allocating uses to which land can be put. With the largely restrictive nature of the system in the UK, supply to the sector has been diminutive compared to the demand. Policies in the system such as the green belt dating from 1947, development controls on height and disincentives at the local level have affected the supply of land and thus housing supply. With high rents, developers transfer the costs to consumers at the end of the chain. This has resulted in house prices soaring over the years as supply decreases despite increasing demand that today stands at a deficit of 337,500(CBI, 2014). The affordability crisis is much more pronounced in the Southeast of England (see (P. Cheshire, 2009, 2014)) led by the London agglomeration with average prices at 530,409GBP(Land Registry, 2015). Assuming perhaps, the constrained housing supply is deliberate, a number of benefits come to the fore. Firstly, less land is developed that affords the kingdom the advantage of conserving this scarce resource against unwarranted wastage. Also, it could be argued that, it reduces the real cost involved in providing critical infrastructure if sprawl were allowed. Lastly, with 4 Hassan Yakubu constrained supply, prices rise providing increased wealth to homeowners who can leverage it to enter into businesses that eventually impact the economy. Despite these, supposed benefits given the assumption, it is argued that the economic role of housing is much more complex. Regeneris Consulting & Oxford Economics (2010) contend that “It is influenced by the quantity of the stock of housing; the quality and location of the stock of housing; the rate of new house-building; the price of privately owned housing and how this varies by region and locality; the different role of housing tenures; and the tax/benefit treatment of these tenures. Variations in any or all of these factors separately, or more often in combination “. To substantiate the downsides to this constrained housing supply, a number of studies (see Barker (2004), CBI(2014)) have highlighted its dire consequences on the economy. Firstly, due to the tight link with the macro-economy (it has a strong multiplier effect), any disturbances in the sector affect the health of the whole economy. It is estimated for instance that the fall in housing activity from 2007-2009 led to about a third of the fall in UK GDP(Regeneris Consulting & Oxford Economics, 2010). Also, the labour markets suffer substantially from the high prices of housing. In order to cut down costs, labour will locate in areas it can afford lower rents like outside of London and will therefore tend to have longer commutes to work. Local economies consequently will experience shortage of skills as labour will locate in cheaper areas. This will impact the quality of life of labour, place competitiveness and productivity and thus in the long run affect economic growth and sustainability(Roger Tym and Partners, 2003a, 2003b). Following all these problems with the housing sector, government has instituted a number of measures to instigate supply. The Help-To-Buy policy seeks to propel a demand side solution by providing mortgages to consumers in the hope that supply will increase proportionately. However , house prices have increased instead of supply and it is argued to be more of a failed policy(C. Hilber, 2015). Hilber & Turner (2014) contend that evidence from the USA contradicts this kind of initiative. Preliminary results confirm this finding as prices in London have risen by 25% between 2013 and 2014. From the above discussion of the housing subsector, it has been argued that the planning system constrains to a large extent the economy. It has since as early as 1947, limited supply of land that has impacted the quantity of housing provision possible. This has consequently constrained economic growth and development as seen from the examples given above. In a bid to correct this problem that it developed in the first place a number of policies have been proposed and implemented which have not yielded substantial impacts. The planning system is thus the 5 Hassan Yakubu stumbling block in preventing the effective contribution of the housing sector to the wider economic growth of the UK. The Planning System and Businesses. Businesses are an essential part of the economy of any country. They are the avenue through which a majority of goods, services and jobs are produced thereby contributing substantially to a country’s Gross Domestic Product(GDP) and welfare. As of 2015, there were 4.5 million businesses in the UK with an annual turnover of roughly 3.8 trillion GBP(DBIS, 2015). Their role, given the contribution to the economy cannot therefore be neglected. As highlighted in the introduction space is crucial to businesses as it is used in diverse ways such as office space, manufacturing space and sales outlets. A number of studies have touched on the impact of the planning system on the office and retail markets. These will therefore form the basis of the following discussion. Office Space Firms require offices to conduct their businesses. The affordability and location of these determine the productivity of the business and thus its contribution to the economy. Despite the evident importance of businesses to the economy and their pressing demand for office space, the situation in the UK is that of a shortage and high rents. It is estimated that office space in the UK is the most expensive in the world and thrice as much as that in the most expensive city in Europe, Paris (KingSturge, 2003 to 2005; CBRE, 2004 to 2005). This situation is mostly attributed to the effect of the planning system that is restrictive in the supply of land for office space development. This restriction happens through a number of layers consisting firstly of greenbelts that limit the area of urban land and a further limit to available land for most uses such as retail, offices, warehouses and industry. Cheshire & Hilber (2008) point out that the planning system provides a disincentive for local authorities to allocate more urban space for commercial development due to the tax regime. It is shown that taxes on office development varies from 250% in Birmingham to around 400-800% in London whiles it is 0-50% in New York, 200% in Amsterdam and 300% in Paris. They bear the costs of providing infrastructure but retain nothing of the taxes. This is further exacerbated with social and environmental costs that provide fodder for nimbyism arguments against such developments. 6 Hassan Yakubu Retail Market For businesses in retail, the location of stores is critical to the success of the business as that determines its threshold and hence profitability. Planning in the UK, in assigning locations for siting of these premises, influences the productivity of the retail market. It has been suggested that the planning constraints on the retail market have adversely affected the growth of the sector and increased significantly the economic costs as compared to the USA(Cheshire et al, 2015). In the UK, the policy of Town Centre First (TCF), instituted in the 1990s that guides siting of retail outlets has impacted the outputs and thus profitability of a number of chain stores. Cheshire et al. (2015) suggest that the TCF policy exerted additional barriers of entry , creating local monopolies; forced stores into difficult sites and lastly, provided inaccessible sites that did not auger well for competiveness. Through an empirical study, they explore the impact of the TCF policy on store output of a particular retailer. They calculate that the retailer observed losses of 17.3% in 1996 alone. Extrapolating to the wider retail market they conclude that, productivity is restricted by the planning system as stores become less competitive . The combined effect of these problems is that firstly, businesses become less competitive as compared to their counterparts in other countries. With office space cheaper in New York and Paris, businesses would prefer to locate in these cities to London consequently robbing the economy of additional revenue. As has been seen for the retail industry, the loss in competiveness impacts productivity negatively. Incurring high fixed costs on office space, retail outlets and sites for manufacturing adds to the total cost of service and goods produced. This further translates to a reduction in the total welfare for consumers in the UK economy as they will pay higher prices for goods of perhaps lower quality than could have been the case. To conclude this section, it has been argued that the planning system affects businesses in terms of supply of adequate and affordable office space. The retail market is also affected in terms of siting of outlets which reduces productivity. Other businesses such as the manufacturing industry are affected by location and land use factors. These problems highlighted above to a large extent contribute to the planning system’s constraints on the UK economy. The Planning System and Cities Cities play a crucial role in economic development. Throughout history they have been at the centre of civilisations. Often regarded as an economic organism, they emerge as a result of the interaction of economic forces. With more than half the world’s population in urban areas and the increasing spate of urbanisation, cities have re-emerged as a crucial entity in the economy 7 Hassan Yakubu of countries. The agglomeration economies that arise as a result of concentration of firms in cities account for its increasing contribution to economic growth and development. Businesses enjoy these economies as a result of closer links with others, access to large markets and skilled pool of labour. In the UK, cities contribute 60% of the GVA , making them virtually the national economy(Centre for Cities, 2011). They also account for 60% of jobs in Great Britain, 75% of private sector jobs and the nine largest cities account for 49.5% of the country’s GDP. These benefits accruing to the economy from the current cities, it is argued is attributable largely to an effective planning system. In restricting city sprawl through greenbelts and ensuring concentration, it is argued that the UK planning system ensured that a critical mass of labour and businesses have been concentrated in the major cities such as London, Cambridge and others creating clusters that thereby contribute substantially to the economy. However, a look at the costs that this comes at leaves much to be desired. The associated development costs as a result of restrictions have been high thereby restricting the levels of investment in these same areas thus the current economies of scale may not be truly reflective of that which could be achieved. In the IT industry for instance, clusters are an instrumental factor for growth and productivity. A McKinsey report of 1998(McKinsey Global Institute, 1998) observed that development of such clusters had either been slowed or prevented due to the restriction imposed by the planning system in the UK. Barker (2006) suggests that Cambridge and Oxford may have experienced a slow growth in their clusters due to containment policies and other cities such as York, Surrey and Bath may have had theirs delayed by years altogether. Still with agglomeration economies, it is argued that in concentrating businesses in the centre of cities as in the case of the TCF policy, benefits are attained. However, from the discussion above on the retail market, the case has been made that contrarily, the TCF policy inhibits growth (see Cheshire et al. ,2015). Further, it is argued that agglomeration economies accrue as a result of urban density associated with the planning system’s containment of growth. However, Cheshire et al (2012) have observed that there is no such causal link between density and agglomeration economies thus promoting density as in the case of the planning system is more of a needless constraint on city growth and hence the economy. Even granted a causal link exists, the implicit definition of the optimal size of the city through containment could imply insufficiency. This is because cities may actually be below the size that ensures optimum efficiency. To substantiate this, London perhaps without its green belt might contribute more to the UK economy as a result of greater agglomeration economies than what is the case at present. 8 Hassan Yakubu In addition, the planning system encourages brownfield development through setting national targets. Brownfield development serves as a source of available land within the city thereby advancing the agenda of urban containment. The national target as of 2008, was that 60% of new developments should be on brownfield land. The benefits of this policy is to prevent urban sprawl and also repopulate city centres as was the case for Manchester and Liverpool. However, criticism of brownfield development suggests that, there is no evidence linking it to any effect on the city(Nathan & Overman, 2011). Thus, it only skews development in favour of the centre which perhaps comes at an expense of lesser growth for the entire city. Also, preparation of brownfield sites comes at an extra cost as they are mostly contaminated. Their locations may not also be suitable for competitiveness of businesses. It has come to light here that, the planning system in constraining urban regions prevents the realisation of greater economies of scale that will enable cities contribute substantially to the UK economy. The Direct Costs of the Planning System. Aside constraining growth of the economy through the various subsectors discussed above, the planning system with its inherent nature and operation costs adds more to the problem. Firstly, the planning system in the UK unlike the Netherlands or Denmark is described as discretionary in practice. This refers to a system where strict compliance with planning regulations does not automatically translate into planning permission. Decisions in such a system are “subject to political and administrative discretion”(Shaw, Nadin, & Westlake, 1995). The advantage of this system is that it allows for flexibility and tailored responses to different circumstances not fully covered within the laid down planning regulations. However, this comes at a cost of uncertainty. Investors in planning development require a measure of certainty in order to weigh options and avoid risks. A planning system as that of the UK that fails to allow for certainty inhibits the prospects of investment. Also, the uncertainty is fuelled further by the varying and longer times it takes to process applications. It is documented that on average developments that actually get built take far more than the reported 13 weeks. On average it takes 43 weeks(Ball, 2010) to process irrespective of the size of the project. In a recent report however, the Royal Town Planning Institute (RTPI) claims the majority of applications take between 8-16 weeks(Jim Hubbard, 2014). 9 Hassan Yakubu The true cost of this uncertainty and delays of the system is brought to bear on Major Infrastructure Projects(MIP). These are projects such as energy and transport infrastructure that substantially benefit communities. Their complex nature usually entails lengthy planning processes which is exacerbated with the nature of the current system. Businesses that rely on such decisions are delayed, cancelled or worse incur extra costs. To conclude, it has been argued here that uncertainty of the system and the lengthy processing times leads to loss of investment. Businesses have highlighted that the planning system is their major concern when deciding on investments in the UK. Conclusion From the above discussion, it has been argued that the UK planning system constrains the growth of the economy through its impact on the housing sector, businesses, cities and its implicit costs. The system works largely through development control by determining the use to which land can be put. This allows it to control the supply of land for development in the housing and business sectors as well as critical infrastructure. It has been shown that in restricting supply of land, rents have been continually on the rise limiting the ability of developers to provide needed housing and office space that are essential for labour and investors alike. This has resulted in the affordability crisis in the UK housing market and also earning UK the reputation of having the most expensive office space in the world. This evidently does not auger well for competition with other countries in Europe and the USA where rents are relatively cheaper. Productivity is also hampered as a result as was shown in the retail market. These all combine to make UK cities less competitive as agglomeration economies are not achieved to ensure efficiency. Also, the very nature of the system leads to costs that inhibit growth of the economy. The characteristic uncertainty, longer processing times and the costs to government contribute to constraining growth. All in all, there needs to be more reforms to ensure that the planning system rather than stifling contributes to the realisation of a prosperous UK economy. 10 Hassan Yakubu References: Ball, M. J. (2010). Housing supply and planning controls: the impact of development control processing times on housing supply in England. Retrieved from https://www.communities.gov.uk/archived/generalcontent/nhpau/research/planningapproval/\nhttps://centaur.reading.ac.uk/17234/ Barker, K. (2004). Review of Housing Supply. https://doi.org/10.1037/015276 Barker, K. (2006). Barker Review of Land Use Planning. CBI. (2014). Housing Britain: Building new homes for growth. Retrieved from https://www.cbi.org.uk/media/2876609/homes-for-growth.pdf CBRE. (2004). Global Market Rents. Los Angeles. CBRE. (2005). Global Market Rents. Los Angeles. Centre for Cities. (2011). The growth conundrum : The importance of cities to economic growth in the UK. Cheshire, P. (2009). Urban Containment , Housing Affordability and Price Stability Irreconcilable Goals. Spatial Economics Research Centre, 4(September), 1–20. Cheshire, P. (2014). Turning houses into gold : the failure of British planning. CentrePiece, 19(1), 14–18. Cheshire, P. C., & Hilber, C. A. L. (2008). Office space supply restrictions in Britain: The political economy of market revenge. Economic Journal, 118(529). https://doi.org/10.1111/j.1468-0297.2008.02149.x Cheshire, P. C., Hilber, C. A. L., & Kaplanis, I. (2015). Land use regulation and productivity-land matters: Evidence from a UK supermarket chain. Journal of Economic Geography, 15(1), 43–73. https://doi.org/10.1093/jeg/lbu007 Cheshire, P., Leunig, T., Nathan, M., & Overman, H. (2012). Links Between Planning and Economic Performance : Evidence Note For LSE Growth Commission. DBIS. (2015). Statistical Release Business Population Estimates for the Uk and Regions 2015. Retrieved from https://www.gov.uk/government/statistics/business-populationestimates-2015 DCLG. (2015). Dwelling Stock Estimates : 2014, England. UK Government. Glossop, C. (2008). Housing and Economic Development: Moving Forward Together. Hilber, C. (2015). UK Housing and Planning Policies: the evidence from economic research (No. EA033). Retrieved from https://cep.lse.ac.uk/pubs/download/EA033.pdf Hilber, C. A. L., & Turner, T. M. (2014). The Mortgage Interest Deduction and Its Impact 11 Hassan Yakubu on the Homeownership Decisions. The Review of Economics and Statistics, 96(4), 618–637. https://doi.org/10.1162/REST_a_00427 HM Treasury. (2005). Housing policy: an overview. Jim Hubbard. (2014). Fostering Growth:Understanding and Strengthening the Economic Benefits of Planning. KingSturge. (2003). Global Industrial and Office Rents Survey. London. KingSturge. (2005). Global Industrial and Office Rents Survey. London. Land Registry. (2015). Land Registry House Price Index January 2016. McKinsey Global Institute. (1998). Driving Productivity and Growth in the U.K. Economy, (October), 1–302. Nathan, M., & Overman, H. G. (2011). What We Know (and Don’t Know) About the Links between Planning and Economic Performance. SERC Policy Paper, (November). Regeneris Consulting, & Oxford Economics. (2010). Economy The Role of Housing in the Economy. Cheshire. Roger Tym and Partners. (2003a). Cambridge Sub Region Key Worker Housing 12