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.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

2 thoughts on “Planning and the supply side of the economy”

  1. Posted 14/02/2011 at 17:57 | Permalink

    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.

  2. Posted 15/02/2011 at 10:10 | Permalink

    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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