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Macro-economic policy

The CMA Housebuilding Study: Labour’s blueprint?

31st March 2024 by newtjoh

This extended post summarises and critically reviews the Housebuilding Market Study (the Study) that the Competition and Market Authority (CMA) published this February. This concluded that the housebuilding market in England, Scotland, and Wales is failing consumers and has consistently done so over successive decades, delivering outcomes falling well short of what a market working well should do.

Wider lessons are drawn from both the Study’s analysis and shortcomings to focus on the actions that a new Starmer-led United Kingdom (UK) government should put in hand within its first few weeks of office if it was serious in intent to achieve Labour’s proclaimed commitment to build 1.5m. additional homes during the lifetime of the next parliament in England (an average annual total of 300,000).

 Section One provides background to the process, defining the Study’s diagnosis of housing market failure taken from both the published final report and supporting evidence documents against the metrics of supply and affordability, the quality, innovation and sustainability of the delivered product, and the profitability of the 12 largest housebuilders.

Its main decisions on future actions, including the recommendations to government made concerning the future private management of public amenities on housing estates and on future consumer welfare, protection, and information outcomes are noted. Appendix A records those recommendations.

Section Two delves deeper into the causes and consequences of the wider market and the institutional failures that the Study identified, with reference to the operation of the planning system and the speculative housing model and its associated low build out rates.

The options it identified for government to consider while taking account of wider policy and other trade-offs, as well as other possible areas of government intervention that to improve outcomes across the planning and the speculative housing system and associated build out rates are discussed. Appendix B catalogues these options.

Section Three points out that the Study, like many housing policy commentaries, conveniently neglect the key political economy parameters of housing policy that need to be understood and addressed for real press to occur.

These include the real fiscal crisis of the state, Nimbyism and related issues of local democratic preference versus the central compulsion required if set central government objectives are to be attained, lack institutional capacity at both central and local levels, and political short-termism and the related lack of effective governmental focus on, or any real intent to achieve proclaimed objectives, most notably the overarching 300,000 supply target (the target).

Section Four points out that development timescales and almost certain substantial under-supply in 2025 mean that planning approvals and housing starts must begin their substantive upward trajectory no later than 2026 if the target is not to prove an early ‘dead duck’ or an example of ‘wishful verbiage’ for the new government, as it has proved for previous governments. It outlines an initial route map on how a new UK government could at least hit the ground running in its initial weeks in the light of that imperative.

It also demonstrates that the target cannot be achieved without a substantial step increase in the share of total supply taken by affordable and other forms of housing delivered outside the speculative model.

This – as will the enabling of New Towns and other large scale urban extensions – will require additional public investment. The 2025 Comprehensive Spending Review treatment of that investment requirement will thus provide an early and determining litmus test as of the practical application of Rachel Reeve’s fiscal rules and their positive relationship to wider macro-economic and strategic political goals.

1             Process and Diagnosis

The Competition and Markets Authority in February 2023 launched a Market Study (MS), under its Enterprise Act 2002 statutory powers, into the supply of new homes to consumers (‘housebuilding’) in England, Scotland, and Wales.

Under that Act, such a MS can be a self-standing piece of work or, where reasonable grounds for suspecting “that a feature or combination of features of a market or markets in the UK for goods or services prevents, restricts or distorts competition” are found, it can lead to a further market investigation reference (MIR), which can then culminate in the imposition of fines or other remedies on identified firms.

In November 2023 working papers on the  Private management of public amenities on housing estates, land banks, and the planning system(s). were published.

The  final report (the Study), alongside other supporting material including a supporting evidence document, was published on the 26 February 2024.  It concluded that intervention in the housing market was required for it to deliver better outcomes, across three main areas:

  1. More homes overall, and particularly in the areas of highest demand, in turn reducing pressure on affordability;
  2. Consistently better outcomes on new build quality, with consumers having an effective route to redress; and
  3. Reduced detriment to consumers arising from the private management of amenities on new build estates.

The CMA, however, decided against making MIR references regarding the existing private management of public amenities (estate management) or the land banking arrangements it had examined in detail.

With respect to estate management, it concluded that direct government action would provide a more appropriate and comprehensive response to the consumer detriment the Study identified as occurring, as well as its future prevention.

Specific policy recommendations (see Recommendations 1.1 to 1.5, Appendix A) were made aimed at preventing the future proliferation of private management arrangements on new housing estates and to provide greater protection to households living under such existing arrangements.

It further invited the United Kingdom, Scottish and Welsh governments (GB governments) to also consider options to support the adoption of public amenities on estates currently under such private arrangements.

The Study also made specific recommendations to governments to improve quality and redress routes for consumers and purchasers of newly built housing (Recommendations 2.1 to 2.6, Appendix A.

These specific recommendations were made across both the above areas, because better market outcomes could be obtained “within the current broad market framework and (they) which do not involve significant trade-offs with other policy objectives which are outside the scope of the CMA’s study and which would involve wider political choices”.

With respect to land banking, the Study found that their size and operation reflected wider market and institutional failures, namely the operation of the planning system and the speculative private housebuilding model alongside related incentives driving the speed of private speculative build out.

These wider failures, it concluded, would be better addressed through government action focused on those areas, (see section 2 below) rather than through remedial measures made specifically to reduce the size of landbanks, as these taken in isolation would most likely reduce housing supply.

However, on the back of evidence uncovered by the Study that suggested that some housebuilders may be sharing non-public information on sales prices, on incentives, and on rates of sale, the CMA did decide to launch an investigation under the Competition Act 1998 into such suspected conduct by Barratt, Bellway, Berkeley, Bloor Homes, Persimmon, Redrow, Taylor Wimpey, and Vistry, “given that it may have the object or effect of preventing, restricting or distorting competition”.

In March it announced that (outside the Study) it would commence a preliminary investigation into the proposed merger of Redrow and Barratt.

Supply and Affordability

The Study linked together two crucial facts that:

  • Housing supply has persistently fallen well short of successive government targets, “compounding over time to create a growing housing shortfall”; and,
  • Housebuilding has only previously reached the current 300,000 dwellings target (in England during periods where “significant supply was provided via local authority building”. Final report Figure 3.2 provides a useful annotated graphic illustrating that historically fundamental outcome.

The achievement of an additional annual supply of 300,000 is also the opposition’s target consistent with Labour’s commitment to build 1.5m homes over the lifetime of the next five-year parliament. The Welsh and Scottish governments have not hitherto set a headline total new supply target.

As Table 1, instructively, shows, the highest annual new supply (total net additions) figure recorded since 2006-07 (when the most accurate and comprehensive official housing statistical series to measure new completions and net additions in England began) was c248,500 dwellings in 2019-20: 83% of the 300,000 annual target; more pertinently, the annual average total supply across the entire 2006-23 period was c195,000 dwellings, c64% or less than two thirds of the proclaimed target.

The table also demonstrates the further substantive (albeit well known) point that the Study went on to make that new supply is also highly cyclical and prone to sharp fluctuation: the 2010-11 low point figure was barely half of the latest 2019-20 peak, as cited above.

Explaining this, the Study reported that most new homes are delivered through the private ‘speculative model’ of housebuilding for profit, where housebuilders buy land in advance of the construction and sale of homes without knowing the final price at which they will be sold.

Overall, according to the Study, around a half of GB homes are built speculatively, and a third on an affordable housing basis, sold or rented at a discount to market price; self- or other custom-built and build to rent completions account for the remainder of the total (noting that data on the tenure breakdown of completions is less accurate than total new supply data (DLUHC), certainly in the case of England.

In England, however, (less during market downswings, more during upswings) around 60% of new builds are produced through private speculative model. Scotland and Wales produce relatively more affordable housing, 45% and 50% of total new build supply in 2021-22, respectively, compared to around the 29% share that it takes across England.

The Study went on to highlight that this model produces too few houses especially in the areas in which they are most needed, consequently, “exerting associated effects on local affordability and overall consumer welfare outcomes”.

“Significant variation in housing delivery relative to need” also occurs across both countries and regions, with Scotland in recent years coming closer to meeting its implied target levels than has England and Wales.

London, the South East, and the East regions (administratively defined) account for the majority of the areas exhibiting “significant under-delivery against assessed need”. All LPAs in the East of England, South East, South West, and London regions have an affordability ratio of five or higher.

Housing need is defined by the Study as “the amount of housing required for all households to live in accommodation that meets a certain prescribed standard (which irreducibly involves political judgement as to the acceptable standard)”.

This is a normative standard that invariably results in a higher figure than the 300,000 target. For instance, a 2019 Study (Bramley or Heriot-Watt Study) for the National Housing Federation (NHF) and Crisis found that around 340,000 new homes need to be supplied in England each year, of which 145,000 dwellings should be affordable.

A February 2024 Financial Times (FT) analysis  (not reported in the Study) that used the Heriot-Watt University methodology referenced above, but updated it with the latest (Office of National Statistics (ONS) population data and with net migration projections from Oxford University’s Migration Observatory, found that c421,000 additional homes were needed to be provided annually until 2036, assuming that average annual net migration to England figure will hover around 345,000 over the next 15 years.

On the other hand, the Study also cited an analysis (Study link broken, but summary by Ian Mulheirn can be found here) that argued that UK housing supply has outstripped household formation (for decades and that house price increases are a function of the main components of the cost of capital: mortgage interest rates, taxes, and expectations of future price growth.

Indeed, since the late 1990s, mortgage rates have tumbled, with inflation-adjusted interest rates on five-year fixed-rate mortgages, for example, falling from 8% to around 2% which given that mortgage interest rates tend to be the dominant element of the cost of capital for homeowners, largely explaining the substantial increase in house prices experienced since 1996.

It is relevant to note in that regard that a seminal 2019 Bank of England working paper concluded that the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk‑free interest rate observable  over that same period and that changes in that rate “were a crucial driver  in house price changes”.

Ian Mulheirn’s study went on to posit that the housebuilding target of 300,000 would only result in a 10% decrease in the affordability ratio over 20 years. It would neither solve problems of high house prices nor low home ownership, but instead likely to result in further growth in the number of unoccupied (and under occupied?) homes, “which may not be an efficient use of scarce investment capital”.

Alternative policy solutions it suggested included more social housing or more generous housing benefit, “as these policies would help affordability-constrained young people”.

The CMA Study concluded that even a highly competitive private housebuilding market (which it showed did not exist) will not, on its own initiative, produce sufficient housing to meet overall housing need in accord with its wider (external) benefits (boost to productivity, education, health, and other outcomes) to society.

And, while private housebuilder incentives to build are likely to follow changes in demand, how well the housebuilding sector is delivering for consumers and wider society “is likely to be better captured by how far it is delivering against housing need”.

The CMA accordingly decided to focus on assessing supply delivery against housing need in its supply analysis (para 2.6, further evidence document).

Turning to housing demand, this, according to the Study, is determined “by the number of people or organisations willing and financially able to buy a property, either as a home, second home or investment property”; an outcome patterned by disparate factors, including aspiring buyers’ ability to sell their existing home, their access to housing equity or a deposit, their access to credit and the price of that credit (effective demand is interest-rate sensitive where prospective purchasers rely upon mortgage finance to proceed), their current income and future expectations, as well as the financial and tax implications of property ownership, their expectations of future returns, and wider market sentiment.

People will also often choose to purchase more housing when their incomes allow, for example, taking on properties with spare rooms or buying holiday homes. Thus, as real incomes increase, it can be expected – other things being equal, which, of course, they will rarely be, as above – that housing demand will expand proportionately more.

Because all these factors are constantly changing and are strongly linked to general macroeconomic performance, housing demand will fluctuate, making it difficult to measure.

In addition, buying, selling, and even moving house are all time-consuming and difficult endeavours involving high time and other transaction costs, including residential stamp duty, estate agents’ fees, removal, and reconnection costs, etc.

Consequently, people may not adjust their individual demand for housing immediately as their circumstances change.

The Study went on to posit that “although affordability is determined by factors such as household size and composition, credit conditions (including interest rate changes, presumably), population growth, and levels of household income”, if the supply of housing fails to keep pace with changes in demand, house prices can be expected to rise faster than earnings, so worsening affordability.

This the Study defined as “the level of housing outgoings (for rent, mortgage, etc.) which a household can (and will) meet from its recurrent income without significant risk of material hardship or financial stress, including the risk of being pushed into poverty”.

It has certainly worsened over time. A key ONS dataset reports that the median house price to median gross annual residence-based earnings affordability ratio rose from 5.11 in England and 6.9 in London in 2002 to 9.06 and 13.62, respectively, in 2021, before subsequently slightly falling back as house prices dipped in response to increased mortgage rates.

The Study itself reported that by 2022, full-time employees in England could expect to spend around 8.4 years of income buying a home, compared to 6.4 in Wales, and 5.3 in Scotland, noting that as rough rule of thumb, it should lie in the four to five range (mortgage lenders, for example, seldom lend more than 4.5 times of purchaser annual income).

Considerable variation within countries and regions (as well as between – exemplified by the London figures reported above) also occurs. All regions (except the North east) have LPAs in 2021 with affordability ratios of over five (see figure 2.4, CMA Supporting evidence document for an annotated and illuminating infographic defining the most and least affordable LPAs within each country and region. You could purchase then homes in Merthyr Tydfil, Barnsley, Copeland, Bolsover, County Durham, Copeland, and Stoke-in Trent, LPAs reporting an affordability ratio of less than five).

The Study pointed out such entrenched variation is likely to be symptomatic of a market that in supply response is unable to adequately adjust to consumer preferences, expressed through price signals, concerning the supply of available homes and their desired locations.

With respect to rental levels, the Study reported that the rental affordability ratio for both England and Wales since 2014 taken across the board has remained below the affordability threshold of 30% of income, used by the ONS as a normative yardstick.

More instructively, however, when lower quartile income (the income that 25% of households are at or below) are compared with the lower quartile rent (the rent that 25% of rental properties are at or below),  the ONS found that at a country level, in England and Wales, high, average, and low rents were all above the ONS’s affordability threshold and thus unaffordable for lower income households; and that they were only affordable for average-income households in Wales. In England only average and low rents were affordable for average-income households.

Quality, innovation, and sustainability

The Study recorded a lack of competitive pressure to drive up new build quality, related to factors both intrinsic to the characteristics of housing as a good and to specific shortcomings in the consumer regulation and oversight of the housebuilding market.

Intrinsic factors include that new build quality is difficult or impossible to observe prior to purchase. It becomes noticeable to purchasers only when something subsequently goes wrong. In that sense, the speculative housing market suffers from a similar market information failure or imbalance as does the second-hand car market – something the Study did not highlight.

Connected to that, prospective buyers also prioritise factors other than quality (which, as above, in any case, is difficult to observe or assess) as they hurriedly compete to complete a purchase in accord with their budget constraint and preferences and not to miss out on their hopes.

During this process they can fear that they will otherwise ‘miss the boat’ and be priced out (especially during periods of robust house price growth),  making them even more amenable to the assumption that housebuilders build to a baseline level of quality  – a reasonable one given the nature, importance, and expense of the good, when considered alongside associated seller publicity, which is often unclear and sometimes misleading (another information imbalance or failure).

The Study was clear that such information imbalances have not been rectified by the current voluntary consumer protection arrangements. It singled the House Builders Federation (HBF) Star Rating Scheme for criticism as of limited informational value, one which was not designed in the first place to ensure effective and timely rectification of defects.

Evidence of consumers encountering increasing and mounting difficulty and housebuilder resistance found by the Study when multiple number of snags or faults remain to be rectified, with a small but significant minority experiencing the most serious defects suffering significant consumer detriment: a serious matter and market failure for the most important purchase that most people make in their lives in terms both of their financial commitment and their individual/family future and welfare.

Levels of innovation in the industry were also found by the Study to seriously undershoot what it considered a dynamic, well-functioning market should foster and generate, noting that despite the largest housebuilders investing in, acquiring, or developing their own more innovative production capacity its dissemination continues to be slow, while sustainability efforts are primarily driven by expectations of future regulation, rather than endogenous (self-driven) industry momentum.

Profitability

The Study found that the profitability of the 12 largest housebuilders, delivering around 40% of total housing completions in recent years, exceeded what it would expect a well-functioning competitive market to provide, at least during “periods outside the Global Financial Crisis (GFC) and its immediate aftermath”.

That conclusion was based on a methodology predicated on the assumption that in a competitive market, a ‘normal’ profit  was “the minimum level required to keep the factors of production in their current use in the long run: i.e. when the rate of return on capital employed for a particular business activity would be equal to the opportunity cost of capital for that activity”.

The rate of return that housebuilders achieved on their employed capital accordingly was compared to the opportunity cost of that capital between 2003 to 2022 inclusive.

Housebuilder profits from 2013 to 2019 were found by the Study to be particularly high against that ‘normal profit’ yardstick, because of supportive economic circumstances for housebuilders – in particular, low interest rates and quantitative easing – as well as by measures taken by the government to help homebuyers fund deposits for the purchase of new homes through the Help to Buy (HtB) scheme.

The Study highlighted that one large housebuilder, following the changes to the planning regime in 2012 was able to build out the strategic land bank it held at the time, thereby realising the greater returns associated with buying land without planning permission, before it then benefited significantly from increased HtB-driven demand; c60% of the homes sold by that housebuilder in 2018 were supported by that scheme.

Specifically, it (Table A:1) computed that during the 2016-19 period inclusive the return on capital employed (ROCE) achieved annually by the 12 housebuilders was between 29% and 34%, whereas its mid estimate (Table B.4 of Appendix B) of their pre-tax nominal annual cost of capital was between 14.4% and 14.6%: the observed profit of the largest housebuilders was thus double their expected ‘normal’ profit.

The Study had earlier confirmed (para 4.105, planning working paper, see link above) that, typically, housebuilders expect to achieve margins in the range of 15% to 25% on residential development sites, equating to approximately £46,000 to £77,000 per plot at average house prices.

It still concluded, nevertheless, that specific intervention (s) is not required to tackle such excess levels of observed profitability directly, as such intervention, according to the Study “could create an additional downward pressure on the number of houses being built, exacerbating the supply problems that have characterised this market over a long period”, because:

  • the housing market is highly cyclical and is impacted by external factors, including the wider economic climate;
  • profitability during the 2010s is likely to have been boosted by supportive economic circumstances and temporary factors no longer in evidence, in particular a prolonged period of low interest rates and the Help to Buy schemes’ support for first-time buyers;
  • there was significant variation in the performance of individual large housebuilders in the Study sample.

 2             Causes and consequences of housing market failure

The Study found that deficient housing supply and its affordability was propelled by, in effect, two (and a half?) key drivers:

  1. The nature and operation of the planning system;
  2. The limited amount of housing built outside the speculative approach (such as affordable housing, self-build, and build-to-rent), with private speculative build-out rates providing an additional (related?) factor insofar that it is both cyclical and calibrated to avoid impacting on market prices.

 Operation of the planning system

Insofar that a prior condition for building houses is possessing permission to build them, the Study found that the nature and operation of the planning systems is a key driver of the under-delivery of new housing at levels required to meet government targets and measures of assessed need.

That the number of planning permissions granted over the last 10 years across GB, and particularly in England, have been “insufficient to support housebuilding at the level required to meet government targets and widely accepted measures of need” was highlighted, with the number of units granted planning permission in England in 2022-23 falling to 269,000 after several years when permissions had exceeded 300,000.

The Study pointed that due to some applications lapsing because of viability or other reasons and the time lag between when a scheme is approved and when it is built out, achievement of the 300,000 target requires the number of applications approved each to exceed 300,000 to allow enough permissions to be banked over time consistent with the delivery target.

More broadly, the ability of the planning system(s) “to support the level of housebuilding that policymakers believe is needed”, is limited by its:

  • lack of predictability;
  • length, cost, and complexity; and the
  • insufficient clarity, consistency and strength of LPA targets, objectives, and incentives to meet housing need.

These problems, the Study added, may have a disproportionate impact on Small and Medium Enterprise (SME) housebuilders.

Four potential sources of unpredictability in the planning system were then pinpointed.

First, governments frequently use the planning system to implement new policies, most commonly environmental regulations resulting, in effect, administrative and policy overload on LPAs with limited resources causing consequent delay and confusion. Examples provided by the Study included nutrient neutrality requirements and biodiversity net gain rules in England.

Second, since the introduction of the National Planning Policy Framework (NPPF) in 2012, significant revisions have become more frequent in recent years, with the review process that starting with the 2020 Planning White Paper generating particular policy uncertainty at LPA and other stakeholder levels.

The most recent and, perhaps, notorious example was the December 2022 consultation on revisions to the NPPF, which, as this website in  and others warned would happen, has led some LPAs to delay or to even withdraw their Plans, and/or rescind previous application approvals.

The Levelling Up Secretary of State Michael Gove in a December 2023 Ministerial Written Statement announced the result of the government’s response to that consultation, in parallel publishing an updated National Planning Policy Framework reflecting the changes made.

In summary, the new 2023 NPPF, according to the government, is designed to: facilitate flexibility for local authorities in relation to local housing need, with the Standard Method (see below) for calculating housing need becoming an “advisory starting point” rather than a mandatory input for LPAs in their determination housing numbers; clarify a local lock on any changes to Green Belt boundaries; safeguard local plans from densities that would be wholly out of character; free local authorities with up-to-date local plans from annual updates to their five-year housing land supply and remove buffer requirements, save that a 20% buffer  will still be applied if Housing Delivery Test targets are not met; limit the practice of housing need being exported to neighbouring authorities without mutual agreement; bolster protections from speculative development for neighbourhoods that develop their own plans; support self-build, custom-build and community-led housing; and cement the role of beauty and placemaking in the planning system.

The 2023 NPPF also retained the 35% uplift to the assessed housing need for the 20 largest towns and cities in England and the requirement that it should be accommodated within those cities themselves, except where cross boundary redistribution agreements are in place.

According to the Study, the uncertainty arising from this latest review process have yet to be resolved, with many changes proposed to be rolled out gradually on a ‘test and learn’ basis.

Although it did not highlight introduction of the Infrastructure Levy (IL) by LURA that measure provides a prime case in point of planning reform generating confusion and uncertainty with its associated ‘test and learn’ issues risking potential and substantive future policy planning blight, as this website in Going around the Mulberry Bush  discussed in detail.

In February 2024, the UK government announced further changes focused on encouraging brownfield development, including a new consultation on changes to the NPPF involving introduction of a presumption in favour of brownfield residential development where a LPAs HDT result is both below 95% and it is one of the 20 LPAs in receipt of the 35% urban uplift, and a change that would expect all LPAs to give significant weight to the benefits of delivering as many homes as possible, and to be flexible in applying policies or guidance on the internal layout of developments, especially again in relation to brownfield land proposals.

There have also been significant recent changes in Scotland and Wales over the past few years.

Third, there is a lack of up-to-date Local Plans (LPs), especially in England, where on 31 December 2021, less than 40% of LPAs had updated their plans in the last five years. 22% had not either adopted a plan for more than 10 years or had no plan in place.

Updating a plan is a complex and lengthy process, with DLUHC estimates suggesting that the average time taken to produce a local plan is seven years involving substantial time and other resource costs.

The Study was told by some LPAs told us that they had difficulty getting plans adopted for political reasons, especially where the plan might require the release of green belt land to meet housing need, with analysis presented showing that the LPAs with either a significantly outdated plan, or no plan at all, typically have much higher percentages of greenbelt land within their boundaries (see Table 6.8, further evidence document).

The Study advised that LPAs with out of date or no plans  tend to the same ones that undershoot their Housing Delivery Test (HDT), (Table 6.5, further evidence document). The presumption of sustainable development ceases to apply to speculative applications where an LPA is not delivering more than 75% of its assessed housing need target, as it does where the LPA’s LP is out of date and/or where it cannot demonstrate a five-year housing land supply (5YHLS), subject to the changes made in the 2023 NPPF.

As way of background, the 2018 updated NPPF introduced both the centralised Standard Method (SM) to assess housing need and the HDT.  The SM is a baseline formula used to identify the minimum number of homes expected to be planned for in a way which addresses projected household growth, affordability and, in some cases, any urban uplift required by the 2023 NPPF.

It identifies a minimum annual housing need figure to be used in the HDT, not a housing requirement figure, which the individual LPAs are expected to define themselves.

HDT targets cover a three-year period with specific values set and calculated for each year, based on the lower of either the need level set out in an up-to-date Local Plan (LP) or the SM assessed need level. Where the LP is not up to date, as is the case for the majority of English LPAs, the HDT should assess local delivery against the local SM assessed need figure.

In short, significant underperformance of housing delivery against targets is limited to a relatively small number of LPAs, relatively highly concentrated in certain areas of the country, particularly in the South East, the East of England, and the London regions.

The Study cited its own analysis that 51 out of more than 306 LPAs (17%) in England achieved less than 75% of their need based HDT targets in 2021, whereas 214 (or 70%) of LPAs achieved more than 95% of their housing need.

The majority of the areas that achieved less than 75% (37) are located in the South East, East of England and London, with LPA performance in the HDT remaining broadly consistent since 2018 (see Table 6.1, further evidence document). The above, of course, are the same areas where supply deficiency and affordability problems and the population are most concentrated (see section 1).

The Study further found that LPAs with the highest delivery against their housing targets tend to process a higher number of applications relative to their housing stock; approve a higher proportion of those applications; have a lower proportion of their rejection decisions appealed; and lose a lower proportion of appeals, with converse being the case for LPAs with the lowest delivery against their housing targets.

Fourth, political and public attitudes to development are frequently expressed through the planning process. Residential development has become increasingly politically contested, delaying, and making harder timely Local Plan making and planning application determination, to the point that development applications and investment are discouraged.

The Study did, nevertheless, find that the strongest existing sanctions for LPAs to prioritise housing delivery exist in England, where a presumption in favour of sustainable development (due to the NPPF) comes into play if targets are not met. Housebuilders therefore have greater rights to have applications approved, compared to Scotland or Wales, where no equivalent incentive is in place.

Protected land or geographic constraints can undercut that presumption, however. Across many areas of England (footnote seven of para 66, NPPF), designated local green spaces, areas of outstanding natural beauty, national parks, heritage coast, irreplaceable habitats, heritage assets (and other heritage assets of archaeological interest), and areas at risk of flooding or coastal change, as well as designated green belt land are specifically excluded from the presumption.   The North West of England (53.1%) and the South East of England (49.6%) have the highest proportion of protected land in England

 The Study went on recognise that when all is said and done the planning system(s) was and is in large part designed to ensure that local preferences are incorporated into decision-making – adding the cavil that this does not necessarily lead to consistent decision-making at a local level.

Given that and “the wider policy trade-offs and complexities that are inherent in planning system design and operation”, the Study decided that it would be inappropriate for the CMA to make specific recommendations to governments about how such trade-offs should be made.

Rather, given “the vital role that (planning systems) play in shaping market outcomes” it offered options to make them more predictable and less costly, lengthy and complex for housebuilders.

But it left it up to governments to “consider whether the (associated) trade-offs with wider policy objectives are worth making, in the context of their overall objectives for the housing market”.

These are set out in Options 2.1 to 2.7, Appendix B.

To give a flavour of these planning options, Option 2.1 defines the features that would mark an effective methodology more likely to result in a local target that accurately reflects need:

  • ease of understanding – ensuring that the assessment of housing need is easily implementable and has results that are readily understood, will allow for national and local targets to be more readily accepted and outputs to be more easily disseminated;
  • using reliable evidence – using up-to-date and robust evidence will ensure that the target will more closely reflect current housing need. In addition, using evidence from credible and, where possible, publicly available sources will help ensure that the results are more easily understood and accepted;
  • regular assessment – regular calculation of the housing target will help to ensure that the target is as accurate as possible; noting, however, that LPAs need a degree of stability in the national target so that they can effectively plan to deliver their local housing target for the medium and long term. Updating the target too frequently could lead to increased uncertainty at a local level, as well as the national and local target losing credibility. To achieve the right balance, the target could, for example, be updated whenever updated national household projections are available, but no more frequently than this;
  • unadjusted outputs – noting that housing policy is a matter for governments and incorporating aspects of policy targets, such as brownfield land use, may be an appropriate way of achieving policy aims. However, reducing the incorporation of other policy aims in the methodology through adjustments will result in the target becoming less reflective of underlying housing need. Therefore, such adjustments should be kept to a minimum with limited scope for discretion for the governments in making such adjustments.
  • local alignment with national target – limiting local deviation from the agreed methodology will result in local targets that are more closely aligned with the national target.

Appendix B should be consulted for detail on the other options that the Study presented.

Wider operation of the speculative housing system and associated build out policy issues

The Study largely echoed the Letwin Draft Report analysis in concluding competitive pressure to supply homes at a rate that exceeds the current local absorption rate was weak, “limiting the number of homes that are built over a period, removing potential downward pressure on local prices”.

Letwin’s investigation into 15 very large sites in areas of high housing demand found that their median build out period from the moment when the house builder has an implementable consent is 15.5 years; or put another way, the median percentage of a site built out each year on average through the build out period is 6.5%.

It pointed out that across the large sites of over 1,500 dwellings that it examined the revealed market absorption or build out rate went on to limit the corresponding scope to provide cross-subsidies between the units sold at market values and the affordable dwellings, consequently retarding the rate at which housebuilders can and will build out the affordable housing that may be required by any applicable affordable housing Section106 (S106) agreement.

The CMA Study put forward Options 2.8 to 2.10, Appendix B to support a higher build out rate.

Under Option 2.8, LPAs could require increased diversity of tenure for larger sites to be granted planning permission, including raising the proportion of affordable, build to rent or custom build homes on sites.

Increasing the wider diversity of housing tenures (sub-tenures?) aimed at different sub-segments of the market, could consequently allow for more homes to be absorbed within the local market “without housebuilders needing to reduce the prices of the housing they produce for the private market, thereby improving the speed of housing delivery”.

LPAs could also publish their policy on housing tenure requirements, meaning that they are known by housebuilders and reflected in land transactions.

Such a requirement could be decided and operated in a similar way to LPA policies on affordable housing and developer contributions. The Study noted that the Letwin Final Report recommended a similar measure for developments providing over 1,500 dwellings, not then taken forward by the UK government.

With Option 2.10, LPAs could require housebuilders to increase the diversity of the types of homes (type, size, style, design, rather than tenure?) that they build on larger sites.

Sites with greater diversity of types may build out more quickly “as the varying types of homes entering the market are more likely to appeal to different sub-segments of the market and therefore such sites are less constrained by the local absorption rate”.

It went on to caution that were to support a higher build out rate the UK, Scottish, and Welsh governments to pursue these options that they should pay regard to the following considerations:

  • requirements for housebuilders to deviate from the profit-maximising level of site diversity could impact on viability and the number of sites developed;
  • to build a greater amount of affordable housing would likely require additional public funding, as such housing is sold to registered providers who are, at least in part, funded by government grants;
  • as with obtaining developer contributions, site diversity requirements must be consistent and not complex, as this would increase uncertainty and create delays in the planning process.

The Study concluded, however,  that whilst housebuilders could increase the rate at which they sell speculative homes by offering them for sale at lower price, as the number of homes that housebuilders can build (and therefore sell) in an area in the short to medium term is inherently limited by the planning system, “lowering their prices is more likely to bring sales of these homes forward in time, rather than increasing their overall sales over the medium term”.

Once a housebuilder has built out and sold the homes it has planning permission for in an area, it cannot simply sell more homes. To increase sales further a housebuilder must first obtain additional planning permissions, which, as the Study reiterated, is a lengthy and risky process, meaning that over the longer-term, “supply will depend on the extent to which they can get hold of further land with planning permission in the area”.

Yet, its overall conclusion was even if policymakers made the changes the Study proposed (as set out in Appendices A and B) “the market may still fall short of delivering the quantity of homes, supporting a level of affordability”, that policymakers find acceptable” because:

  • market outcomes are heavily influenced by external factors, such as interest rates, mortgage availability, the rate of new household formation, by demographic change and by the level of household incomes; and
  • market cyclicality and the speculative housebuilding model means that private housebuilders do not collectively have the necessary incentives to build houses at the rate required to meet policymakers’ objectives.

The Study went to say while it is open to policymakers to deliver change through more fundamental interventions “that go beyond the way in which the market itself works but would have a significant impact on the quality and affordability of new homes being built”, such interventions often come attached with “fiscal and policy implications”.

It accordingly declined to offer recommendations or specific policy options, but did identify areas of potential intervention because, “without them our analysis of this market and the potential outputs it can deliver would remain incomplete”.

These covered the encouragement of non-speculative housebuilding models, including self- or custom-build homes.  CMA, therefore, looked to the UK, Scottish, and Welsh governments to significantly increase their delivery of publicly funded housing by local authorities or housing associations to “supplement the absolute number of houses provided by private sector housebuilders, whilst incentivising housebuilders of these types of homes to deliver homes at a faster rate than under the speculative model”.

Governments “could consider” also a more active role for the public sector in the purchase and assembly of land for development. This the Study suggested could be achieved by granting LPAs additional powers to purchase land and/or to generate revenue to support development or through Community Land Auctions.

It further noted that the Letwin review recommended the establishment of more local development corporations with strong compulsory purchase powers and the ability to raise finance to fund local infrastructure.

In that light, the Levelling Up and Regeneration Act (LURA) since its enactment in October 2023 provides for LPAs to apply for a direction from the Secretary of State to permit Compulsory Purchase Orders to be used for specific projects in the ‘public interest’, such as education, healthcare, or affordable housing, without compensating the landowner for the potential uplift in the value of the land associated with the land being granted planning permission (hope value).

Alternatively, the Study went on, across GB, expectations of higher build-out rates could be reflected in national planning policy and in local plans. LPAs could set the build-out rate it expects housebuilders to achieve and be provided with greater enforcement powers where housebuilders undershoot the required build-out rate.

In addition, the UK, Scottish, and Welsh governments may “wish to consider” measures to increase housing demand, but should then have regard to the following principles:

  • stimulating demand without addressing the shortage in supply may cause house prices to rise. Therefore, implementing measures that increase supply would also be needed need to mitigate the risk that the gains from demand-side interventions accrue primarily to housebuilders and other sellers rather than buyers;
  • measures that seek to stimulate demand among certain groups of customers reduce the incentives on housebuilders to reduce their prices to attract those customers, or to attract other customers. Any intervention should therefore be carefully designed to “target those potential purchasers who would not otherwise be able to purchase a home”;
  • schemes that reduce the deposit requirement buyers face will also reduce the equity those buyers have in their home at the time of purchase, leaving “such buyers vulnerable to future mortgage and house price movements, with negative equity more likely”.
  • any demand-focused scheme will inevitably be temporary, risking unintended consequences, “including creating winners and losers among different groups of house purchasers over time: an important temporal aspect to consider when designing such a scheme”.

 3     Review and assessment

 The Study provides a comprehensive, evidenced, and useful policy commentary (well worth careful reading for its informational and review value), rather than – as might be expected given the CMA’s formal remit to promote competition and to protect consumers – a focused technical dissection of the housebuilding market from an economic, consumer welfare and competition perspective.

Consequently, sometimes it reads more as a policy critique and reform commentary than a market analysis, written by a specialist campaigning organisation or a think tank, reprising key elements of the government’s 2019 Housing and 2020 Planning White papers, and other recent government reviews, notably the Letwin Review.

Accordingly, the Study has already been criticised by some as straying outside its territory by “not minding its own business”, indulging in wishful aspirational group-thinking distracted by well-meaning and often frequently put well-rehearsed generalisations covering the firs area of concern it identified – producing more homes overall, particularly in the areas of highest demand – that risk gathering dust within the corridors of Whitehall rather than acting quickly and directly on the policy dial.

Indeed, a danger is discernible that policy focus is thereby diverted away from its key recommendations it made to government concerning improving consumer protection and information arrangements and the private management of estates (covering the second and third of the areas where the Study identified that government intervention was required to deliver better outcomes), potentially distracting attention away from evidenced reforms and action that the CMA could and should effectively progress itself with central government, squarely within its statutory remit.

Although invariably the Study’s analysis and conclusions made from an objective technocratic standpoint are perfectly sensible and correct, it (perhaps necessarily, and certainly understandably) neglected the political force and dimension of the reasons (largely political economy based) giving rise to the problems that it identified and their constraining effect on effective remedial public action.

For example: national housing targets should be set “in an objective way that better reflects need in a more certain and consistent manner to avoid the counterproductive confusion and uncertainty of recent years, underpinned by a methodology that is easy to understand that uses reliable and up-to-date information, and is assessed at regular intervals to ensure it remains reflective of need with the government provided limited discretion to adjust the original calculation”.

As the last section recorded, the Study went on to suggest using demographic projections as a default regular mechanism to update need assessments. These, however, can fluctuate depending on the assumptions applied, resulting in large swings in local figures that require dampening or, in other words, the exercise of central government ‘discretion’; moreover, it is far from clear that such ‘a predict and provide’ indicator subject to uncertainty is the best one to use.

It probably would have been more helpful to systematically tabulate the different possible ways that local housing targets could be constructed, their pros and cons and other salient considerations, rather than just plump for one option in an ill-considered way.

The overall objective to make local target setting more consistent and certain makes perfect sense but is one hostage to politically disruptive events, inevitable in a competitive political democracy subject to the political economy characteristics of the UK, and of England especially.

One such disruptive event was the 2021 Chesham by-election when the Conservatives lost to the Liberal Democrats in a campaign coloured by concerns of additional housing adversely impacting on the local environment and the quality of life of a generally well-heeled population. It practically acted as a death sentence on the 2020 Planning White Paper.

Likewise, the December 2022 NPPF consultation and the subsequent December 2023 changes cannot be divorced from government political electoral concerns that similar affluent seats across the ‘Blue wall’ of the London environs – including the Surrey Heath seat of Micheal Gove, the current Secretary of state – could be lost at least in part due to similar concern.

Key political economy characteristics other than Nimbyism and the associated tension between local democratic preference and the levels of central compulsion needed to secure nationally set objectives, include the real fiscal crisis of the state, lack of institutional capacity at both central and local levels, as well as the time divergence between the short-term concentrated cost and political pain of planning and other housing reform measures versus their long-term diffused benefits. A tension that can undermine and discourage the levels of sustained political focus needed for desired change to be effectively and substantively actuated.

A more fundamental criticism of the Study was its choice to focus on the extent that housing need is being met as the key metric of effective supply delivery. This comes across as mixed up, big time given that its purported focus was the housebuilding market.

In short, there is no reason why speculative housing market should deliver supply sufficient to meet normatively defined levels of housing need rather than effective demand. Many in housing need will be unable to afford or access the speculative market; and put simply, private housebuilders cannot be expected to act as housing charities.

That is not to say that it would be more economically and socially optimal for private housebuilders to migrate down the value chain and make a more diverse tenure and type offer, consistent with Options 2.8 and 2.10 that the Study advanced (see previous section).

It should have logically gone further and concluded that unless the share of such housing approached 50%, neither the 300,000 nor an alternative target based on housing need will be met.  But, as noted earlier, the Study concluded instead that while this might bring forward additional housing supply, overall, it would not increase numbers in total as these are constrained by the planning system and its ability and capacity to generate sufficient additional planning permissions. That, however, does not necessarily follow.

Indeed, at a practical policy level, the achievement of a sustainable stable and less volatile annual new supply level of 300,000 dwellings in England presupposes a much-enlarged state-enabled housing sector providing or enabling at least 100,000 dwellings a year, whether of social rented or intermediate sub-tenure: 50,000 more or broadly double than the average level of affordable gross supply achieved over the last decade, (see, Annex Table Four ) 

The Study itself reported that, since the Second World War, private developer output has fluctuated between roughly 150,000 and 200,000 dwellings per annum, implying that between 100,000 and 150,000 of a 300,000 total target will need to be met from other sources.

Not only would increasing the share of affordable housing (or requiring it to be built earlier) increase the supply of affordable housing sooner but such an intervention could encourage LPAs to approve applications in the first place.

Also, if the 300,000 target is to be attained, schemes of 2,000 homes of which 1,000 are affordable need to be approved rather than 1,500 homes of which 500 are affordable.

A connected conceptual problem with the Study was that its twofold diagnosis of deficient housing supply and affordability – the nature and operation of the planning system and the limited amount of housing being built outside the speculative approach (such as affordable housing, self-build, and build-to-rent), alongside with too low private speculative build-out rates– was sometimes likewise confused.

Subsequent media attention has largely focused on the emphasis the Study gave to the negative impact of the planning system on market outcomes and the resulting need for the system(s) to be made more predictable and less difficult and costly to navigate, and on occasions the Study seemed to assume that  the planning system provided the overarching problem and that its reform would provide the needed remedy to systemic housing under supply.

Yet it also emphasised that the private speculative housing market due to its particular and developed characteristics and its sensitivity to wider macro-economic conditions meant that model was intrinsically incapable of meeting societal objectives.

In the view of this website, it would have been more intellectually honest and potentially more impact effective (as well as more in accord with its remit) for the Study to highlight that an incremental and partial shift to a contracting rather than speculative provision model was a necessity  if policymakers declared objectives are to be attained, referencing that conclusion to robust and evidenced demonstration of housing market multiple failure.

Such a shift should increase the market absorption rate as well as both total and affordable housing supply. Known public purchases of affordable housing should involve a far lower profit rate than is currently levied and expected on speculative housing as housebuilders would no longer be subject to demand risk, although they would still be subject to some economic risk concerning construction and other costs.

But the levels of expanded public supply consistent with the attainment of the 300,000 target will require additional public funding, bringing it into conflict with the real fiscal crisis of the state: the unwillingness of governments to raise or commit to levels of needed social expenditure due to unwillingness to tax or borrow the necessary sums.

That crisis is not simply a reflection of real economic or financial constraints but also one of underlying denial that UK governments can both achieve desired social objectives based on citizen expectations of service delivery and quality as well as pursue the goal of low taxation.

But the Study, when recognising that the supply share taken by government-supported affordable housing must increase if supply targets are to be met, qualified that conclusion by recognising the policy and resource trade-offs involved, including increased public grant support versus wider macro-economic and public finance imperatives and increased developer contributions versus scheme viability considerations. In other words, it soon reverted to bureaucratic caution, pulling its punches.

So, on one hand, the Study went on ‘right-on’, boldly arguing on the primacy of housing need – as one would expect Shelter and Crisis to do – while, on the other, it then shied away from following the hard policy implications of that chosen approach.

The need for increased affordable housing and social rent has been previously advanced not infrequently by parliamentary Select Committee findings (often populated by MPs in favour of lower taxes and fiscal prudence), that then attract an invariably anodyne governmental response.

Certainly, the issue that must be understood and tackled is, why successive governments of whatever political colour, despite widespread cross party and public support for more affordable housing, have failed or felt unable or unwilling to act in the manner recommended by endless parliamentary committees, successive commissions of the ‘great and good’, as well as much of the mainstream media.

It would have more useful and pertinent for the Study to have queried the seriousness of intent of the UK government’s supply target; in short, is it simply aspirational or, put more cynically, an example of “wishful verbiage” (as a recent commentator put it in a wider political context) rather than a public policy objective backed by real political, financial, and institutional commitment.

If the former, the Study will be one of many that in the past and no doubt in the future that has or will say much the same things, without any or little policy impact, as this website’s earlier submission to the Study, tracked.

Of course, the CMA cannot directly intrude into the sphere of macro-economic and public finance management, but simply recognising such fundamental trade-offs hardly takes matters further.

Rather it behaved more like a pressure group facing both ways. By taking assessed housing need as the correct determinant of target setting – even though, as described earlier, that most studies indicate that would require substantial upward revision of national and local targets (above the national 300,000 level).

Such upward revision, however, would involve further methodological and process change – the same that the Study cautions against on planning certainty grounds and, in any case, would prove an exercise in futility insofar there is no prospect of a higher target being anything other than aspirational in the current and foreseeable policy environment.

The Study also at the same time seemingly ‘swallowed’ developer takes on profitability, viability, and the relationship of the second hand to the new home market.

While the much larger second-hand market (c90% of purchases) may put a partial lid on new build prices in particular locations and contexts, the new build and the second-hand market are not one and the same (perfect substitutes).

Many the housebuilders migrate up the value and price chain and as the Study itself highlighted the new build market has been underpinned by government interventions, most notably in the past by the HtB; nor should the impact of the information imbalances between housebuilder and new build purchasers be under-estimated.

Indeed, the Study itself noted the existence of a new home premium (perhaps 5% in some locations). Its figure 9.1 (supporting evidence document) suggests that during the upward part of the house cycle that premium increases.

The circularity of the argument that reducing housebuilder profits will or may reduce development viability should also be understood.  This is true only to the extent that c20% profit levels are treated as a fixed parameter – predicated on an assumption that they are a necessity – reflecting the characteristics and failures of the market as currently configured.

A six or seven per cent profit level rather than one in the 15% to 25% range represents a difference in price of between £30,000 and £50,000 per home for a home valued at c£300,000, making a big difference at the margin on affordability levels.

Many housebuilders have emphasised that policy certainty and clarity was more important than, for instance, the existence or the level of housing contributions, which they could then factor into their business plans and plan and respond accordingly.

The Study itself also identified evidence that developer contributions could be increased especially on greenfield sites, suggesting that a more consistent and certain approach could induce such an increase.

The fly in the ointment that remains is the associated need to underpin such a partial shift to a contracting model with increased public grant and policy support within the real fiscal crisis of the state, perhaps explaining why the CMA felt that a focus on the planning system was more expedient and more immediately policy relevant, notwithstanding the case made above that is was not intellectually robust  and consistent – cognisant of the prospect that planning reform has been declared as representing an early priority of a new Starmer-led government. That choice is revealing, perhaps, of prevailing civil service attitudes during what is likely to be a political transition year.

4             What should the next government do?

The political and policy challenge is to select and progress the line of least resistance to effectively reform Britain’s flawed institutional housing model, done in such a way that puts both total and affordable supply onto an upward trajectory to a sustainably higher and less volatile level more aligned to national economic and social needs.

The working assumption made here is that a new Starmer-led government, elected sometime in the autumn/winter of 2024-25, facing an immediate economic and political imperative to boost growth sooner rather than later to safeguard and release resources for necessary and vital public service provision and reform without increasing headline direct tax rates, will prioritise planning reform.

This in line with Starmer’s stated commitment that the government will “build rather than block” to support the provision of 1.5 million homes – equivalent to 300,000 homes per year – during the lifetime of the next parliament.

Indeed, it appears that Labour hopes that planning reform by generating a recovery and increase in housebuilding will kickstart the new government’s attempts to achieve higher growth, sidestepping the constraints on additional public investment that the debt reduction component of the fiscal rule framework (public debt as proportion of gdp will fall within five years) will impose.

Rachel Reeves, in her March 2024 Mais Lecture, confirmed the set fiscal rules as central to achieving macro-economic security and stability – the essential states of sustainable steady production-rather than debt-fuelled growth, in her economic worldview.

An alternative view and context is set out in his MainlyMacro blog (Tuesday 26th March)  by an economist who has been instrumental to fiscal rule development, pointing out further that capacity material and labour constraints – likely to especially acute within the housebuilding industry (something that the CMA study omitted) –  actually requires private consumption to be dampened by across the board tax increases.

The inevitable and potentially prolonged time lag (before any planning reform translates into building activity, and certainly into completed homes) translates into growth and productivity outcomes, presents an immediate problem.

That underscores the need for the new government to act quickly, decisively and with laser-like focus, notwithstanding the incessant competing pressures and priorities that it will inevitably face.

If it doesn’t, any prospect of Labour achieving its housing target will be hobbled at the start. On the 300,000 target itself, it is fair to say that it is a figure that has little or no evidential basis, whose virtue seems to be that it is a convenient round number, higher than current supply performance, which has been achieved in the past.

The location, type, and affordability of dwellings provided (composition) are as least, if not more important, than the bald total. The reason, of course that governments, or oppositions expecting to be the next government, do not disaggregate the supply target down into an affordable component is because their insufficient public housing investment would be exposed.

That said, the set target is understandable and visible and, if assumptions are strained to breaking point, potentially achievable – at least temporarily or fleetingly during the peak of the housing cycle.

Yet its current definition is unrealistic. Insofar that it unlikely that net new supply during 2024-25 and then 2025-26, will exceed 250,000 dwellings, a shortfall against that target will start to clock up from the outset. That new supply completions by 2029-30 will be closer to 400,000 than 300,000 (reflecting start levels of that magnitude during 2026-28), sufficient to offset early under performance, is simply not credible.

The lack of effective critical scrutiny is depressing. Even more so, it suggests, that Labour’s commitment to build 1.5m homes is for political show rather than made in serious intent.

Certainly, whether that is an unfair and unfounded accusation will become apparent soon enough. Unless its target is supported both by a committed strategy, detailed policies, and annual plans (very much a ‘Mission’ approach, echoing the committed efforts of early post war governments to achieve 300,000 new homes annually), it can be safely assumed that Labour’s target, as was the Conservatives, will remain an aspirational sop to ‘polite society’ rather than a ‘blood and guts’ political programme.

That Mission should be all encompassing, covering not only New Town and Urban Extension policy and planning, LPA empowerment, the declassification of ‘grey’ green belt land, and affordable housing, but also flats above shops/pubs, transport node densification, and community housing.

The shadow housing spokesperson has promised the imposition of “mandatory targets that bite on individual local planning authorities”.  Settling on what objective sustainable basis they are to be set at a local level itself will take time, given consultation requirements, as would other associated changes consistent with it, such as the conditions when Green Belt land can be used for housing, some of which, such as co-operation with other LPAs, may require primary legislative amendment to LURA rather than NPPF revision (the author of this post is not a planning expert and expects the Shadow Levelling Up and Housing teams to be fully engaged now in working through these issues ready for alternative government detailed engagement with the civil service) .

Rather than getting hang up on what demographic projections should be used, simpler metrics such as local affordability and past delivery (perhaps measured by delivery of additional housing per 1000 dwellings could be used, if possible.

But Gove’s December 2022 changes (Gove changes) should be rescinded with best possible alacrity and replaced with emergency guidance that LPAs in future will be expected to deliver locally housing volumes that summed across the country are consistent with the achievement of the national 300,000 target with some additional buffer provided, covering the points below and others.

LPA’s that have paused Plans or rescinded planning approvals in the wake of Gove changes, should be individually instructed to resume Plan-making in line with that target, as should LPAs without an up-to-date Plan, and given a deadline to do so, monitored by the DLUHC, or whatever its successor may be called. Rescinded approvals should be revisited in line with the new guidance again within a deadline, which if missed will mean that determination by the Independent Planning Inspectorate.

Securing change working with such ‘reluctant soldier’ LPAs will not be easy. However, it is best to take any political pain in the early period of government, necessary in any case because of the timelag issue, as identified above.  Any ‘Chesham’ effect will be better withstood earlier than later in the government’s lifetime.

The CMA Study, indeed, provides civil service and administrative cover and support for such actions and thus now provides a timely and useful resource.

LPAs should be given every possible encouragement and incentive to deliver additional housing sooner rather than later whether through mechanisms, such as the New Homes Bonus, infrastructural and other financial support, the expeditious approval and support of New Town Local, and other Development Corporations where appropriate, and though linkage to measures more specifically designed to increase affordable housing, such as lifting local borrowing caps and the use of CPOs,  as well as the reinstatement of 100% receipt recycling, especially across areas where additional housing is both most needed and most likely contribute to productivity enhancement.

Then, of course, the overarching real fiscal crisis of the state overarching constraint could bite. Yet, public infrastructural investment in transport and sometimes other supporting social infrastructure, will invariably be required to pump prime private housing development investment in relation to large scale schemes.

These include the Oxford-Cambridge corridor, New Towns and urban extensions, and transformative brownfield urban developments, such as along the Thames estuary.

The same point applies to the necessary shift away from the private speculative towards a more towards a more public contracting partnership model, where upwards to 50% of the annual 300,000 additional housing target is affordable, custom-or built to rent.

Without such a shift, the 300,000 target, cannot and will not be met. It will require, however, some additional public funding support and guarantees that, in turn, will need to be an integral part of the 2025 Comprehensive Spending Review process.

It must be understood that if funds are not apportioned to public infrastructure and housing investment, neither the new government’s overarching economic nor its housing objectives will be met. As such it will provide an early test of the pragmatism – both in wider economic as well as political terms) of the application of Labour’s fiscal rules, as well as of its housing policy.

In planning policy terms, early planning guidance could provide a nudge in that direction by indicating an expectation that 50% of additional new supply should be locally affordable, whether officially defined as such or targeted to home buyers at lower quartile prices. Early delivery of affordable housing within large schemes along the lines that Letwin advocated should be put in train.

Creating a fast-tracked route for in-principal approval for applications that are in line with an adopted local plan, providing housebuilders with greater certainty to begin development, could also enter the policy menu.

Appendix A

Preventing the proliferation of private management arrangements on new housing estates

Recommendation 1.1: Common adoptable standards

The UK, Scottish, and Welsh governments each implement common adoptable standards for public amenities on new housing estates.

Recommendation 1.2: Mandatory adoption

The UK, Scottish, and Welsh governments each implement mandatory adoption of public amenities on new housing estates (outside of minor, well-defined exceptions).

Providing greater protection to households living under private management arrangements Recommendation 1.3: Enhanced consumer protection measures

We recommend that the UK government, in consultation with the Scottish and Welsh Governments, introduce enhanced consumer protection measures, underpinned by a robust enforcement regime, for households living under private management arrangements. Recommendation 1.4: Prohibition of new embedded management arrangements

The UK, Scottish, and Welsh governments each prohibit the establishment of new embedded management arrangements.

Recommendation 1.5: Guidance for residents’ management companies

We recommend that the UK, Scottish, and Welsh governments each provide guidance to members and directors of residents’ management companies to support and enable them in effectively managing the amenities on their housing estates.

Quality of new homes produced and service provided by housebuilders A single mandatory consumer code and the New Homes Ombudsman Scheme

Recommendation 2.1: A single mandatory consumer code

The UK government, in consultation with the Scottish and Welsh Governments, develops and approves a single mandatory consumer code for all housebuilders operating in GB. Recommendation 2.2: New Homes Ombudsman Scheme

The UK government, in consultation with the Scottish and Welsh Governments, activates the New Homes Ombudsman Scheme.

Eliminating drip pricing and providing greater clarity to buyers regarding the true cost of their new home

Recommendation 2.3: Prohibition of drip pricing

The UK government, in consultation with the Scottish and Welsh Governments, establishes a specific banned practice on the drip pricing of all mandatory elements of a new home, as well as other charges that are presented as ‘optional’ but which it is reasonably foreseeable that most consumers would have to pay, even if others could avoid them.

Recommendation 2.4: Disclosure of optional extras

The UK government, in consultation with the Scottish and Welsh Governments, requires that where housebuilders present consumers with genuinely optional extras as a part of the purchasing process, these optional extras and their prices are prominently and fully disclosed alongside the headline price.

Developing an independent single consumer satisfaction survey and publishing key quality metrics

Recommendation 2.5: Single consumer satisfaction survey

The UK government, in consultation with the Scottish and Welsh Governments, requires an independent body to develop, maintain and undertake a single consumer satisfaction survey on the quality of new homes and the service provided by all housebuilders.

Recommendation 2.6: Publishing key quality metrics

The UK government, in consultation with the Scottish and Welsh Governments, requires housebuilders to participate in the survey, display their key quality metrics to consumers, and share this information with an independent body for public dissemination.

Appendix B

Reforming the planning process

Option 2.1: More objective and effective use of targets to ensure housing need is met.

Governments are best placed determine an appropriate methodology to set a national housing target. In determining an appropriate methodology, the governments will need to consider: (a) how LAs could effectively align their local plan with the national target; and (b) whether and, if so, how the target should reflect the need to address existing levels of supply, as well as meeting future housing need.

Option 2.2: Effective monitoring and enforcement of local plans to encourage housebuilders to bring forward successful planning applications and build new houses.

  • LPAs should be incentivised to have an up-to-date local plan in place. Incentives could include: ringfencing funds that LPAs can use only if they have an up-to-date local plan in place;
  • making it more difficult for LPAs to reject planning applications if they do not have a local plan in place or if they do not have an up-to-date plan in place;
  • central governments taking over the decision-making authority in a local area until a local plan is in place and as a last resort, imposing a local plan on the LPA, noting that “this would go further than the government’s recently announced plans to drive an improvement in local plan production”.

Option 2.3: Streamlining the planning system to significantly increase the ability of housebuilders to begin work on new projects sooner and bring forward marginal projects which may have previously been non-viable due to the costs of taking them forward.

The UK, Scottish, and Welsh governments could consider the following options for streamlining the planning systems:

  • increasing the emphasis on local plans as the key means by which communities and their elected local officials decide the amount, mix, design, location, and overall standards of new housing in their area, rather than by reviewing planning applications on a case-by-case basis;
  • creating a fast-tracked route for in-principle approval for applications that are in line with an adopted local plan, so housebuilders have greater certainty to begin development;
  • formally reviewing the varied LPA schemes of delegation with a view to harmonising the complex set of rules and removing the use of Planning Committees for those applications which are broadly in-line with the local plan and/or which below an agreed threshold;
  • improving the appeals process, as informal hearing and written representations appeals can cause delays and have an adverse impact on the delivery of smaller housing schemes and on SME housebuilders.

 Improving the planning processes

Option 2.4: Clearly defining and rationalising statutory consultees to reduce the delay caused by the statutory consultation process.

 Option 2.5: Effective monitoring and enforcement of deadlines for statutory consultees so as not to unnecessarily delay the planning process.

Measures to support reforms to the planning systems and processes

Option 2.6: Improving LPA capacity and resource by raising planning fees to a cost reflective level and ringfencing those fees.

Option 2.7: Additional support for SME housebuilders through better guidance, standardised LPA policy and a simpler ‘outline’ stage of planning permission.

Measures to support a higher build-out rate

Option 2.8: LPAs could require greater diversity of housing tenure for larger sites to be granted planning permission.

LPAs could require increased diversity of tenure for larger sites to be granted planning permission by increasing the proportion of affordable, build to rent or custom build homes on sites allow for more homes to be absorbed within different sub-segments of the local market(s) without housebuilders needing to reduce the prices of the housing they produce for the private market, thereby improving the speed of housing delivery.

They could publish their policy on housing tenure requirements, meaning they are known by housebuilders and reflected in land transactions to be decided and operated in a similar way to LPA polices on affordable housing and developer contributions, noting that the Letwin  Final Report recommended a similar measure for developments providing over 1,500 dwellings, although it has not been taken forward by the UK government.

Option 2.9: LPAs could be incentivised by governments to increase the number of homes that are delivered through smaller sites.

The UK government’s NPPF requirement that LPAs should identify land for at least 10% of their housing requirement on sites no larger than one hectare could be strengthened to require explicit identification of the sites that will comprise this 10%, alongside regular enforcement of the policy. A similar policy could also be considered by the Scottish and Welsh Governments, to support SME housebuilders and increase housing delivery rates.

Option 2.10: LPAs could require housebuilders to increase the diversity of the types of homes they build on larger sites.

LPAs could require housebuilders to increase the diversity of the types of homes (type, size and style, design, rather than tenure?) that they build on larger sites. Sites with greater diversity of types may build out more quickly as the varying types of homes entering the market are more likely to appeal to different sub-segments of the market and therefore such sites are less constrained by the local absorption rate.

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Filed Under: CMA Study, Housing, Macro-economic policy, Real Fiscal Crisis of the State, Starmer Tagged With: CMA Study, housing, real fiscal crisis of the state

Starmer and the Spring 2024 Budget

16th January 2024 by newtjoh

In the wake of the May 2021 Hartlepool by election and the botched reshuffle of Angela Rayner, Keir Starmer was widely accused of possessing “no politics”: a competent bureaucrat innately lacking the ‘what it takes’ skill and instinct set to survive in frontline Westminster politics let alone that needed to climb Labour up its electoral mountain to power again.

That shroud of doubt has emphatically lifted. His last two years as leader has been marked by an increasingly assured leadership style, which while not capturing the nation’s imagination nor even enthusing a coherent vision or strategic interlocking policy map, has been a central feature of, if not instrumental to, Labour’s sustained and continuous electoral lead over the Conservatives,  seemingly big enough to win a large overall parliamentary majority later this year; a prospect that was hardly even imaginable in the aftermath of Labour’s 2019 electoral defeat.

Starmer has in the past compared himself to Harold Wilson. Parallels with Wilson’s election victory in 1964 are indeed discernible, not least in the replicated existence of a deeply unpopular incumbent Conservative government, mired in incompetence, corruption and sleaze; tired of, and waiting, if not begging, to be relieved of its responsibilities after 13 increasingly tumultuous and divisive years.

Both came from humble backgrounds with their meritocratic rises stemming from their understated ability, determination, and diligence, not performative charisma nor entitled confidence.

Although Starmer is lawyer rather than an economist and statistician, who grew up in a southern commuter rather than a northern mill town – Oxted rather than Huddersfield – their backstories were and are in keeping with the economic geography and the social spirit of their respective times, exuding lower middle England ambition and capacity for hard work, not upper-class privilege.

Differences, of course, there are. The UK in 1964 still benefited from a historically sustained and robust established pattern of economic growth sufficient to reduce the post war debt to gdp ratio (by increasing the numerator) and to provide additional resources to expand real wages, personal consumption, and public services.

It was one, however, that was becoming progressively prone to shallow recessions getting deeper, constrained by a worsening balance of payments problem that in era of capital controls and fixed exchange rates could not then be by-passed by foreign borrowing and sterling depreciation.

And, unlike 1997, when New Labour inherited from its predecessor a recovered and improving economic and public finance position, a new Starmer-led Labour government will inherit an economic legacy marked by a prolonged period of sustained stagnation of growth and productivity, a record peacetime-incurred debt/gdp ratio, and medium-term public finances predicated on the future withering way of the welfare state.

Unable therefore to rely upon an already established mixture of steady growth and modest inflation to deflate that ratio down, the task of a Starmer-led government will be made that much more difficult by  rises  (see debt increases chart) in interest-rate related debt servicing costs from close to one per cent in 2020-21 to four per cent of gdp in 2022-23, even should some stirrings of renewed growth begin to take root in the real economy.

Not only the debt-gdp ratio, but the tax to gdp ratio also stands at a record post war level. Although both were partly propelled by covid-related spending, their overarching driver is the reduced and stagnant post-2010 post-covid growth record that has become a structural feature of the modern UK economy.

The fiscal austerity of the Cameron/Osborne years hollowed out public service provision to the point that that future political space for further cuts was all but used up: that is without a risk of inducing an electoral backlash and assuming a future governmental willingness to further reduce the coverage and quality of universal public services through cutting into their bone.

Self-denying governmental ordinances and electoral promises not to increase headline direct tax rates combined with stagnant growth also meant that successive governments have had instead increasingly resorted to stealth sources of taxation and/or promises of future public expenditure cuts to meet an ever more frequently shifting and contingent set of fiscal rules.

The non-indexation of income tax thresholds is the most recent and egregious example of such stealth taxation. In March 2021, the standard rate threshold from 2022-23 to 2025-26 was frozen and not indexed to future inflation – as per the default statutory requirement – at £12,750  and the higher rate threshold at £50,270, which, in November 2022, was extended for a further two years to end 2028-29: just before the next election but one (if the next government serves a full five-year term).

The Office of Budgetary Responsibility (OBR) forecasted in November 2023 (see Table A of link) that this extended freeze, if unchanged, by 2028-29 will raise additional annual tax proceeds reaching c£35bn (£44.6bn, when similarly frozen National Insurance Contribution (NIC) and other thresholds are also taken into account): broadly equivalent, in revenue terms, to a 10% increase in the main rate of employee directly paid Class One NICs.

Freezing tax thresholds mean that rising inflation-related nominal and real earnings are not offset by thresholds indexed to inflation, resulting in progressively larger number of taxpayers paying more tax and national insurance.

That tendency known as fiscal drag, will tip, according to the OBR, 11% more taxpayers into the standard rate, and an eye-watering 68% more into the higher rate band consequently causing four million additional individuals to pay income tax at the standard rate and three million more to pay the 40% higher rate by 2027-28.

Such stealth taxation is a prime product of the real crisis of the fiscal state: the mismatch between the public expenditure requirements of the UK (assuming a continuing public desire and demand for accessible and universal public services on the European social democratic model) and the political and electoral willingness for them to be met through forms of taxation that are efficient, sufficient, and transparent.

The supposed fiscal ‘headroom’ that according to the chancellor, Jeremy Hunt, allowed him last November to cut national insurance, derived from the failure to index both tax thresholds and public budgets to inflation: stealth fiscal measures on both sides of the budget combined with dishonest and/or illusory promises to make substantial cuts to public budgets in the future made to meet a debt reduction fiscal rule, which, when the time comes closer, on past practice, will be shelved or reformulated and/or put forward further in the future – invariably beyond the next due election date.

Another facet of the real fiscal crisis of the state is that both Conservative and Labour parties have progressively withdrawn from offering the electorate meaningful choices concerning tax and public expenditure policy or welfare state (social policy) development; both have tended to mimic or to follow the other to rule out headline personal tax increases or any shift to alternative more economically efficient taxes on wealth and unearned income.

Honest and deep debate on public funding requirements matched to sources is accordingly swerved, invariably subverted to short-term political presentational purposes, causing the fiscal can and the ultimate resolving of the crisis to be forever kicked down the road and made worse in the process.

This may well reflect electoral reality. Whilst the voting public through polling data may collectively express an abstract desire for more to be spent on public services and even to pay more, when push comes to shove individual votes are more likely to be determined by perceptions of the immediate impact of tax measures on their short-term household budget positions.

Hallowed out public services also have diffused impacts. These include delayed justice, limited police interventions for some crimes, planning bottlenecks, higher hospital waiting lists, reduced mental health services, eliminated youth provision, more severely rationed adult social care, declining local bus services, and so it goes; the list is almost endless.

However, taken in isolation, such individual impacts are not usually directly felt by the mass of the population: at any one time, few of us tend to be directly affected by each at an intensity felt sufficiently hard to register an electoral response, (save for possibly health service access), compared to the short-term impact of tax changes affecting swathes of the population directly in their pockets. People of any age or period seldom, if ever, welcome or invite taxes, especially ones that weaken and disrupt their short-term budgets, including the author of this post.

For Starmer and Labour now electoral victory later this year is paramount. Failing to win a majority then would be even more calamitous than it was in December 2019 or in 1992. Labour’s current record poll lead and the general abjectness of recent Conservative governments would mean that it would be akin to a top of a league football team losing to one facing relegation, when 3-0 up with 20 minutes to go, which it needed to win to secure coveted promotion. Snatching defeat from the jaws of victory at all costs must be avoided.

Morgan McSweeney, an established and instrumental key Starmer aide now responsible for 2024 election strategy and organisation, reportedly advised Labour’s National Executive Committee (NEC) last November that the party would need to win at least 162 seats across every country and region to secure a stable working majority – more than Tony Blair did in 1997.

That – notwithstanding current poll leads, fortuitous political developments in Scotland following the partial implosion of the Scottish Nationalist Party (SNP), along with some evidence of favourable tactical voting behaviour occurring in recent by-elections across key middle England and Red Wall battleground seats rather than previously confined to metropolitan and university centres – remains a momentous task, leaving little room for accident, false steps, or complacency.

It underscores why fiscal responsibility and costed policy commitments has been and is the mantra coming from Starmer’s shadow cabinet, setting the limits to its retail electoral offer – a stance quite consistent with both the real fiscal crisis of the state and the electoral high stakes involved.

The Conservatives promise a low tax economy but cannot deliver nor present nor promise policies on the expenditure side consistent with the achievement of that outcome on a structural and sustainable basis.

Labour wants to repair and rejuvenate public services damaged by years of fiscal austerity, correct welfare and other injustices, and extend opportunity to the many, but cannot present and promise concrete policies consistent with such outcomes that would cost money not matched by identifiable tax increases that it cannot present for fear of the electoral consequences.

A new Starmer Labour government according to its current no unfunded service promises regardless of need or justification, will rely on future growth and lower interest rates to generate resources for such strategic purposes, much as the Conservatives now rely upon future but unrealisable public expenditure cuts to provide sufficient space for current and trumpeted future tax cuts.

The sources or drivers of such future growth, however, remain unclear and/or wishfully optimistic. Future falls in interest rates, determined as they will be the Bank of England’s Monetary Policy Committee (MPC), are likely to be gradual.

Starmer’s updated decarbonisation version of Wilson’s 1964 election rallying cry to harness the ‘white heat of the technological revolution’, the Green Prosperity Fund (GPF), already in recent months has been increasingly scaled back in ambition and scale, backloaded to the end of the next parliament with existing government spending included in its posited delayed annual £28bn budget, attached with requirements to lever-in at least three times as much private finance for each unit of direct public investment, and, potentially, most crucially, made explicitly conditional on its rolling out not breaching Labour’s set fiscal rules.

This is despite its flagship investment status, funded by capital rather than current spending, covered by the borrowing for investment fiscal rule component, and the apparent illogicality of making of making a key climate emergency, energy security, or even a growth-inducing programme subject and subordinate to the vagaries and uncertainties of a rigid fiscal gdp/debt rule.

Most economists with expertise in the area consider that such a rule is arbitrary and unnecessary, economically sub-optimal if not downright harmful at times when additional public investment is either vital or necessary, especially one calibrated to a fixed rather than rolling period, subject to wide short-term forecasting swings.

For example in this, a former Treasury and Oxford economist  – whose (free to access) blog for decades has consistently made the case for an economically rational fiscal policy –  advises that the sole fiscal target should consist of a five year ahead rolling target for the government’s current deficit (excluding public investment), not be attached with any additional targets, and it should apply only outside recessionary periods, while the OBR should be equipped with a stronger remit to police it.

The fiscal constraint is political rather than economic. Of course, any government, whether for populist or short term electoral or for ideological reasons, which indulges in patently unsustainable fiscal policies that elicits such a market unwillingness to purchase its bonds that it induces an upward interest rate spiral, will inflict often lasting economic and social costs and damage, as, in September 2022, did the short-lived Trussonomics debacle. A strong fiscal council institutional check, however, would provide a better defence to that outcome than a nebulous fiscal rule set.

At the end of the day, whether a fixed debt/gdp ratio rises or falls by small micro-percentage relative to gdp at some fixed time in the future without reference to the economic and other circumstances prevailing at that time, will have little or no effect substantive macro-economic effect: subverting the macro-economic and wider governmental policy framework, as a Starmer Labour government seemingly intends, to the mechanistic achievement of such a target over the lifetime of a parliament would simply be crazy, both economically and politically.

Similar considerations apply across Labour’s main other potentially growth enhancing programmes, most notably the housebuilding proposals and planning reforms that Starmer has put his personal stamp on.

These promise a fresh generation of fast-tracked new towns and urban extensions, brownfield schemes, and the expansion of affordable housing; indeed, all integral to the trumpeted achievement of a 1.5million new homes by the end of the next parliament target – an annual average of 300,000 new homes.

For that to have any remote hope of attainment enabling public investment will need to be front-rather than back-ended across the lifetime of the next parliament, freed from an incorrectly defined fiscal debt rule straitjacket.

Sight should also not be lost that net public investment as a share of gdp has fallen in recent years to what most independent commentators consider to economically inadequate levels. That outcome will not be reversed even if annual spending on the GPF did reach £28bn annually sooner rather than later in the next parliament’s lifetime.

In short, Labour’s overriding debt/gdp fiscal rule and its putative detrimental impact on productive investment clearly needs rethinking; certainly, the self-defeating totemic overriding political fetish it has acquired for political electoral reasons over the last two years should be shed, as soon as is possible.

A much better alternative on both economic and political grounds would be to make public investment decisions demonstrably subject to a much robust and transparent selection, prioritisation, and delivery capacity appraisal process, capable of objectively ranking projects based on their clearly demonstrated economic and social returns  relative to their claimed cost and capacity to deliver on time and on budget (given the lesson of HS2, optimism bias and uncertainty adjustment clearly should be better entrenched in that process).

This website some years ago in Investing in productive infrastructure presented a possible institutional model for that purpose, accommodated with an expanded remit of the well-established National Infrastructure Commission (NIC). Other models that could secure the same aim given the timescales involved and depending on their relative institutional feasibility could and should be considered.

In that light, it may well be no bad thing that the GPF has attracted critical scrutiny and concerns, including its wish-list nature and unevidenced value-for-money and its effectiveness relative to claimed outcomes justification.

A move to an institutional fiscal council type approach to major public investment appraisal and delivery would be consistent with both better ultimate outcomes and for political support for public investment borrowing, as well as for successful possible complementary linkages with, say, the housing, research and development, and training programmes.

The November 2023 autumn Budget provided an exemplary example of the hall and mirrors and some smoke that characterise modern fiscal events, determined in practice by the political and policy parameters set by the real fiscal crisis of the state.

The stealth threshold freeze was extended by Jeremy Hunt in the aftermath of the Truss interlude debacle to allow the government to present itself as fiscally on track to reduce a shifting debt target without having to impose more salient and politically damaging direct tax increases close to an election; the revenue increase generated is largely back-loaded into later years although fiscal drag during 2022-24, as noted above, gave him some of the supposed headroom for a reduction in the employee NIC rate from 12% to 10%.

This was touted as reducing the record tax burden, which it did taken in isolation at an annual forecast cost of c£9bn (taking account of reduced self-employed NICs that will also become operative in April 2024), but its benefit will be substantially offset and then exceeded for most taxpayers by the continuing impact of the freeze in tax allowances, until and when they are unwound.

Instructively, a January 2024 Institute of Fiscal Studies analysis also reports that the future distributional impact of their combined effect (a de facto tax increase) will vary.  An employee earning close to the average £35,000 will be £130 better off over the course of 2024-25 with the maximum gain received at and above the now aligned NIC upper earnings limit and the higher rate threshold of £50,270.  But most taxpaying employees earning less than £29,000 will be worse off next year.

But going forward, if the threshold freeze is maintained as planned until 2028-29, an employee on average earnings will by then be paying about £440 a year more in direct tax – because of the combined impact of the changes to income tax and NICs made since 2021.

The other side of that coin is that revenue raised from freezing thresholds this coming April 2024 alone – rather than uprating them by 6.7%, in line with the usual inflation measure – will exceed the annual cost of cutting the NICs rate. A resulting c£3bn net gain next year (depending on outturn inflation and earnings growth) will then balloon to c. £35bn by 2028-29, assuming no further changes.

Starmer’s Story Must Be Labour’s Story  published by this website soon after Starmer became Labour leader identified that his key challenge was to fuse strategy with tactics to effectively advance a radical but feasible and sustainable social democratic agenda aligned to current and future national needs.

Hitherto he has combined both to best protect the prospect of electoral victory, without which such an overarching agenda would remain merely rhetorical.

The forthcoming March 2024 Spring budget, as the Institute of Government has pointed out, is an unnecessary second fiscal event occurring within five months of the last one, having little no economic or fiscal management objective purpose or point. It will take place to provide a political platform and mechanism for some good old fashioned pre-election voter inducements.

It will, however, provide an opportunity for Starmer and his Treasury shadow team to combine tactics with strategy to hammer home the message before, during, and in the face of the political spectacle and spin that the extended freeze of income tax thresholds represented one of the largest tax increases made in recent memory.

Most commentators expect the spring budget to include a cut to the basic rate of income tax and changes to inheritance tax, which could even be abolished.

Following the November 2023 NIC cut that became operative on 6 January, Sunak’s government will hope that any tax cutting package that it offers will maintain some hoped-for momentum on voter sentiment up to election day, even though the polling dial, as February approaches, remained unmoved.

The imminent election puts a political premium on salient cuts in direct personal tax rates with associated ‘headline’ short term impacts on household budgets; meeting abstract fiscal rules five years into an unknown future will take very a much back seat, even if it manages to get into the car at all.

A one penny cut in the income tax standard rate even though it would be of little or no benefit to low paid workers who, unlike higher and additional rate taxpayers, will not receive the benefit of such a cut across the entire current standard rate threshold range (£12,570 to £50,270).

The government could combine it with a promise to unfreeze thresholds in later years. As the tax threshold freeze tips ever more people into the standard and higher tax bands as reported above, its maintenance to April 2029 will become increasingly unsustainable as its distortionary and arbitrary effects become progressively understood and felt, making it unlikely that any new government could avoid beginning the process of unwinding it prior to then.

Labour certainly should not weakly commit to accepting an opportunistic income tax rate cut, adding to the self-denying list of potential future taxation measures that it has already seemingly ruled out, including re-aligning taxes on capital gains more closely to income tax, thus constricting even further its future fiscal manoeuvreability, demonstrating an asymmetry of its treatment of spending and tax commitments relative to its proclaimed fiscal stance.

Instead, based on the independent OBR and IFS work discussed above, it should continue to hammer home the ‘giveth on one hand and taketh more on the other’ message that it has begun to present, while laying bare the tax history of the Sunak government.

Rebasing the basic and higher rate thresholds closer to where they would have been had they been indexed with inflation since 2022-23, would reduce the tax that ‘hardworking families’ in future would need to pay, while offering some future flexibility to taper the benefit receivable by the higher paid and thus its net cost (as well as its distributional fairness), which lower future inflation should also tend to.

That unwinding process could be done in parallel with changes to universal credit tapers and allowances to reduce the poverty trap, where the combination of higher tax and reduced Universal Credit (UC) entitlements result in low-income wage households incurring one of the highest effective tax rates.

Turning to inheritance Tax (IHT), its abolition would overwhelmingly benefit the wealthiest one percent, entrenching not only inter-generational inequality, but also the perception that the Conservatives remain at heart the party of the already wealthy and privileged at resulting electoral risk. Opposed by many Conservative MPs, it is unlikely to occur in March.

More likely is that either the basic nil rate IHT threshold – ostensibly £325,000 but due to significant allowances and reliefs, the effective threshold for most payers is much higher – or the 40% rate or that both will be changed.

IHT is rightly not levied on the living spouse or civil partner of a deceased person’s estate as otherwise they could well be forced to sell their home or to face other financial difficulties at a time of spousal, bereavement and stress.

However, any unused portions of the basic and the additional £175,000 residence nil-rate bands (applicable to those owning but not renting their homes) are then also transferred to the surviving partner. This means that on their death, up to £1 million (£325,000 +£175,000 x2) in assets can be passed on tax-free: an effective threshold that in combination with other reliefs, results in very few beneficiaries of estates worth £1m or less paying any IHT, unless the estate deceased was a renter and/or single, and/or did or wish or was able to employ a tax accountant to reduce future liability.

Unsurprisingly, the wealthiest utilise the services of a small cottage industry of legal and financial advisers to maximise the benefit of the complex and extensive array of reliefs available to minimise their liability to the point that the payment of IHT proportionate to the value of their estate becomes often voluntary.

Various reform permutations involving the removal of the residential nil rate and/or the capping of  agricultural and business reliefs, which currently allow the value of farms and businesses held with an estate to be netted off its taxable IHT liability, and/or the bringing in defined contribution pension pots (such as SIPPS) within the scope of IHT, could fund an increase in the basic threshold and/or a cut in rate levied as, for example,  was proposed by the Conservative-aligned Onward pressure group in 2022 as an alternative to outright abolition, or most recently as this December 2023 IFS commentary discussed.

The wider socio-economic backdrop to IHT is that taxable inheritances, invariably large and getting bigger, are usually received by beneficiaries in late middle age already wealthy, are realised from the estates of the wealthiest geographically concentrated in London and the south-east.

Those now in young adulthood pushed to the margins of home ownership by rising real prices (translated for existing owners into housing wealth), whose parents had accumulated modest wealth as a product of their lifetime honest toil, their careful spending and stewardship of savings, and from buying their home when to do so was affordable, rarely receive inheritances reduced by IHT.

IHT in general reality in its present form allows the entrenchment of existing and widening wealth inequality inimical to social mobility rather than taxing the cascading of modest inter-generational wealth – largely home ownership equity – within the bulk of the population.

It currently raises c£7bn annually, a figure that is projected to rise in real terms to £15bn by 2032-33, generating proceeds that that any new government will require – at least in the absence of more buoyant and politically less sensitive sources that it can identify and harness – to ride the real fiscal crisis of the state to fund public services subject to increased real cost in an ageing society adequately.

That provides the real-world backdrop that Starmer’s Treasury Team should focus on and convey to parliament, press, and country.  They, accordingly, should reject a IHT rate cut (and, of course, abolition, if it was tabled in March) unless it was accompanied by changes to reliefs and effective incidence that would result in the wealthiest estates paying more to the point that the basic threshold could be raised to reduce its future incidence on the moderately wealthy in a way that was at least revenue neutral and which reduced distortionary and rent-seeking behaviour.

But, more fundamentally, Starmer and his Treasury team should go on the offensive to counter the question as to what Labour would specifically do to reduce the tax burden, one invariably asked in isolation from its relationship to the wider public finances, to debt rules, to the rejuvenation of public services, and to the future growth and inflation trajectory, as well as to the UK’s position as a relatively low taxing country compared to certainly its European social democratic peers.

The electorate should be treated with respect and not treated as little children incapable of seeing and understanding that wider picture, as juries of randomly selected members of the public facing complex and difficult issues invariably do, with the exceptions tending to prove the rule.

Notwithstanding the challenge of the real crisis of the fiscal state laid bare earlier, Labour should recognise and project that the voting public will not be taken-in by last minute politically expedient tax cuts, reversed in effect sooner rather than later, consistent with the see-sawing nature of recent tax measures.

The multiple challenges of squaring future public expenditure requirements with tax policy, while turning around a stagnant economy should be honestly conveyed.

In that vein, future Labour tax policy narrative should be underpinned by the ThreeSs (3Ss), the pursuit of stability and sustainability through seriousness, communicated honesty: qualities generally well matched to Starmer’s.

It could embrace the establishment of an Office of Tax Transparency (OTT), provided with a remit to report clearly and comprehensibly the future expected and projected impact of tax changes proposed by any fiscal event on household budgets and on the future public finances, as well as their distributional consequences, defining transparently their contingent assumptions and sensitivities, referenced to alternatives.

One of its first tasks should be to produce a standard user-friendly ready reckoner on the model of that introduced and developed by the Australian government, allowing and encouraging the public and the media to regularly assess the direction of tax (and spending) policy, including the revenue-raising and distributional impact of particular taxes compared to alternatives. The future development of IHT could provide an early case-in-point.

The OTT could then work in parallel with the Office for Value for Money (OVM) that the shadow chancellor, Rachel Reeves, has already signalled will help guide the strategic spending decisions of a future Labour government, identifying and defining system and budgetary changes to make programme revenue spending more effective, efficient, and economical in tune with long-term societal needs and demands, as well as with long-term fiscal sustainability.

The precise scope and detail of the future remit of the OVM remains to be filled-in but a clear and pressing need to review the funding and delivery of public services, and to identify feasible policy medium term directions and reforms  is present. It should also complement the work of an expanded-remit NIC to ensure smarter, and more and efficient selection and delivery of public investment programmes, including the nascent GPF.

Examples of future joint-working between a newly established OTT and OVM abound. They could include a review of the triple lock, taking cognisance of trade-offs between its future cost and the timing of future age eligibility and that increasing the age of eligibility disproportionately impacts upon lower income householders; the future sustainable and equitable funding of adult social care and its more efficient, effective, and person-responsive joined up delivery with NHS and local community services, supporting and complementing each other rather than working in silo.

All these new fiscal council-type institutions, if established expeditiously without delay on a strengthened OBR-type model, in effect, would begin and underpin the fundamentally vital process that has to start to address the real crisis of the fiscal state within sustainable and transparent social democratic parameters, as well as provide a more substantive and short-term response to the  diversionary ‘return to Labour tax and spend’ jibes that are bound to intrude across the 2024 election run-up.

Such institutional reforms would manifest such a new 3Ss way of working or political methodology in practical concrete form, as required by the enveloping challenges now facing Britain, that could provide a defining hallmark of the next Starmer-led Labour government, as political triangulation was with New Labour, making him in the process a transformative prime minister, with a more legacy more lasting than either Wilson or Blair, in stark contrast to someone who back in 2021 was close to being written-off as one possessing ‘no politics’.

Constructive comments and observations are welcome via: asocialdemocraticfuture@outlook.com

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Filed Under: Macro-economic policy, Real Fiscal Crisis of the State, Starmer, Welfare State and social policy Tagged With: 2024 Spring Budget, Green Prosperity Fund

The New Infrastructure Levy (IL): Going Round the Mulberry Bush

1st July 2023 by newtjoh

Section 1 of this extended post describes how S106 accidently evolved into the primary source of affordable housing, as Table 1 shows, then reports its identified shortcomings, before pointing out that progressive improvements in S106 practice, attributable to the use of standard templates, learning by doing and from experience, and greater consistency and certainty in national and LPA policy and practice, has weakened the force of some of these criticisms, while alternative mechanisms proposed across successive consultation cycles suffer from their own problems.

Section 2 describes the design and policy history of one such mechanism, the Planning Gain Supplement (PGS) proposed in the 2004 Barker Report and why it was stillborn.

Section 3 described the design and operation of the Community Infrastructure Levy (CIL) and how it was undermined by political mismanagement and neglect related to a lack of overarching commitment to first order objectives, including increasing infrastructural investment closer to needed economic and social levels, and by

design problems, identified in Table 2, that not only afflicted CIL but are inherent to any land value capture mechanism that aims to combine the advantages of national policy certainty with needed local flexibility in implementation.

Section 4 describes the proposed new Infrastructure Levy (IL), its possible advantages which, however, depend upon assumptions that tend to conflict with reality on the ground while it could introduce further complexities and problems, and/or replicate the problems encountered by CIL, before noting that the absence overarching political commitment to increased levels of local infrastructural and affordable housing will render any mechanism ineffective.

Section 5 concludes that the upheaval, confusion, and policy blight that would follow the introduction of replacement IL proceeding fitfully in parallel with the existing CIL and S106 systems withering on the vine for a decade or more, is likely to result in more harm than good. The lesson of the CIL implementation process was clear enough and should be learnt this time round.

It follows that incremental reform to, rather than a complex replacement of, the existing ‘present imperfect’ CIL and S106 systems, focused on the issues identified in Table 2, seems to offer a more sensible way forward.

Such changes should include setting clear process arrangements for the forward financing public funding of infrastructure to help to ‘crowd-in’ future development, the definition and application of development viability with reference to land value mechanisms (whether IL, CIL or S106) that can best reconcile national certainty with needed local variation,  securing greater consistency of, and certainty in the application of S106 affordable housing contributions at both central and local levels in a way that could tap effectively into the potential for increased land value, where that was present.

1      Section 106 obligations: an accidental provider of affordable housing

Section 106 planning obligations (S106) are legally enforceable contracts between local planning authorities (LPAs) and developers. They specify the contributions required to make specific developments acceptable in planning terms.

These contributions can be made in cash or kind and can include specific items of infrastructure, such as access roads, new junctions, or, in the case of the largest developments, even new health and school facilities where these are required by the new development in question, as well as more generally affordable housing.

Developer affordable housing contributions involve the provision of a designated proportion of dwellings on affordable terms to a social landlord, including direct on- or off-site provision of rented and discounted low-cost home ownership units, on- or off-site provision of land for free or at a rate below market value, or by making commuted monetary payments or other contributions.

S106 contributions take their title from Section 106 (inserted in by Planning and Compensation Act 1991) of the the Town and Country Planning Act 1990 (TCPA1990).

It provided LPAs with the specific statutory power to, and consolidated the process by which they could require obligatory contributions (commitments) to make schemes or projects acceptable in local planning terms.

Planning obligations (Section 106 or S106) could now be attached to a planning permission or derive from a unilateral undertaking – usually made by developers at planning appeals.

Section 52 of the Town and County Planning Act 1971 had earlier specifically empowered local planning authorities (LPAs) to make a planning permission(s) conditional on an applicant(s) entering into a legally binding planning agreement(s).

Despite the enactment of TCPA1990, planning agreements and conditions sometimes continued to be used in an ad hoc, and, at worst, arbitrary way, raising concerns about a form of ‘legalised bribery’ taking place.

Permissions, for instance, for out-of-town shopping centres, could be, in effect, auctioned to the developer offering the best ‘deal’ to fund infrastructure and facilities that were neither necessarily materially related to the development in scale or kind, nor integrated or consistent with the relevant Local Plan (LP) – see, for example, May 1995 House of Lords case.

Government circulars, departmentally issued to provide non-statutory policy guidance on the local implementation of legislative measures and which can provide material considerations to LPAs to consider when making planning decisions and to the Planning Inspectorate or to the courts when reviewing such decisions, often covered such concerns.

Circular 16/91, circulated in the wake of TCPA 1990, confirmed the government’s policy position that obligations should only be sought or made when a direct relationship between such obligations and the proposed development was established, and when these obligations fairly and reasonably related in scale and kind to the same development – a position sometimes termed, rational nexus, that has since hardly changed.

 It also highlighted that the term ‘planning gain’ – capturing for public gain a share of the uplift in development value attributable to a planning permission(s) – neither possessed statutory significance nor backing within the planning legislative framework, specifically cautioning LPAs not to seek cash or in-kind payments for purposes not directly related to proposed developments.

However, Circular 7/91: Planning and Affordable Housing, began to plough a parallel furrow, by extending the policy scope for LPAs to use S106 as a significant source of local affordable housing supply.

It confirmed that a “community’s need for affordable housing is a material planning consideration that may properly be taken into account in formulating local plan policies”, and “they (such policies) can properly be used to restrict the occupation of property for people falling within particular categories of need”, although it went on to add the rider that “planning conditions and agreements cannot normally be used to impose restrictions on tenure, price or ownership”.

Paragraph 12 of  Circular 11/95 then made it clear that where it was possible to for a LPA to use either a planning condition or an obligation(s) then it should use the former, as the latter precluded the developer appealing against its imposition.

Notwithstanding its official discouragement of using planning obligations, the same circular also indicated that planning instruments could be used, in effect, as tool of housing policy, although some ambiguity remained (the circular was issued to reflect case law precedent, rather than to declare a new policy direction backed by government commitment: see last sentence below), with its para 97 advising that:

“The courts have held that the community’s need for a mix of housing types – including affordable housing is capable of being a material planning consideration. It follows that there may be circumstances in which it will be acceptable to use conditions to ensure that some of the housing built is occupied only by people falling within particular categories of need. Such conditions would normally only be necessary where a different planning decision might have been taken if the proposed development did not provide for affordable housing and should make clear the nature of the restriction by referring to criteria set out in the relevant local plan policy. Conditions should not normally be used to control matters such as tenure, price, or ownership”.

 Margaret Thatcher’s Conservative governments during the eighties curtailed council house building programmes while post-1980 Housing Act Right-to-Buy programmes dwindled their existing stocks.

Housing associations (now Registered Providers, RPs) became the primary source of new social housing let at sub-market rents during the eighties, but at much-reduced volume levels.

Their main funding source was capital housing grant – then called Housing Association Grant (HAG), now known as Social Housing Grant (SHG) – channeled through a public agency founded in 1974: the Housing Corporation (now Homes England).

Although post-Thatcherite governments continued to direct public spending away to other social spending programmes, they did, however, recognise the need for additional affordable housing supply to increase.

In that political light, from the end of the eighties onwards, RPs were given greater freedoms to borrow privately to supplement public grant support, allowing them to ‘stretch’ supply levels, even as the percentage of scheme costs met by grant progressively reduced.

The planning system also came into steadily larger view as an alternative potential mechanism to expand affordable housing supply.

Circular 13/96 acknowledged that a practical way of ensuring long-term control over ownership and occupation was to involve registered housing associations in the provision of the new affordable housing using planning (affordable housing) obligations.

Circular 6/98 reduced the threshold below which it would be inappropriate seek affordable housing obligations to 25 dwellings, save that for Inner London or across other areas “where a robust housing needs assessment provided evidential support for a lower threshold”, a lower 15 dwelling threshold was set. It is now ten dwellings.

Not only was the base on which S106 affordable housing obligations could be levied broadened, but the proportion of social housing completions that used a mix of public and section 106 support (partial grant) rose, as the proportion funded solely from public grant fell.

The shift to the use of S106 as a supplemental and then as an alternative funding source to public grant accelerated as the new millennium progressed.

Evidence submitted to House of Commons in 2011-12 indicated that the number of new affordable homes approved through S106 obligations more than trebled from just under 14,000 in 1998–99 to peak at over 48,000 in 2007–08. An estimated 80% of these approvals were subsequently actually delivered.

As Table 1 reports (itself collated from Table 1000C  of the official affordable housing statistical series) the proportion of social rented completions accounted for by nil grant S106 also steadily increased from three per cent in 2002-3 to reach 11% by 2008-2009.

Yet, the future role of S106 remained confused, contested, and fluid on the central government policy development stage.

In December 2001, New Labour’s newly re-elected second term government published Reforming Planning Obligations: A consultation Paper – Delivering a Fundamental Change (DTLR, 2001) that criticised the S106 process, proposing that to secure a “faster, more efficient and more effective planning system”, LPAs should instead use more standardised and generalised tariffs rather than individually negotiated S106 agreements, which in future should be limited to where they were “clearly justified to deliver, for example, site-specific requirements”.

But within two years, in November 2003, another consultation document: Contributing to Sustainable Communities – A New Approach to Planning Obligations, proposed that LPAs should be empowered to offer an upfront pre-set “optional planning charge”, set in advance but variable between LPAs and between different types of development, which developers could choose to pay as an alternative to negotiating both S106 planning and affordable housing obligation(s).

That new policy proposal, in turn, was put on ice by the publication in March 2004 (following an interim report in December 2003) of the Barker report that Section 2 will discuss.

The then-prevailing view on planning obligations was generally lukewarm at best, marked by a sense that their unpredictability and uncertain impact justified a shift towards alternative mechanisms, such as up-front standard and fixed tariffs.

Shelter, for example, had, in its response to the government’s December 2001 consultation, stated that “We agree with the government’s analysis of the faults of the current system of planning obligations. We consider that a ‘tariff’ system will offer much in the way of clarity of expectations on developers, faster procedures, and easier quantification of the benefits and how they are applied”.

Circular 05/2005  was published into this slipstream of prevailing and continuing policy uncertainty concerning the future scope and coverage of planning obligations.

While confirming the optional planning charge outlined in the November 2003 consultation would not be introduced until the government decided its response to the 2004 Barker report, including to her flagship PGS proposal, its focus was rather on the policy acceptability of planning obligations and the process/procedure used to negotiate and secure them in the context of the “improvements to the current system which the Government would like to make in the interim period before further reforms are brought forward”.

In practice, the circular remained extant – as did Circular 11/95 – until it was replaced by the National Planning Policy Framework in March 2012. It thus proved more of an unintended consolidation and watershed than an interim response.

Its Annex B reaffirmed that that planning obligations could be used to:

  • prescribe the nature of a development, such as requiring a proportion of a development to be affordable;
  • compensate for loss or damage caused by a development, such as a loss of an amenity by securing in-kind or cash from a developer;
  • mitigate an impact of a development, for example, through the funding of transport, health, or educational provision improvements to “make acceptable development that otherwise would be unacceptable in planning terms”.

 A ‘functional or geographical link’ between such obligations and the development should exist save for affordable housing, and they should be “fairly and reasonably related in scale and kind to the proposed development and reasonable in all other respects”.

 The Global Financial Crash (GFC) then intervened to throttle the housing market and thus reduce the scope for developers to cross subsidise affordable housing from market sales. Many developments stalled and even across developments that were then subsequently built out S106 affordable housing obligations were often scaled back or not implemented.

Many commentators argued that public investment in affordable housing should be increased as part of a classis Keynesian domestic counter cyclical fiscal response to the GFC.

Housing capital expenditure instead took the brunt of fiscal austerity measures that George Osborne, chancellor of the 2010-15 Conservative and Liberal Democrat government, put in hand to ostensibly reduce the deficit but also part of a wider strategy to ‘shrink the state’.

Average grant levels were cut by up to 60% in total. Funding for new social rented housing – largely replaced by an affordable rent sub- tenure offered at c80% rather than 50% market rental levels – ended as policy presumption shifted towards providing affordable housing without public grant subsidy.

RPs, working in partnership with both councils and developers, were forced to work ever harder to devise and implement new affordable housing provision and funding models.

This turbo charged the tendency already begun during preceding decades for RPs to become developers of schemes, using sales of market housing to cross-subsidise rented dwellings let generally at sub-market levels, to purchase dwellings off-peg from developers to then offer on affordable terms, often in accordance with S106s agreed and made with LPAs.

An associated and intensifying secular trend was for such developer RPs to grow larger in size and turnover through takeovers, consolidation, and merger, as well as from organic growth. This was to increase their borrowing capacity and balance sheets and to benefit from economies of scale and scope.

The impact of fiscal austerity on national affordable housing capital budgets and on local budgets generally meant that when the housing market again took off at least across economically buoyant and areas concentrated around London and other high housing value areas that RPs increasingly relied on nil grant S106 to provide social housing.

Nil grant S106 affordable completions increased more than fivefold from a 2011 trough, occasioned by the GFC, to exceed 30,000 during 2019-20 – accounting for more than 50% of total affordable completions that year (see previous link to Table 1).

Between April 2017 and March 2021, the proportion of social rent completions enabled by nil grant S106 in England exceeded 50% each successive year, while for intermediate tenures, the proportion so enabled touched 65% in 2017-18, although subsequently that proportion has dropped.

S106 without public grant had become the primary funding source of affordable housing: an essential component of the mixed public and private funded welfare state across the housing sphere.

In many ways, a remarkable outcome. It represented, at first glance, a part privatisation of the funding of social and affordable housing, enabled by locally negotiated S106 agreements that, in effect, represented a locally levied and collected development tax or charge on speculative market developments, with its value or proceeds provided-in-kind or hypothecated for local affordable housing as a contractual commitment(s) linked to specific development(s) .

These outcomes were a product, not of first order political design or agency or competing party ideology or preference, but primarily one of incremental pragmatic responses of stakeholders responding at a local level to the inability of both the housing market and the planning system to deliver affordable housing or balanced communities in tenure and social compositional terms and to changes in the wider political and policy environment.

Planning policy at a national level initially largely followed evolved practice on the ground ratified by judicial case law decision, and then responded to conditions of post-GFC fiscal austerity.

S106 was also not specifically designed by central government to effectively recycle windfall landowner and development gains into affordable housing and other public purposes; indeed, until the nineties using it for that purpose was officially discouraged, if not prohibited.

The academics that have advised the government and House of Commons select committees on mechanisms to capture land value estimated that by 2018 that c30% increased land value resulting from residential development of greenfield sites was captured by the combined operation of CIL and S106, with up to another 20% captured by national capital gains and stamp duty land taxes.

The accidental antecedents of S106 partly explain why the level and composition of developer affordable S106 contributions lack predictability, related to uncertainties caused by contingent market conditions, top variant site attributes and circumstances, to the availability or otherwise of SHG, as well to the relative negotiating position/skills of the parties.

The process overall has tended to be piecemeal, reactive, cumbersome, hampered by the fact that information that is shared between the parties has tended to be asymmetrical and imperfect.

The non-exhaustive list of problems catalogued below have often cited in successive consultations by both government and stakeholder respondents as a reason to replace S106:

 obligations are mostly attached to major housing schemes that many authorities only infrequently face and progress, causing problems related to LPA lack of experience and capacity in dealing with such applications;

  • the complexity of such large-scale schemes and lack of policy certainty on contribution amounts and rates can result in protracted negotiations that consume much local authority and developer time and other resources, to the especial detriment of small and medium housebuilder enterprises (SMEs);
  • asymmetries in negotiating expertise exist between the two parties, leading to unsatisfactory public policy outcomes related to above, for example, Southwark case example;
  • a site- and locally negotiable system, rather than one subject to certain requirements known in advance, mean that both local authorities and developers are not always aware of the level of planning contributions that might reasonably be expected from a given development, resulting in obligations varying between areas and applications otherwise substantially similar;
  • besides such local discretion in treatment, such variation is an inevitable by-product of a process sensitive to changes in market conditions (a rising or falling housing market impinges on development values and developer profits and hence perceived, claimed, or actual scheme viability) that can also result in substantial downward negation or revision of previously agreed negotiations as, for instance, did occur in the wake of the GFC, and could be occurring now with the recent housing market downturn;
  • affordable housing levels achieved on a site-by-site and LPA level can therefore diverge markedly from published local policy requirements, which in the past has and can lead to developers to assume less than policy compliant levels of affordable housing when bidding for land, resulting in higher land prices and development costs generating a self-fulfilling circular process;
  • A stated headline affordable policy requirement – say 35% – in any case cover a range of compositional permutations of social rented and intermediate tenure options that in realisation vary in value to the LPA and in cost to the developer both over time and between LPA’s;
  • associated problems of lack of process transparency;
  • other potential sources of contribution, including commercial and smaller developments, are left untapped;
  • S106 scheme contributions towards community infrastructure and/or site mitigation can be meshed more to stakeholder budgetary imperatives rather than local needs;
  • possible tendency of some local authorities to misuse Section 106 to delay or discourage development, by asking for unreasonably onerous levels of developer contributions;
  • possible generation of perverse incentives in favour of high-density housing schemes deemed most likely to maximise contributions and to protect developer profit levels, thus risking over-development or sub-optimal social outcomes, such as compressed space and other standards;
  • long time lags between the negotiation, the agreement, and the receipt of contributions;
  • inadequate monitoring of the delivery of originally negotiated obligations, whether due to their renegotiation, to changes to planning applications or their non-progression in full or part, or to simple shortfall when the development takes place, can result in LPAs not getting the full benefit of contractually committed obligations. A May 2022 audit of affordable housing delivery,  annually undertaken by the London Borough of Southwark, for example,  identified in 21 cases of apparent under-provision of social rented units and 39 pertaining to intermediate, with another nine no responses, indicating a potential significant under delivery problem. There is little or no reason to suppose that a similar problem does not exist across other such authorities.

This long and apparently damning inventory of problems and issues associated with S106 fails, however, to recognise the progressive improvements in practice, such as use of standard templates, learning by doing and from experience, and the movement towards more consistency and certainty in national and LPA policy and practice, all of which has gathered pace in recent years.

Focused initiatives such as the Mayor of London’s Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), incorporated into the 2021 London Plan, that introduced a streamlined Fast Track Route for applications that include commitments to provide at least 35% cent affordable housing, and 50% on public or redeveloped industrial land has provided greater policy certainty to developers and London LPA’s hat by embedding the costs of defined and more certain affordable housing requirements into land values has served both to increase the level of achieved contributions and to speed up the planning process.

Recent proposed June 2023 updates to London Plan Guidance (LPG) on  Affordable Housing  and Development Viability  also provide pointers to future replicable good practice.

Undoubtedly S106 is a second-best public policy response to the need to fund and provide additional affordable housing and connected local cumulative infrastructural requirements.

But that bald statement begs the question as to what is and would be the best response.

The parallel and co-ordinated reform of public and private and business models to mainstream affordable housing provision most efficiently at optimum volume and public subsidy levels combined with a distributional fair land value tax attached with minimal distortionary economic deadweight effects would be one candidate. Like others, however, it is not immediately realisable for a mix of political and institutional reasons.

And an evolved and known second best is still better than third or fourth best or even possibly improved second best alternatives that, however, will involve upheaval and are uncertain in outcome.

At root such alternatives will suffer also from similar or other problems intrinsic to all land value mechanisms that seek to combine certainty with flexibility, when a ‘one-size fits all’ approach rubs against the reality of divergent spatial and site characteristics and circumstances, as subsequent sections will now go on to demonstrate.

2          Barker’s Planning Gain Supplement (PGS): a partly hypothecated national tax to support local infrastructural funding

Gordon Brown, a chancellor forever focused on stamping his authority on New Labour domestic policy, appointed Kate Baker, a former Bank of England economist to examine how improved supply responsiveness of the housing system could reduce the impact of rising real house price levels on the wider macro economy.

Her March 2004 (following an interim report in December 2003) Barker Review Final Report (Barker) concluded that Section 106  in its existing form it “did not offer the best method to achieve needed higher levels of housing supply”.

 It proposed a national direct levy or tax on development betterment – the Planning Gain Supplement (PGS), to be levied when full planning permission was granted.

Barker envisaged that PGS would generate proceeds sufficient to cover the estimated Section 106 contributions that (in the absence of PGS) would have been made plus additional resources to boost housing supply and for associated infrastructural and other requirements but set not so “high to discourage development”.

Section 106 planning obligations (S106) could then be “scaled back” to cover site-specific impact mitigation and affordable and/or social housing requirements only (R24).

To finance their wider cumulative infrastructural requirements, Barker envisaged that local authorities (LPAs) should receive from central government a direct but unspecified share of the PGS proceeds generated within their areas.

Should the government decide against introducing PGS, Barker suggested that it alternatively should then press ahead and introduce instead an up-front pre-set and fixed tariff or charge that could still be set to vary between LPAs and types of development, however.

This had been proposed in the November 2003 consultation document Contributing to Sustainable Communities – A New Approach to Planning Obligations” that developers could choose to pay on a scheme-by-scheme basis as an optional alternative to negotiating S106 planning and affordable housing obligation(s).

However, Barker emphasised that this alternative was a second-best response that was likely to involve continuing prolonged and costly section 106 negotiations covering large and complex schemes.

As is conveyed by the above, Barker painted her canvas with a broad brush, leaving much of the crucial detail left to be filled in later, including:

  • the difficulties of establishing the point in time when the uplift in value on which PGS should be levied;
  • whether the computation of current use value should reflect ‘hope value’; (projected planning uplift attributed to an expected or possible future planning permission);
  • whether PSG should be levied on the landowner or on the developer or on both;
  • the precise and respective future coverage and impact of PSG and Section 106 on affordable housing provision;
  • the impact of a national uniform tax levy on the development viability of sites possessing variant geographical, locational, and physical characteristics;
  • whether low value brownfield development should be exempted;
  • the PSG rate itself, and whether it should be a uniform UK rate or made regionally or locally variable, or applied differently across the devolved administrations;
  • whether it should be applied across all developments save for householder improvements, or be targeted towards housing developments above a defined minimum threshold value;
  • whether the supply of land available for development would be reduced by landowners withholding it as PGS was capitalised into lower land prices;
  • whether, and in what proportion, PSG should be re-distributed between authorities, rather than simply directly allocated back to the originating LPA;
  • the need or otherwise for transitional arrangements to cover existing planning applications and industry practices, such as option agreements, where the developer had had paid the landowner for an option to purchase their land in the future.

The canvas then began to be filled in by a chain of government consultations, select committee reports, subsequent responses, and then policy announcements pertaining to PSG, including the HM Treasury response to 2005 consultation; the 2006 Pre-Budget report; the  Planning Policy Statement 3  (PPS3) issued  in November 2006; Planning Obligations: Practice Guidance; the November 2006 Select Committee Report on PSG; the Government response to November 2006 report; the Changes to Planning Obligations December 2006 consultation; and the  November 2007 government response to Valuing and Paying for PSG consultations.

The upshot, broadly taken across the piece of that process, was that PGS, when implemented, should:

1          Be set “at a modest rate across the UK” – some commentators took that to mean c20%: in short, a simple and modest (depending on viewpoint and/or interest) flat rate national tax on development, provided with limited exemptions.

Alternatives could include a lower rate for brownfield sites possibly supplemented by tax reliefs or credits targeted to support urban regeneration, “subject to further investigation”.

2          PGS revenues should be separated from the local government funding settlement.

At least 70 per cent of PGS revenues sourced from a local area should be hypothecated (ear-marked) to support infrastructure priorities within that same area.

3          Liability for PGS would not arise until after a developer – following the granting of full planning permission – had applied for a PGS Start Notice, signifying that they intended to commence site development.

4          That liability would then be calculated by subtracting the current actual use value (CUV) of a site (actual site values were preferred over taking a measure of average local values due to their variability and heterogeneity – each site is different – from its post-planning permission value (PV).

So: (PV – CUV) x PGS rate (%) = PGS liability.

Two separate valuations therefore would be required to determine PGS liability: one, to establish the CUV of the development; and the second to establish its PV.

5          PSG for each eligible site was to be paid by its developer (the entity implementing the planning permission) on the assumption that it possessed a notional unencumbered freehold interest with vacant possession (FHVP) of the site in question.

The government had concluded that site developers were best placed to accommodate the costs of PGS during the normal commercial negotiations they concluded with landowners to bring sites into development.

Having only one legal entity to account to HMRC for the site PGS liability, it was envisaged, would simplify the valuation process.

6          Section 106 should be scaled back to cover only “direct impact mitigation” at the site level, including the physical environment of development sites: their access connectivity; the direct mitigation of any arising adverse environmental impacts, relating, for instance, to landscaping, or other specific archaeological, environmental protection considerations; or other related site requirements.

The crucial – albeit by then established – exception was that securing affordable housing in a residential or mixed-use development at a proportion set within the relevant Local Development Framework (LDF) Plan should remain within the scope of S106.

7          The provision of such affordable housing was considered to constitute an on-site delivery issue that needed to be integrated from the outset into the site development process.

This was considered consistent with the wider achievement of mixed communities, in terms of their tenure and price offer, as well as their household compositional mix, including families with children, single, and older people.

The November 2006 PPS3 (see earlier link) had required LPAs to set an overall (plan-wide) affordable housing target(s), split, where appropriate, between social and intermediate housing categories, based on “an assessment of the likely economic viability of land for housing within the area, taking account of risks to delivery and drawing on informed assessments of the likely levels of finance available for affordable housing, including public subsidy and the level of developer contribution that can reasonably be secured”.

This represented an official acknowledgment that S106 affordable housing obligations had become integral to national and local affordable housing provision supply.

The national minimum indicative minimum size threshold for such affordable housing obligations was reduced to 15 dwellings. Local authorities, however, were offered the discretion to set a lower threshold, where that was “viable and practicable”.

8          Social or community infrastructural requirements, including leisure, educational, health facilities, in future, would fall outside scope of Section 106, to be funded from PGS or other sources.

In summary, to meet three different requirements:

  • the on-site mitigation of adverse consequences of development;
  • the funding of local infrastructural requirements connected with new developments;
  • the provision of local affordable housing,

the government, on the back of the Barker report, proposed two primary policy instruments.

First, S106, scaled down to the still considerable twin-tasks of making a development acceptable in planning land use terms and of expanding affordable housing supply.

Second, a mechanism, PGS, a national tax on the uplift in site development values when crystallised by relevant planning approval(s), to fund necessary supporting community infrastructure.

The cumulative infrastructure funding issue

Site-related planning considerations can straddle wider community-related educational, transport, and other infrastructural needs.

Take, for instance, a site access connector road – clearly a site-related consideration – feeding into a new relief road, where that, given the expected impact of the new development on traffic flows, was also assessed as necessary to reduce congestion across the wider settlement spatial area,

When built, however, such a relief road could well reduce future traffic congestion within the wider area – even with the addition of the traffic generated by the new development, to below to what was experienced before it was built – at least if and until a new congestion ‘tipping point’ was reached when congestion became worse than it was before it was opened.

A new level crossing or road bridge over a railway that Network Rail, for instance, deemed necessary due to the increased traffic it expected a new development would generate, is another example of such a ‘tipping point’ effect.

They can apply to increased provision of school places, GP surgeries, and other items of community infrastructure that expand future system capacity across a wider pool of users than future residents of a proposed development but are lumpy in terms of their associated fixed cost requirements, when may not always be possible or appropriate to expand provision incrementally on existing sites, such as providing a new classroom.

Logically, these ‘tipping edge’ and ‘cumulative funding’ problems can be overcome – and often are – by a S106 contribution made proportionate to the assessed impact of a new development on existing and future local cumulative infrastructure needs,

Indeed,  B21-24 of Annex B of Circular 05/2005  advised that LPAs should set out in advance the need for such wider (not confined to individual site mitigation purposes) supporting cumulative community infrastructure, such as health and educational facilities, and the likelihood of a contribution towards them being required.

In such cases, a direct relationship between the development and the supporting infrastructure required and that the contribution sought was fair and reasonable in scale should be both demonstrated. A clear audit trail should then be maintained between the contribution made and the infrastructure provided.

It went on further to say that developer contributions could be pooled, if necessary,  across different developments and local authority areas and that “In some cases, individual developments will have some impact but not sufficient to justify the need for a discrete piece of infrastructure. In these instances, local planning authorities may wish to consider whether it is appropriate to seek contributions to specific future provision”.

Yet such contributions, especially when they need to be combined with existing LPA and/or external agency resources available for infrastructure works, often prove insufficient to allow the desired infrastructure to proceed prior, or in parallel, with site development.

They can also prove difficult to quantify and apportion to individual items of infrastructure and on what planning and provision basis.

Whether the impact of the development on needed infrastructural provision constitutes a ‘tipping point’, can consequentially risk become becoming a source of negotiating complexity, contention, and delay.

In the case of the relief road example, if the contribution only augmented the existing pot available for such a project but not enough to allow it to proceed, congestion would worsen in the meantime. Similarly, school and GP surgery excess demand and overcrowding could result.

Such ‘tipping point’ and associated cumulative funding co-ordination problems are increasingly highlighted or even exploited as reasons to resist such new development, as discussed in The 2020 Planning White Paper: Key Lessons. 

PGS, development viability and affordable housing obligations

Another issue not resolved by the post-Barker consultation policy development process was the extent that the retention of section 106 affordable housing obligations could be supported and paid for by developers within a new regime that also included PGS.

In short, could a PGS levied, at say, a national 20% cent uniform rate across England co-co-exist with S106 affordable housing as well as some limited site mitigation obligations, without its introduction undermining the viability of future developments and then ultimately housing supply?

The 2007-2010 Brown government itself recognised that for section 106 to operate effectively in parallel with PSG, then the legal, policy, and funding pegs on which affordable contributions were to be hung needed to be made clearer and more certain, concluding that “a contribution by the developer in the form of, or equivalent to the value of, the land necessary to support the required number of affordable units on the development site would represent a reasonable starting point for negotiations”.

That treatment, however, still left open on how such land contributions could be combined with the proposed PSG, as well as other valuation issues connected to geographically or spatially variant land values.

As it turned out, the proportion of planning obligations accounted for by land contributions progressively fell over subsequent years.

Why did the PGS fail even to reach the runway?

Post-war policy experience of taxing development betterment values at a national level was not encouraging.

The three main legislative attempts to do so in 1947, 1967, and 1976 proved singularly unsuccessful, both in terms of revenue raised and in securing greater land supply for development.

Developers held back on the expectation that the high levels of tax involved (100% in 1947) would prove unsustainable and would be reversed by a successor government.

The prospects of the future success of PGS were, therefore, not promising from the outset.

Notwithstanding the lower rates envisaged by Barker, PSG could still involve a disincentive for developers to seek permission, or then to start work.

Practical issues concerning its timing also remained unresolved.  The post Barker consultations proposed that valuation would occur when full planning permission was granted for a development with payment due 60 days after works commenced.

But development values could change between the date that planning permission was granted for the development and the date when it commenced: the scope and cost of remedial or other site preparation work could increase, for instance.

The largest developments also often involve multi-phasing over a prolonged period, the treatment of which would have likely complicated the operation and timing of PGS, quite likely encouraging developers to structure and sequence schemes to minimise their liability to pay it.

Alternatively, if PGS was assessed against final development value, measurement and timing issues could remain, while a delayed receipt profile could prove a problem for LPAs needing to fund supporting infrastructure – especially if they were prevented from forward-financing such works.

These issues will likely pertain to the emerging new Infrastructure Levy, discussed in Section 4, when introduced.

In any case, a hammer was thrown into the post-Barker policy development process when the 2006 Pre-Budget Report indicated that PSG would only be implemented, if “after further consultation it continued to be deemed workable and effective; and, in any case, no earlier than 2009”.

Hardly a ringing commitment to begin with, reflecting doubts within and outside government as to whether PGS was workable.

Delaying the earliest date of its introduction to the year prior to a general election, in effect, represented a pre-announced death sentence for PGS.

Developers, unsurprisingly, exploited the enveloping uncertainty to mobilise against PGS, with their lobbying efforts coalescing around the introduction of alternative standardised tariff approaches, involving a fixed per square meter rate, rather redolent of the standardized tariff approach that had been proposed in another earlier December 2001 Reforming Planning Obligations consultation.

Some LPAs, including Milton Keynes and Ashford, responding to continuing central encouragement to “experiment using such standard charges”, did set such tariffs.

The most high-profile example was the Milton Keynes ‘roof tax’. It involved a fixed tariff set at £18,500 per dwelling and c£66 per square meter of commercial floor space and was designed to raise £311m towards the c£1.7bn total scheme costs of extending the UK’s largest and most successful new town.

This tariff, however, did not cover the cost of affordable housing: section 106 contributions of c£316m towards affordable housing were still needed, but overall the tariff was considered an effective and efficient way of funding infrastructure.

Such a proportionate and certain tariff was considered conducive to streamlined development planning and delivery and to securing broader stakeholder acceptability.

But by 2008, the UK, like other advanced economies, was entering the grip of the Global Financial Recession (GFC) that, inter alia, threatened to bankrupt the domestic housebuilding industry.

An election was also approaching, when, for the first time for a generation, the formerly hegemonic New Labour ‘project’ – already running out of political steam and ideas – faced the real prospect of electoral defeat.

Whatever remnant government enthusiasm for PGS rapidly ebbed away until it was finally put out of its misery and discarded in favour of the Community Infrastructure Levy.

3      The Community Infrastructure Levy (CIL)

Introduced in the 2008 Planning Act, CIL became operative on the 6 April 2010 through regulatory statutory instrument 2010/48 (CIL Regulations 2010). It was then retained by the incoming 2010-15 Conservative and Liberal Democrat Coalition government. CIL was not adopted in Scotland.

CIL was designed to act as a specific standalone statutory source of local community infrastructural funding (except for affordable housing), replacing the blurred and uncertain role that S106 provided in default for that purpose.

Unlike the previously proposed PGS – a national tax – it was designed to be locally set and collected and to be voluntary.

A 2011 DCLG Overview of CIL laid out the government’s aim and justification for the scheme, setting forth the expectation or hope that it will prove “ fairer, faster and more certain and transparent than the system of planning obligations which causes delay as a result of lengthy negotiations. Levy rates will be set in consultation with local communities and developers and will provide developers with much more certainty ‘up front’ about how much money they will be expected to contribute”, enabling “the mitigation of cumulative impacts from development”.

It envisaged that CIL would be levied across smaller developments untouched by S106, noting that (then) “only 6 per cent of all planning permissions brought any contribution to the cost of supporting infrastructure”.

Regulation 122 linked the Levy to a parallel scaling back of planning obligations, limiting such obligations, save for the provision of affordable housing, to site specific measures directly related to the development, that were fairly and reasonably in scale to it, and were necessary to make the same development acceptable in land use planning terms.

It continues as a core feature of CIL and S106, providing continuity to guidance dating back to Circular 16/91, while putting the treatment of planning obligations that Circular 05/2005 set out onto a statutory footing.

Regulation 123, as enacted in 2010 (later amended, prior to its recension in 2019), prescribed that after a CIL charging schedule (CS) had been approved and published, LPAs could not use a planning obligation(s) to fund or provide items of infrastructure that it had included in its ‘Regulation 123 list’ –  one detailing items or types of infrastructure intended for local CIL funding  –  or where such a list was absent, from supporting the provision of any item of infrastructure (double dipping).

 Otherwise, only five or less planning obligation contributions could be pooled to help fund for an item of infrastructure not locally intended to be funded by CIL and included in its regulation 123 list (pooling restriction).

These restrictions aimed to encourage LPAs to adopt CIL as their future source of funding for local cumulative infrastructural requirements and to confine S106 to site specific and affordable housing provision obligations, avoiding any overlap funding of local infrastructure between CIL and S106, with CIL becoming the preferred vehicle for the collection of pooled contributions.

Pooling restrictions were lifted in 2019, however, while ‘regulation 123 lists’ were superseded in 2020 by a requirement on LPAs to produce annual infrastructure funding statements, defining developer contributions received (both through CIL and section 106 obligations) and detailing how they had been spent.

Subsequent published Guidance in 2014 remains extant, as updated. Its main provisions are summarised below.

  • CIL is a voluntary and local charge on local new development providing over 100m2 additional floorspace – complications, however, soon arose concerning the precise definition and application of additional, occasioning subsequent and successive revisions to the regulations.
  • LPAs must define local CIL rates in a local Charging Schedule (CS). Charges become payable when full planning permission is granted and “material operations” commence on site.
  • CIL charges involve a straightforward pound per square metre rate, but such rates can vary or differentiate according to the type and size category of developments and their area location, as well as to whether it counts as a ‘strategic’ within each LPA (such different charging classes must be defined in the approved CS).
  • Each proposed CS, prior to its formal adoption, is subject to a defined consultation process and to a local viability review/test, followed by a Public Examination.
  • When setting its CS, LPAs are required, according to the guidance, “to strike an appropriate balance between securing additional investment to support local development and the potential effect of the Levy on their viability”.
  • On adoption, CS rates set across each defined charging class are payable as specified and applicable. They are consequently not negotiable nor variably discretionary on a site-by-site basis, outside or contrary to the provisions of the applicable CS.
  • In short, the local LPA decision whether to adopt CIL is voluntary, but CIL liability when due is each development’s intended gross internal metre square floor addition times the applicable rate set out in the CS for that development, indexed broadly in line with construction costs: its application is then not discretionary or variable.
  • Following the enactment of the 2011 Localism Act, LPAs were empowered to design CSs that encouraged the devolution of planning to a more local level, including making provision for the earmarking of a proportion of CIL receipts to support new chargeable development subject to a designated and approved Neighbourhood Plan.
  • The scope of exemption or reliefs from CIL were widened to encompass social housing, charitable, self-build, residential annexes, and additions, and to some cases of demolishment, of refurbishment, and of change in use – these were also subject to subsequent definitional and other regulatory revisions.
  • CIL proceeds cannot be used to fund the provision of local social or affordable housing.

They can, however, fund a very wide range of other local infrastructure, including roads and other transport infrastructure, drainage schemes, flood defenses, schools, hospitals and other health and social care facilities, parks, green spaces, and other environmental improvement, as well as leisure and other local facilities, “arising from the cumulative impact on local infrastructural needs of successive developments, including those made subject to the Levy”.

CIL progress and operation in practice

A  Review of CIL operation and progress commissioned in 2016 but published in February 2017 to accompany the Housing White Paper (HWP), noted that although it had been slow to start, the process of CIL introduction and of CS adoption, five years from its outset, had begun to pick up and accelerate.

Yet, by August 2015 only 93 LPAs (27%) had adopted a CS, reflective of an introduction period marked by frequent and, according to LPA and developer respondents, often confusing, regulatory changes, as touched on above. Another 109 LPAs were identified as working towards CS adoption.

When added to an already onerous and cumbersome adoption process, such changes tended to undermine timely and effective implementation of CIL by LPAs.

The narrowing of the charging base occasioned by the regulatory extension of exemptions and reliefs also prompted complaints from many LPAs concerning consequent loss of potential receipts.

By mid-2015 around 200 (58%) authorities had either adopted a CS or had begun the process to do so: representing a partial and delayed rather than a comprehensive and universal response to CIL, reliant as it was on local introduction and implementation.

Where LPAs, however, had put in place a CS for two years or more, average year-on-year revenue yield, according to the review, had risen from an average of £0.2m per charging authority in 2012-13 to £0.5m in 2013-14, before rising sharply to reach £2m in 2014-15.

That upward but lagged trend from a very low base reflected that receipts could not begin to be generated until the CS consultation, examination and adoption process was completed and then the ensuing time lag between CIL liability notice issue and revenue receipt – an issue that is likely to be repeated with IL.

CIL in 2015, according to respondents, represented a relatively minor development cost of around two to three percent of total market development value. As an average computed across all charging authorities that figure masked higher charges levied on developments across high value areas more able to withstand higher CIL rates.

A more technically-based review,  A New Approach to Developer Contributions, (CIL Review Team Report, 2017 or 2017 Review), also published to accompany the February 2017 HWP, suggested that CIL raised 15% to 20% of cumulative infrastructural requirements, leaving the remainder to be found by LPAs.

Local authorities were then suffering from the concurrent infliction of post-2010 fiscal austerity that reduced some relevant revenue budgets by more than 50%.

This review went on to note that CIL was generally levied only at a “significant” rate on residential and retail development: other commercial uses to encourage local “economic growth” usually attracted a zero or low rates.

Relying on CIL to fund supporting infrastructure for large developments also served to shift development risk onto LPAs despite developers often being best placed to shoulder such risk.

Liz Peace, the chair of that review, in her later evidence to the 2018 Select Committee on Land Value Capture said it was difficult and, for the very largest developments “almost impossible to apply the formulaic CIL approach”.

 Where, for example, a new school was required, developers “did not want to pay that into a pot and wait for the local authority to build you a school in however, any years’ time it would be: you wanted the ability to do that on your site in kind”.

Her review concluded in 2017 that “CIL is a more appropriate mechanism for capturing infrastructure funding to mitigate the cumulative impact of smaller scale developments. However, it would be more appropriate to have maintained s106 as a mechanism for delivering on-site infrastructure requirements for large-scale sites. The issue of upfront infrastructure cost for large-scale sites is still an obstacle to delivery whether under CIL or s106”.

It proposed replacing CIL with a low level, broad but certain and mandatory Local Infrastructure Tariff (LIT): “a twin-track system of a (low level) Local Infrastructure Tariff (LIT) combined with Section 106 on larger sites”.

By bringing smaller and nonS106 sites into the contribution net and thus increase proceeds beyond levels then currently realized by CIL, such an LIT would thus capture the “best of both worlds”, as well as offer regulatory simplification and process streamlining when integrated with the Local Plan process, while the retention of S106 on larger sites would allow more substantial infrastructure needs to be met in a timely manner by the stakeholder/agents best placed to do so.

A standard, but locally sensitive, national £ per square metre formula “pegged and calibrated to local prevailing values”, was suggested, set between 1.75 and 2.5% of the sale price of a standardised 100 square metre three-bedroom family home divided by 100, which the review posited should obviate the need for a complex Public Examination process, removing layers of complexity and potential delay,  and would have a marginal impact on viability within low value areas.

How it would operate in practice was far from clear, however, as the government later highlighted.

The 2017 Review acknowledged that replacing CIL would involve upheaval and associated transitional issues but concluded, in effect, that the certainty provided by a mandatory low level LIT was worth such disruption, even though a low level LIT would generate insufficient resources to pay for affordable housing in addition to much other supporting and cumulative infrastructure requirements, requiring S106 negotiation of affordable housing requirements to continue.

Essentially, the 2017 Review was itself unable to juggle the conflicting pressures that Table 1 will shortly catalogue, most notably that between the advantages offered by certainty and flexibility: a low level certain and uniform tariff set low enough not to undermine development viability across low value areas or development types will not secure the maximum possible feasible land value capture across high value areas/development types and thus require much cumulative infrastructure to be funded by other methods and sources.

Certainly, the government did not take on board the review’s proposals for LIT to replace CIL. It chose instead to undertake a March 2018 consultation focused on the combined operation of section 106 and CIL (2018 consultation), describing the current system of developer contributions “too complex and uncertain”.

The proposals this consultation made were largely limited to “first step” short-term incremental modifications to the existing combined CIL/S106 developer contributions regime.

These aimed to streamline in time and process terms the statutory CIL adoption process, to allow the pooling of section 106 contributions in CIL-adopted LPAs  (later extended to all areas in para 25 of the government’s response to the consultation), along with the publication of annual Infrastructure Funding Statements.

It did flag, however, that “in the longer term… one option could be for contributions to affordable housing and infrastructure to be set nationally, and to be non-negotiable”.

Like the 2017 Review, it also extolled the Mayor of London CIL scheme – a low-level tariff charged across all London boroughs confined in scope to funding key transport infrastructure, mainly CrossRail – as an effective mechanism to finance visible a strategic infrastructural item(s), noting that since its introduction in 2012, £381 million had been raised against a £300 million target, without much fuss.

The Local Democracy, Economic Development and Construction Act 2009 had created and empowered new Combined Authorities (CAs) to carry out the same functions as the Mayor of London (the direct election of metro-mayors for such CAs was also allowed in 2014) and to charge CIL.

By 2016, CAs covering the former county jurisdictional areas of Greater Manchester, South, and West Yorkshire, and the West Midlands, (councils which had been abolished with the Greater London Council, in 1986) had been freshly created to strategically plan and coordinate regeneration and economic development activity across their respective conurbations/sub-regions.

The 2018 consultation, in that light, also proposed that CAs should be empowered to introduce a low-level Strategic Infrastructure Tariff (SIT) on the Mayor of London model to “increase the flexibility of the developer contribution system, and encourage cross boundary planning to support the delivery of strategic infrastructure”.

Subsequent progress on that proved slow, however.  Successive governments have preferred to progress devolution deals with individual CAs.

A later 2020 Review  of the wider operation of CIL and its impact alongside the planning obligations system, confirmed that the tempo of CIL introduction and implementation had continued to quicken during the second half of the decade.

Mainly based on survey responses from LPA and other stakeholders, focused on the 2018-2019 financial year, it reported that in April 2019, just under half – 155 of 317 potential LPA charging authorities in England (after the reorganization and boundary reorganization of that month, and exclusive of Mayoral, Combined, National Park authorities) – were by then charging CIL.

Given that another 67 were progressing CIL, around two thirds of English LPAs, nearly a decade after its introduction, had either adopted or issued a CS.

By 2018-19, the value of CIL levied by LPAs had risen to £830 million (not necessarily collected), with a further £200 million levied by the Mayor of London,

compared to a combined developer contribution (S106 + CIL) figure of c£7bn for that year, including £4.7bn for the provision of affordable housing provided through S106.

The c£1bn contribution made by CIL to that £7bn total remained relatively small beer.

CIL coverage is very geographically uneven. Over half of contributions were accounted for by London and South-East LPAs in 2018-19, reflecting their higher locational development values with nearly all London authorities charging CIL compared to 21% across the North-West.

Many Northern and Midlands LPAs, where development values were generally much lower, were correspondingly less able to levy CIL at significant level, even on residential developments – at least without either eating into potential affordable housing provision or threatening the commercial viability of some developments.

By the same token, CIL rates, when set not to undermine perceived development viability across such areas, were reported as barely sufficient to justify local implementation cost. Lack of local capacity to implement CIL provided a further and related problem.

LPAs in that position have generally continued to shun CIL.

In operation, it remains spatially concentrated – both in adoption and receipt generation terms — within the more economically buoyant and affluent parts of the country that has left some swathes of the country almost untouched.

Was CIL doomed by design or by central government mismanagement and neglect?

Two key deliverables were expected from CIL. First, it should help to streamline the development process and produce associated efficiency and timeliness benefits.

Second, to generate net additional resources for local infrastructural provision without any associated loss in affordable housing provision.

Successive reviews, summarised above, identified long gestations in the CIL adoption process, followed by inevitable delays in building up or augmenting receipts to reach a point sufficient to fund lumpy required community infrastructure items.

When combined with a central proscription on LPAs forward funding infrastructure on the back of future expected CIL revenue flows, these delays put an effective lid on the short- to medium term infrastructural funding capacity of LPAs.

That lid, along with the transitional problems engendered by having to operate in parallel for a prolonged multi-year period the previous S106 system for planning permissions that had been agreed prior to local CIL adoption, were intrinsic to CIL design.

Another problem was that CIL viability testing (assessment of what developers could be expected to pay, depending on assumptions made) was often made across an individual LPA, rather than at a more granular area or project, basis.

The upshot was that viability was often assessed locally on a pan-LPA ‘worst case’ basis, thereby reducing potential total future receipt generation capacity, especially across low value areas, further fueling LPA perception across such areas that CIL was not ‘really worth the candle’ for them.

Frequent changes in the regulations – S106 pooling of obligations and the fluctuating technical treatment of the coverage, extent, and timing of reliefs provided prime examples – caused further confusion and uncertainty for the stakeholders that needed to operate the new system, as did the imposition of second or third order objectives, such as the decadal tack towards neighbourhood planning.

While the discretion and flexibility provided to LPAs in devising charging schedules did, however, provide some scope for variations in local development conditions and values to be taken on board, such local variation lessened certainty: in short, a ‘one-size fits all’ more certain approach rubs against the reality of divergent spatial and site characteristics and circumstances.

Practice could vary significantly between LPA; a tendency that was driven also by differences in local institutional implementative capacity.

Taken across the board, these scheme features tended to confuse, if not discourage, LPA staff and other key stakeholders, including developers, in their implementation effort, dashing initial hopes that CIL would prove “fair, fast, simple and transparent” in operation.

These problems help to explain why CIL remained a work in progress a decade after its introduction, and why it took that long for scheme receipts to even approach the levels that were anticipated at its inception.

Table 2 below identifies issues and problems that will continue to apply, regardless of whether CIL and/or Section 106 is either reformed or replaced by IL.

These need to be mitigated and managed rather than compounded by policy actions across design and implementation stages.

Table 2

   Issue and/or Design Parameter
1 Simplicity, uniformity, and certainty at a national level versus flexibility of treatment and incidence at a local area and site level.
2 Securing revenue-generation sufficient to meet locally cumulative infrastructural requirements versus development viability, whether at an area or project basis.
3 The definition and assessment of development viability and its constituent parameters, including assumed developer profit and landowner premiums.
4 The related extent that national or even LPA-wide tariff-based systems and possible supplemental mayoral strategic infrastructure levies and other parallel mechanisms, notably site negotiable S106, can achieve increased public land value capture.
5 The funding and provision of lumpy infrastructure projects that become cumulatively ‘necessary’ at a point before sufficient resources from slowly uncertain accumulating revenue funding streams are realized to pay for them – the tipping point and cumulative funding problem – at least in the absence of centrally provided capital subsidy, delegated forward funding approval(s) or alternative new local funding sources.
6 Securing the co-operation and funding input of other public authorities (such as county councils with education powers or Network Rail) or agencies (such as the Highways Authority) that possess funding profiles and priorities often different from that of LPAs.
7 The ability and capacity of new school and improved transport connectivity provision not only to make a marginal new development acceptable in planning terms, but also to facilitate or to make possible future development – the ‘crowding-in’ funding effect central to strategic regeneration schemes, such Barking Riverside and Oxford and Cambridge Arc.
8 The receipt gestation and other transitional problems that any new scheme would involve and/or need to overcome.
9 The related prospect of having to operate legacy systems, including CIL and S106, in parallel with a prolonged introduction of a new mechanism.
10 The establishment of robust local processes that prioritise infrastructure needs and then match associated spending profiles to supporting funding streams or sources and that then effectively and transparently monitor resultant outcomes.
11 The resourcing and capacity of LPA planning departments to operate in an efficient and timely manner such schemes in accord with their purported objectives.

 This section began by noting that CIL was introduced as an alternative to a proposed mechanism, PGS: an explicit national tax on development value crystallised by planning permission.

Although CIL, unlike PGS, was designed to be voluntary and locally based, allowing some local flexibility in rate-setting and treatment, it still constituted – both in intention and effect – a local levy on development value: proceeds could be used to plug existing or to meet future deficiencies in local infrastructural provision not necessarily directly related to any chargeable development.

Its introduction reestablished the principle of taxing land value betterment, albeit this was only tacitly recognized by government at the time.

CIL was undermined by design and transitional problems leading to its patchy local implementation, crucially compounded by a continuing lack of overarching central government policy clarity and certainty.

Any steadfast national public policy commitment to securing increased infrastructural investment in line with local affordable housing requirements and economic development needs likewise was notable only by its absence.

Such an absence of overarching political commitment and drive will invariably undermine any replacement to CIL, namely the new IL, included in the Levelling-Up Bill expected to receive Royal Assent in 2023. To that, we now turn.

4          The emerging IL

The August 2020 the Planning for the Future  White Paper (PWP), announced an intention to replace the Community Infrastructure Levy (CIL) and the current system of planning obligations with a new nationally set, value-based flat rate charge: the Infrastructure Levy (IL).

The IL did not emerge into the PWP out of thin air. Its antecedents can be traced back decades to the often-official espousal of alternative tariff approaches to S106, some of which were discussed in previous sections, grounded on a perception that these could offer greater predictability and certainty and thus reduce delays and costs.

S106 obligations, in any case, could include tariff-like requirements set on a per dwelling basis. Barker herself in her 2004 report was receptive to such a treatment.

The PWP took on board the tentative long-term preference of the 2018 consultation (itself influenced by the 2017 CIL Team Review) for a nationally set and non-negotiable levy to replace CIL and S106.

In that light, it proposed that CIL and Section 106 should be consolidated into a nationally set, mandatory value-based flat rate Infrastructure Levy (IL), levied as a fixed proportion of the final development value of sites or schemes above a minimum threshold at the point of occupation.

The PWP expected the new IL to raise more revenue and to deliver at least as on-site affordable housing as the existing combined CIL and S106 developer contribution system did without the “months of negotiation of Section 106 agreements and the need to consider site viability”.

It would also deliver more of the infrastructure that existing and new communities required by “capturing a greater share of the uplift in land value that comes with development”.

Permitted development rights were to be included in the scope of IL, so that additional homes delivered through this route could provide funding support for new infrastructure.

LPAs could specify the forms and tenures of the on-site affordable provision required, working with a nominated affordable housing provider (Provider), who could purchase the dwellings at a market-discounted rate.

That discount (the difference between the price at which the unit was sold to the Provider and the market price) would then be considered and costed as an in-kind delivery component of the IL that would then be subtracted from the developer’s IL liability for that site, prefiguring the ‘Right to Require’ included in the March 2023 consultation, discussed below.

Few of the 44,000 respondents to the consultation that followed on to the PWP felt that the new proposed levy would in practice increase on-site delivery of affordable housing, however.

Most, including the Royal Town Planning Institute and Shelter, expected it instead to reduce such provision. A survey of social housing providers found that only four per cent of respondents believed that the PWP proposals would deliver more homes for social rent and help to deliver mixed communities.

Although linking IL liability to realised development values was welcomed by some commentators, many also pointed out that its corollary was that some infrastructure necessary for development completion would need to be forward financed by LPAs, subjecting them to both development and funding risk, echoing a criticism made by the 2017 Review of CIL.

The PWP had indicated that LPAs would be permitted to borrow against IL revenues to forward fund infrastructure, as well as be bound by a new nationally determined local housing requirement, which they would have to deliver through their Plans at a local level consistent with the stated government aspiration of “creating a housing market that is capable of delivering 300,000 homes annually, and one million homes over this Parliament”, focused on areas facing the highest affordability pressures.

But when in parallel to the August 2020 PWP consultation, the government proposed associated interim changes to the standard method of assessing local housing needs that would produce figures in aggregate more aligned to its 300,000 national target, following NIMBY opposition within and outside parliament during that autumn, they were withdrawn within three months.

Proposed changes to the NPPF, published in December 2022, according to assessments undertaken by Lichfields and Savills, will reduce future housebuilding levels to around half of the that target, to c155,000 or lower (not taking account of the impacts of any prolonged housing market downturn).

Legislative provision for the IL to replace CIL in England was made in Part Four of the Levelling-up and Regeneration Bill (LURB) introduced into the Commons in May 2022.

The policy paper that accompanied LURB described IL as a “simple, mandatory, and locally determined Infrastructure Levy”.

That shift to a locally determined rate represented a key departure from the PWP design, which, following previous consultations, proposed a nationally determined rate.

 As such, it reflected recognition that it was not possible to combine certainty linked to uniformity with the flexibility in rate-setting needed to both to maximise potential land value capture across high value areas and to maintain development viability across low value areas, given the greatly variant development and site circumstances that prevail across and within LPAs.

During LURB’s passage through the Commons, MPs expressed concerns that the indeterminacy and lack of design detail of IL risked future complexity and uncertainty – contrary to stated intention, as well as doubts as whether it would secure developer infrastructural and affordable housing contributions comparable to the current combined CIL and S106 system, let alone more.

In March 2023, DLUHC issued a technical consultation on the detailed design of IL, indicating that further consultation would follow when the necessary secondary regulations needed to enact it were published.

According to LURB (as amended) and the March technical consultation, IL will:

  1. Largely replace existing CIL and S106 contributions towards community infrastructure and affordable housing in England (not Wales), except for the London Mayoral Levy.
  2. Apply to all types of development including permitted development, except for defined exemptions.
  3. Be calculated and collected as a set percentage of the Gross Development Value’ (GDV) of completed and sold developments above a minimum threshold level (on a £ per m2 basis), below which it will not be charged, “broadly meaning that the Levy is charged on the increase in land value created by a development”. Provision for staged or interim payments may be made, subject to the government response to the March technical consultation and later regulatory development. Constituting, in effect, a tax on completed sales value of a development, rather than a set and then fixed percentage of the additional floorspace approved at point of planning permission, regardless of its future value, IL should, according to the government, allow “developers to price in the value of contributions into the value of the land, allow liabilities to respond to market conditions and removes the need for obligations to be renegotiated if the gross development value is lower than expected; while allowing local authorities to share in the uplift if gross development values are higher than anticipated”.
  4. Rates and minimum thresholds to be locally set that could vary according to sub-area or type of development, according to a typology of development typical to each individual LPA.
  5. Charging schedules must pay regard to development viability and will be subject to public consultation and Examination, subject to Secretary of State intervention. In that light, rates and minimum thresholds set across applicable site typologies should “balance the need to capture land value uplift with the need to ensure that development remains viable” and that landowners are sufficiently incentivised to release sites for development. 
  6. Be mandatory. Deadlines for its implementation at LPA level will be centrally prescribed, with the rider that each LPA will have at least 12 months to implement.
  7. Involve introduction of a new ‘Right to Require’ for LPAs, allowing them to determine a non-negotiable proportion of IL that they should receive as in-kind onsite affordable home contributions of value “at least as much onsite affordable housing” as does the existing system. The precise measurement of that benchmark, involving the quantification of value of the affordable housing so provided and the associated detailed operation of the ‘right-to-return’, will be subject to subject to the government response to the March consultation and later regulatory development.
  8. Require developers to deliver infrastructure defined as “integral” to the operation and physical design of a site – such as on-site play areas, site access and internal highway network or draining systems – through planning conditions. Where this is not possible, integral infrastructure will be delivered through targeted planning obligations known as ‘Delivery Agreements’. All other forms of infrastructure – ‘Levy funded’ infrastructure – mostly community infrastructure, will be collected in cash through a ‘Core Routeway’, save for the operation of the ‘Right to Require’. The dividing line between ‘Integral’ and ‘Levy-funded’ infrastructure will be set in subsequent regulations, policy, and guidance, informed by the March 2023 technical consultation process.
  9. Restrict S106 otherwise to an ‘Infrastructure In-Kind Routeway’ where “infrastructure will be able to be provided in-kind and negotiated, but with the guarantee that the value of what is agreed will be no less than will be paid through the Levy (using the Core Routeway). A ‘S106-only Routeway’, where IL will not be collected, will apply when GDV is not calculable or where buildings are not the focus of development, such as minerals or waste sites. LPAs to set out in their local Plans the routeway applicable to distinct kinds of site after future regulations set an overarching framework for IL to operate in, also subject to further consultation.
  10. Allow forward funding through borrowing and use of reserves by LPAs to finance local infrastructure, subject to further regulatory development.
  11. Be staggered in implementation to allow a ‘test and learn’ approach to be applied over several years, so “allowing for careful monitoring and evaluation, in order to design the most effective system possible”. The earliest expected time for ‘test and learn’ LPAs to introduce IL is expected late 2024-25 with operation beginning in 2025-26.
  12. Require LPAs to prepare and publish Infrastructure Delivery Strategies, setting out how they intend to spend IL income, with other infrastructure providers required to assist their preparation, subject also to Public Examination, and:
  13. Sites permitted before the introduction of IL in each LPA will continue to be subject to their CIL and section 106 requirements.
  14. It may be possible for LPAs to spend IL receipts on recurrent service provision, subject to future regulatory regulation.

As ever, and as reported above, much will depend upon future detail, including how securing ‘at least as much’ affordable housing will be measured – a metric that in size and tenure composition terms differs significantly between authorities and can change over time with changing local circumstances and needs.

The technical consultation suggested that the most appropriate measure may be the value of the average cumulative discounts of affordable housing secured over an extended period at a LPA level, to reflect differences and changes in type and wider market conditions secured over the period selected.

It further noted that across some high value areas, the total value of the in-kind affordable housing provided could exceed the total IL liability.

Likewise, the consultation recognised that where the threshold for the Infrastructure In-Kind Routeway is set – which could range from a 500 to 10,000 dwelling qualifying threshold – will have significant implications for the final design of IL. Another big problematic issue with an uncertain answer.

A lower threshold would allow greater scope for developers to deliver infrastructure as an in-kind contribution, while a higher threshold is likely to be associated with greater uncertainty and negotiation.

For instance, as to whether additional community infrastructure, such as a new school or GP surgery, was required to mitigate the direct impacts of – and thus were integral to – the site, or rather reflected wider cumulative impacts of population growth, and/or both.

The opportunity, problem, and risk profile

The primary potential advantage posited for the introduction of IL is that it possesses the potential to raise more revenue in a more certain way than can CIL.

First, it would be mandatory and have wider coverage than the combined discretionary S106 and CIL system.

Second, its calibration to a percentage of final development value rather than to a fixed percentage of additional development floorspace approved at point of planning permission, as is the case with CIL, allows for greater development upside – whether that results from wider market conditions, the commercial success of a particular development, or the innate profitability potential of some types of developments – to be captured for public purposes.

Back in May 2019, the Scottish Land Commission advised Scottish ministers that a financial modelling exercise it had conducted with the Scottish Futures Trust, comparing the emerging model of an Infrastructure Growth Contribution Levy (IGC) – then contemplated for possible introduction in Scotland – with the Community Infrastructure Levy already established in England, had concluded that IGC would offer a more effective tool for land value capture.

This was attributed to the IGC’s “non-linear formula” calibrated to development value and because it would apply to “most developments”.

IGC, it was envisaged, would continue to operate alongside S106 (S75 in Scotland) and unlike IL would be levied at point of planning permission, but has not been subsequently introduced.

Most recently and relevantly, modelling and case study evidence assembled by a research team highly experienced and expert in the area reported in an evaluative study (the 2023 study), commissioned by the DLUHC and published in February 2023, suggested that substantial scope existed for IL contributions to exceed total developer CIL plus S106 contributions in the case of greenfield residential developments located across LPAs with high housing values.

This modelling, across a range of LPA case examples, compared potential IL proceeds obtainable at an estimated lower bound – calibrated to the scale of total developer contributions expected from within the existing system from a policy compliant scheme – and an estimated upper bound defined “as the maximum rate at which IL could be set whilst maintaining benchmark land value (sufficient to incentivise the landowner to release) and a 15% internal rate of return (IRR) to the developer”.

Proceeds from levying IL on warehousing, purpose-built student accommodation, and some other types of development largely untouched by the current scheme, could also increase aggregate proceeds beyond existing levels.

Other potential advantages could include greater certainty as to the scope and coverage and quantum of developer contributions, thus reducing the need for negotiation.

The 2023 study went on to point out, however, supported by qualitative local authority interview evidence, that most of the potential advantages posited for IL, depend upon assumptions that tend to conflict with reality on the ground or it could introduce further complexities and problems, and/or replicate the problems encountered by CIL.

The core driver and justification of IL is to increase proceeds for infrastructural investment. But increased CIL rates and extended its coverage to include permitted development, commercial development, and reduced exemptions could do likewise.

The government, reprising the findings of the latest published August 2020 CIL review, itself recognised in its recent March 2023 technical consultation that, when charged, CIL increased developer contributions available for infrastructural provision.

60% of CIL charging authorities reported increases in land value capture following its introduction, while 38% of non-CIL charging authorities believed that it could enhance value capture.

An incidence shift to a value-based levy on final realised development value might offer the prospect of greater proceeds and upside for LPAs, especially during the rising period of national and local economic and housing cycles.

But equally, it could result in downside risk and could involve prolonged asymmetrical negotiation and scrutiny with uncertain outcomes – a problem and issue that was raised during the consultations concerned with PGS.

IL proceeds are still likely to be geographically concentrated in high value areas, while the truncation of S106 will tend to break the contractual link between scheme development and infrastructural provision that it can provide.

Achieving “a similar level of affordable contributions” based on past contributions is likely to prove problematic to measure.

Setting and measuring the benchmark in a way that reflects the messy reality of divergent past practice will prove complex and challenging and is likely to be mired in confusion and uncertainty.

Even if the past pattern of developer contributions was achieved in practice and they reflected current requirements, it would not represent a net system improvement, certainly when transitional and implementation costs are factored in, unless IL was also successful in generating additional overall proceeds that could then be used for local community infrastructural development.

That begs the question as to the overall point of such a complex and indeterminate exercise, if it is to simply measure whether the local operation of IL is likely to provide as much affordable housing contributions as before, even though that level – even if accurate – may not provide a good base to meet current and future housing need requirements, consequently requiring further negotiation at a local level to realign them in line with changing national and local policy and other conditions.

Some further problems are obvious and stark: the setting of charging schedules will not necessarily synchronise with local Plan-setting processes, and will not in the future, unless the local Plan-making process becomes much more streamlined and truncated. That seems simply wishful thinking rather than a credible assumption.

More likely is that the introduction of IL will further complicate the Plan-making process, providing more excuse and reason for delay at a local level, thus not only self-defeating much of the purported purpose and intention of IL, but further undermining the wider working of the planning system.

IL will also need to run in parallel with a legacy CIL and Section 106 system for many years, that is if it gets off the ground: precisely the same transitional problem that bedeviled CIL across its early years, engendering the associated confusion and uncertainty that made it a target of criticism and replacement of previous successive consultation cycles, as a range of stakeholder organisations underlined in a June 2023 letter to the Secretary of State.

The long and apparently damning inventory of problems and issues associated with S106 that section 1 documented have long been the butt of successive government consultations, but as that section pointed out, progressive improvements in S106 practice, attributable to the use of standard templates, learning by doing and from experience, and greater consistency and certainty in national and LPA policy and practice, has weakened the force of some of these criticisms.

Proposed replacements, including PGS, the use of standardised tariffs, LIT, and now IL, all recognised the need to retain S106 in some shape or form.

As section 3 discussed, and Table 2 identified, many of the problems connected with CIL were a product of political mismanagement related to a lack of overarching commitment to first order objectives, including increasing infrastructural investment closer to needed economic and social levels, and/or to design problems inherent to any land value capture mechanism that aims to combine the advantages of national policy certainty with needed local flexibility in implementation.

Increased levels of public investment and the setting of supportive arrangements for LPAs to forward finance necessary local infrastructure provision consistent with economic and housing supply outcomes, also stares into the jaws of the real fiscal crisis of the state:  unwillingness or inability of government or political parties seeking electoral majorities to tax or borrow sufficiently to provide resources to secure the outcomes expected and/or needed.

A related danger exists that allowing IL proceeds to be used to support recurrent revenue budgets that they become a substitute for central government revenue support and/or local tax sources or stockpiled rather than used to fund local cumulative infrastructural requirements.

Some of the authors of the government commissioned 2023 evaluation study of IL have questioned whether significant simplifications to S106 and CIL could achieve  similar goals with less damaging disruption and delay, for example, by: using a fixed tariff instead of CIL for smaller sites (say, up to 100 dwellings for residential and an equivalent for commercial) for affordable housing and site mitigation with no exemptions so better linking funding to requirements (retaining CIL only for Mayoral CIL (London and combined authorities) for sub-regional/regional infrastructure; retaining Section 106 for larger for more complex sites requiring discussions and negotiations  while using a partnership-type approach, as suggested by the Letwin Review, for very large sites,  and, more ambitiously and optimistically, ensuring that Local Plans are in place that clearly state infrastructure requirements.

5          What should happen in 2024

IL will not become operative until 2024 at the earliest when its initial introduction could coincide thereabouts with a general election that autumn.

A new government, if it secured a working majority would then be able to decide whether to proceed with IL, as the incoming Cameron government did in 2010 with CIL, whether combined with parallel or interim reforms to CIL and S106 and to what extent, or to shelve it altogether.

The core concern and conclusion of this website is that the upheaval, confusion, and policy blight that would follow the introduction of replacement IL proceeding fitfully in parallel with the existing CIL and S106 systems withering on the vine for a decade or more, is likely to result in more harm than good.

The lesson of the CIL implementation process was clear enough and should be learnt this time round.

The design and transitional problems that afflicted CIL, set out in section 3, were largely the result of policy uncertainty and fluctuation, a necessarily long gestation period combined with slow and patchy take up, all compounded crucially by a continuing lack of overarching central government policy commitment, all risk repeating with IL.

It simply seems astonishing that the government appears to believe that introducing another complicated reform attached with a long receipt gestation and learning curve period that will still need to run for many years in parallel with, the existing CIL and S106 legacy systems – running with three or more horses, in effect –  will prove a positive catalyst and support of local infrastructural and affordable housing supply, rather than either policy blight and upheaval or both for LPAs for much of the next decade or beyond.

The Laurel and Hardy song concerning the successive unsuccessful efforts of the comic but relatable duo, as removal men, to transport a grand piano down a tenement block staircase rather comes to mind:

“We were getting nowhere … so we decided to have another cup of tea” – paraphrased here to – “after many years of getting nowhere, we were finally getting somewhere, if not that different in destination from where we started from, but after another cup of tea (aka: policy review/initiative in this case) we decided to start again from the beginning and get nowhere again for a while”.

Unfair poetic license, perhaps, insofar that the process undertaken by DLUHC has served to highlight the potential for more land value on greenfield sites to be captured and has suggested a more systematic approach to the costing and the obtaining in kind affordable housing contributions.

That said, it must be expected that the net present value of the distant and uncertain benefits that IL might generate a long time in the future, if realistically discounted, will be low at best and more likely negative. And, of course, a decade on past form it will be time for another disruptive reform.

Putting in hand ‘working with the grain’ incremental reform to, rather than a complex replacement of, the existing ‘present imperfect’ CIL and S106 systems, focused on the issues identified in Table 2 seems to offer a more sensible way forward.

Such changes should include setting clear process arrangements for the forward financing public funding of infrastructure to help to ‘crowd-in’ future development, the definition and application of development viability with reference to land value mechanisms (whether IL, CIL or S106) that can best reconcile national certainty with needed local variation,  securing greater consistency of, and certainty in the application of S106 affordable housing contributions at both central and local levels in a way that could tap effectively into the potential for increased land value, where that was present.

There also could well be merit in introducing as a mandatory default a low level LIT for those LPAs lacking a CIL schedule.

As the previous section noted, CIL coverage could be widened and deepened. CAs or at least the Metro Mayors could be empowered to levy a SIT where they could demonstrate that its proceeds are needed to unlock locally economic enhancing development through pump priming specific infrastructural additionalities, such as new transport links and stations.

Allowing LPAs to retain higher proportions of locally levied business rates could facilitate local infrastructural provision assisted by prudential borrowing.

In that light, the second core conclusion of this website, is that any new government should address and progress the first order design issues that Table 1 set out that before committing to IL or any new scheme.

Ideally, some variant of IL could be piloted as a demonstration project alternative in Scotland, where CIL is not levied, but that depends upon the consent and support of the Scottish government.

Most fundamentally of all, any future reform to be successful requires the necessary overarching political and policy commitment to be present on a sustained basis. Without that, nothing is likely to succeed.

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Filed Under: Housing, Macro-economic policy Tagged With: CIL, Infrastructure Levy, planning

The 2020 Planning White Paper: Key Lessons

3rd June 2023 by newtjoh

Link

This extended post outlines the main proposals of the PWP before explaining why they were mainly stillborn, mainly because it had unrealistic aims not matched by demonstrable capacity or commitment to implement them – identified as a foundational weakness of modern UK politics, tending to become ever more entrenched.

It goes to explain how that weakness meant that when the NIMBY elephant in the room reared its head, the government not only backtracked but reversed policy direction, using some case examples to illustrate practice and issues at the local level and its interaction with national policy, and the resulting implications.

The concluding section looks towards 2025 beyond the next election to the prospects for housing and planning reform, suggesting that a 300,000 national target is over optimistic, a banner for political show, rather than a feasible, if challenging, policy objective, and that a more realistic 250,000 rising to 275,000 target that underpinned and correlated with supporting planning reform and increased land value capture and first order economic objectives might well offer faster and more effective progress, but only if seriously sought and supported by the necessary overarching central government policy priority, clarity, and certainty, which is a prerequisite for any progress.

1          Antecedents and summary of the PWP

Early in 2020, two Policy Exchange (PE) reports, Rethinking the planning-system for the 21st-century  and the more eclectic topic-based Planning Anew were published that emphasized the negative part that the planning system – especially across high housing demand areas – plays in reducing new housing supply, in pushing up prices, and in redistributing income and wealth from renters to homeowners.

The system’s discretionary, cumbersome, over-detailed, extended, and uncertain characteristics, including its use of mechanistic “largely unpredictable’ future projections of economic and housing need over a 15 year or more period inherently subject to uncertainty, required “‘wholesale change” allowing it to be freed from the continuing legacy of the 1947 Town and Country Planning Act, itself established to further a “command and control” economy.

The Building Better, Building Beautiful Commission Living with Beauty, also published a report, which offered two central conclusions.

In its eloquent own words, these were, first, “We do not see beauty as a cost, to be negotiated away once planning permission has been obtained. It is the benchmark that all new developments should meet. It includes everything that promotes a healthy and happy life, everything that makes a collection of buildings into a place, everything that turns anywhere into somewhere, and nowhere into home. So understood beauty should be an essential condition for the grant of planning permission”.

Then, second, “good quality housing development costs more to deliver. Whilst data is limited in this regard, anecdotal evidence across the projects studied suggests that the cost premium might range between 10% and 22%. Our analysis showed that this could be offset by the value premium, concluding that following a quality agenda is a viable choice. The choice to adopt a higher quality route need not preclude cheaper housing. Both may be equally profitable and both may sit comfortably alongside each other offering choice to consumers at different price point.”

All three reports influenced the August 2020  Planning for the Future  White Paper (PWP), which then prime minister, Boris Johnson, in his usual customary hyperbolic style, described, in its forward, as “radical reform unlike anything we have seen since the Second World War” to “tear down” the existing crumbling, cumbersome, and complex planning system.

The PWP then proceeded to set out its stall in more somber terms. It diagnosed the system’s core problem its reliance on a discretionary rather than a rules-based Local Plan process. Most planning consents – contrary to general European practice – were made on a case-by-case basis rather than by reference to clear set rules, causing up a third of consents to be subsequently overturned on appeal.

Another fundamental failing was it “simply does not lead to enough homes being built, especially in those places where the need for new homes is the highest”, pointing out that adopted Local Plans provided for 187,000 homes per year across England – far short of the government’s ambition of 300,000 new homes annually.

Such structural under supply made housing increasingly expensive, compared to European peers, such Italy, Germany, and the Netherlands, where “you can get twice as much housing space for your money compared to the UK”.

Consultation and participatory arrangements often crowded out or ignored the voices of the young and others, which, as they were the very people that depended upon new developments meeting their needs to proceed expeditiously, exacerbated entrenched inequalities.

The PWPs proposed cornerstone reform in response was a shift to a rules-based tri-zonal system of development control, comprising:

  • Growth areas suitable for substantial development; outline approval for development would be automatically granted if it was in conformity with the forms and types of development specified in the applicable Local Plan;
  • Renewal areas suitable for some development, such as gentle densification; and,
  • Protected areas where – as the name suggested – development would be restricted.

Local Planning Authorities (LPAs) in future were to complete the plan-making process within a newly required time limit of 30 months.

General development management policies would also be set nationally, obviating the time and resource costs involved in assembling a long list of local development “policies” of varying specificity.

Local Plans under this new regime would instead concentrate on site- and area-specific requirements and on local design codes. A core set of “visual and map-based” digitally based local requirements for development would be limited to “setting out site- or area-specific parameters and opportunities”.

Concerning housing delivery, a new nationally determined, binding housing requirement would be set for LPAs to deliver through their Local Plans, focused on areas where affordability pressure is highest, consistent with the government’s “aspirations of creating a housing market that is capable of delivering 300,000 homes annually”.

The PWP also signaled future measures to speed up build up delivery rates across large sites, to provide better information to local communities, to promote competition amongst developers, to assist SMEs and new entrants to the sector, as well as to improve the data held on contractual arrangements used to control land.

Another strong focus was on ‘beauty’, broadly defined as good design rooted in a local ‘sense of place’, reflecting a reaction against burgeoning ‘cereal box or ‘identikit’ drearily designed developments that had become almost a ubiquitous feature of the periphery landscape of ‘middle England’ market towns, amid deteriorating quality and space standards.

Highlighting the need to deliver more of the infrastructure existing and new communities require by capturing a greater share of the uplift in land value that comes with development, the PWP also announced an intention to replace the Community Infrastructure Levy (CIL) and the current system of planning obligations with a new nationally set, value-based flat rate charge: the Infrastructure Levy.

This would “raise more revenue than under the current system of developer contributions, and deliver at least as much – if not more – on-site affordable housing as at present” and “enable us to sweep away months of negotiation of Section 106 agreements and the need to consider site viability”, and will be considered separately in a succeeding dedicated post.

In general, the PWP was a curious and interesting mix of high-level free market, social democratic and communitarian principles, partly reflecting, perhaps, the divergent drivers of a post-fiscal austerity Boris Johnson government that needed Janus-like to accommodate both its disparate new “Red Wall’ and its traditional ‘middle England’ sources of electoral support.

It is difficult to dispute that the nine key criticisms the PWP made of the existing planning system possessed at least some validity nor that much of its vision was appealing, when less than 40% of English LPAs in early 2023 possessed an up-to-date Local Plan, spurring developers to make speculative applications or to make appeals against permission refusal, or when the long gestation period involved in their production can cause them to be already out-of-date when finally adopted.

Features not inconsistent with the PWP’s conclusion that the existing planning system was generally not fit for purpose; or, indeed, at its worst, when measured against its purported objectives, self-defeating.

2          Why the PWP was stillborn

The PWP was, itself, self-defeating, however.

Its ‘big bang’ upending of the system that it seemed to inherit from the Policy Exchange in preference to a more ‘make do and mend’ incremental approach was always going to be at the mercy of both national and local public government commitment and/or capacity.

But any grounds for optimism that local LPAs, following years of under-resourcing, could cope with introducing such a new system in the timescales set was whimsical or flimsy, at best.

Even more crucially, the lack of an accompanying national robust evidence-based, funding and policy framework to the PWP indicated unrealistic aims not matched by demonstrable capacity or commitment to implement them.

A not unusual feature of modern UK government and politics, it must be said – a foundational weakness tending to become ever more entrenched.

That weakness was soon to be exposed, with the PWP likely to prove a prime case example.

Unless overcome, such foundational weakness will almost certainly render ineffective any successor attempts at reform in the face of the political and institutional challenges and conflicting objectives that any future reform would have to both balance and surmount.

Trampled by the NIMBY elephant in the room or a flawed method or both

The PWP failed to adequately address the political reality (partly picked up in its own diagnosis) that low turnout in local elections combined with the disproportionate tendency for older homeowners – as well as with their growing share of the general population – to participate in them, is a systemic barrier against development proceeding at a level anywhere close or consistent with the achievement of the government’s overarching 300,000 annual new supply target.

On the ground, local councillors generally face greater pressure from often vocal and well organized existing and established resident groups to refuse permissions to build local extensions to settlements and/or high-density urban developments, under the banner of protecting the ‘character’ of their area and/or avoid adding to local infrastructural shortfalls, than they do to step up local housebuilding.

Such new development could or should in the future help local young people needing access to affordable accommodation or in-migrants that are seeking to work in growing sectors of the economy, such as IT and biotechnology – often located in high values areas, including the Oxford and Cambridge Arc.

But as the future benefits of such developments are dispersed and delayed, their potential future beneficiaries are, unsurprisingly, far less likely coalescence into a local organized grouping and/or to participate in development specific consultations than are existing residents agitating against proposed specific local developments in real time, the disbenefits of which are concentrated within their communities.

To suppose that better designed proposed developments, even with higher proportions of affordable housing, will necessarily placate such local opposition was always going to be optimistic: established residents enjoying a high-quality local environment often oppose new development because it threatens the ‘character’ of their area, spoiling their views and their peace and quiet.

This is even when such proposed developments will lie beyond their neighbourhoods or are close to transport modes (in the case of existing high density urban areas) or are on greenfield sites on the periphery of their home settlement boundary.

Relatively affluent residents seldom welcome new social housing or other developments that might mitigate against house price appreciation or impact upon school catchment areas: self-interest rather than altruism tends to prevail.

That NIMBY elephant in the room was always going to translate into local political reluctance or refusal to designate the proposed growth or even renewal areas.

When it reared its head at Westminster to protest the prospect of increased centrally set local housing targets, much of the integrated vision of the PWP began to fall apart at unseemly speed, even before it was translated into legislation.

Concurrent with a wider consultation on the PWP, proposed changes to the local needs assessment algorithm or formula or the standard method for assessing local housing need (standard method)), “to make assessing the minimum number of homes needed in an area easier, cheaper and more transparent”, were also, in August 2020, put out to consultation.

The standard method was first implemented in the 2018 iteration of National Planning Policy Framework (NPPF) to produce the objectively assessed housing need (OAN) figure for each LPA, providing a starting point for its housing provision policies and its setting of local housing requirements.

The underlying formula starts with the projected average annual household growth over a consecutive ten-year period starting with the current year, using Office of National Statistics (ONS) 2014-based household projection base data.

This annual growth figure (baseline figure) is then adjusted according to the local ‘affordability ratio’ based on the latest ONS data on local authority median affordability ratios (local median house price divided by gross annual workplace earnings).

If the median house price is more than four times the average earnings of someone who works in the area, the average household growth baseline figure is revised upwards according to an adjustment factor.

Any resulting increase is subject to a 40per cent cap above the average annual housing requirement figure set out in the existing policies when adopted within the last five years and for LPAs with strategic plans more than five years old, 40per cent of whichever was higher of the projected baseline household growth figure, or the most recent number taken from the LPAs spatial development strategy.

The proposed revisions to that 2019 standard model, which included the complete elimination of the cap, were designed to ensure “that the new standard method delivers a number nationally that is consistent with the commitment to plan for the delivery of 300,000 new homes a year, a focus on achieving a more appropriate distribution of homes, and on targeting more homes into areas where there are affordability challenges”.

It was envisaged that they would then become part of the future process for setting any binding housing requirement, to be determined separately.

Using currently available data, the revisions generated a national housing need of 337,000 (in England): a figure, which, the consultation advised, would constitute the “starting point for planning and not the final housing requirement”, with the surplus reflecting that not all homes planned for are built, as well as to allow for a land buffer to compensate for the drop-off rate between permissions and completions.

The consultation went on to recognise that the revised method at a local authority level would affect individual authorities differently, with 141 authorities (excluding London boroughs) facing an increased requirement of a quarter or more over and their current plans or existing standard method numbers.

Many of these authorities were located across Conservative southern heartlands, while the revised method generally generated lower housing numbers in city authorities in the Midlands and North, often Labour controlled.

Regardless of whether the revised figures constituted a ‘target’ or a ‘minimum’ or something else (for the record, the consultation made it quite clear that “the standard method identifies the minimum number of homes that a local authority should plan for in an area”), that LPA performance and progress towards reaching such higher figures could be taken into account as material planning consideration by the Planning Inspectorate (PI) when determining developer appeals against consent refusals, soon induced intense opposition to the change within the ranks of Conservative MP’s and council figures, especially those representing ‘Middle England’ metropolitan suburban and shire county constituencies.

In the autumn of 2020, a 8 October Commons debate on a successful motion calling for the government to delay any planned implementation of the changes to the standard method for assessing local housing need, articulated many of the concerns and issues raised.

Theresa May, speaking as the MP for Maidenhead, advised that her borough’s housing target would increase by 21%, so strengthening the implication that its green belt would need to be built on.

She went on to add that despite her neighbouring Council, Wokingham Borough Council, delivering new homes over and above its target during the previous three years, under the revised method, its current annual target of 789 homes would double to over 1,635 homes.

Philip Hollobone, MP for Kettering, also advised the chamber that North Northamptonshire’s target would increase from 1,837 a year to 3,009 a year, when “since 2011 on average we have only managed to build 1,640 a year and at the very height of the market the maximum that was achieved was 2,100, the target is completely unrealistic and undeliverable”.

MPs of all parties cautioned against ‘over development’ across London and south-east or in the words of one “making Kent a patio”, at the risk of undermining the Levelling-Up agenda.

Many suggested that instead of relying on unattainable ‘top-down targets’ that failed to take account of local circumstances and preferences, forcing developers sitting on planning permissions to build out quicker and/or providing more affordable housing would prove more effective in increasing supply.

Jeremy Hunt, the MP for South-West Surrey, and the current chancellor, for example, after expressing concern about the threat to his constituency that a 20% higher housing target posed to ‘its beautiful countryside’, pointed out that the average income in his constituency was £39,000 when the average house price was £447,000,  requiring a first time purchaser to have a £60,000 income to afford an entry-level house, way out of the reach of a nurse, a police officer or a teacher.

He concluded that the proposed revised method would make that problem worse, not better, as “ simply increasing the housing targets does not help them, because the price of new stock is set by the price of existing stock, and all that happens is land banking, which is why in my constituency currently, only 28% of all the housing permissions granted are actually being built out”, while emphasising the need to ‘carry people’ in favour of local development.

Later that month, John Halsall, Conservative leader of Wokingham Borough Council graphically complained in an interview with Planning magazine that if the revised method goes ahead, “we’re really utterly stuffed. Not in a million years could we get a five-year supply. We’re just an open goal for any developer to score in ….I doubt there’d be a Tory council left in the South East afterwards. The government is well aware of the extent of the opposition now.”

Indeed, it was. A U-turn soon followed.

In its response to the consultation published in December  2020, the government announced, barely over three months after its proposed revisions went out to consultation that the standard method would be retained.

This was, however, attached with a big cavil: a 35 per cent uplift would be applied to the cap generated by the standard method to Greater London and to LPAs covering 19 most populated cities and urban centres in England: Birmingham, Liverpool, Bristol, Manchester, Sheffield, Leeds, Leicester, Coventry, Bradford, Nottingham, Kingston upon Hull, Newcastle upon Tyne, Stoke-on-Trent, Southampton, Plymouth, Derby, Reading, Wolverhampton, and Brighton and Hove.

In an accompanying ministerial statement, then Secretary of State for Levelling Up, Housing, and Communities (the Housing Secretary) Robert Jenrick, said the government had “heard clearly” that the building of homes should not be at the expense of “precious green spaces” and that instead it would be done better in urban areas.

This was despite evidence showing that there was and is not enough brownfield land to meet housing needs in any region, especially so in London and across other areas where demand and need is strongest.

It had taken less than four months, therefore, for the PWP’s radical ambition to wilt into political expediency.

The May 2021 Queens Speech, nevertheless, did, still go on to promise “laws to modernise the planning system, so that more homes can be built, will be brought forward”.

The concurrent wider consultation on the PWP had induced 44,000 responses, mainly negative, focused on concerns on its lack of detail on how the zonal system would work or how necessary associated infrastructural works would be funded, including that it would become a ‘developer’s charter’ that would increase the market value of land located in designated growth areas at the expense of affordable housing levels and of local community accountability.

In that vein, the Housing, Communities and Local Government Select Committee in June 2021 published a report  that noting the lack of detail or supporting evidence provided in the PWP recommended the government should reconsider its proposal to move to a zonal-based system with different planning rules applying depending upon zone.

It also disagreed with shifting public engagement from individual planning applications to the Local Plan stage, insofar that “far more people engage with individual planning proposals”, expressing concern and that proposed change risked reducing public involvement in the planning process.

That same month, the Conservative loss of the Chesham and Amersham by-election concentrated government minds even further on the real political downside risk of pressing ahead with planning reforms designed to help secure a higher housebuilding target as, inter alia, a means of expanding the numbers of new homeowners expected to imbue Conservative values in tune with their new tenure status.

Instead, it was perceived that pressing ahead with planning reforms could induce a loss of seats to the Liberal Democrats and/or encourage Labour and the Liberal Democrats to cooperate to make inroads into the ‘Blue Wall’ of supposedly safe Conservative seats, many of which were around London and other high value areas.

Given that watershed political moment, there was little surprise, therefore, when the new Housing secretary, Michael Gove, briefed MPs in March 2022 that in place of a standalone Planning Bill designed to replace and transform the existing post-1947 planning, a slimmed-down version of the PWP would be delivered as part of the Levelling Up legislation that he would pilot through the Commons during 2022.

The subsequent Levelling Up and Regeneration Bill (LURB) omitted the PWP’s flagship proposed shift to zonal planning and a system shift to rules-based rather than discretionary planning decision-making.

It did include, however, some significant PWP proposals, namely, requiring LPAs to start work on new Plans at the latest five years after adoption of their previous Plan, and then to adopt their new Plan within 30 months; and the production of centrally defined National Development Management policies that would have precedence in the case of any conflict with Local Plan policies.

Then that autumn, in November 2022, a large number of Conservative MPs signed an amendment to LURB, put forward by Chipping Barnet  Conservative MP Theresa Villiers, supported by Bob Seely MP for the Isle of Wight (who had initiated the 8 October debate two years previously) to make “centrally set” housebuilding targets “advisory and not mandatory” that “should not be taken into account when determining planning applications”.

Villiers, a longstanding advocate of not building high rise blocks on suburban sites and of protecting Green Belt and other greenfield sites, earlier that year was instrumental in getting the Transport Secretary to block on a legal technicality an application, by Transport of London (TfL) to build 351 flats, of which 40% by habitable room would have been affordable, on a car park TfL owned adjacent to Cockfosters Underground Station, given outline or ‘in principle’ approval by Enfield Council (ref: 21/025/FI/FUL).

The Labour controlled Enfield Council and the Greater London Assembly (GLA) concluded that the scheme, even though it involved tall buildings not in an area designated by the existing Plan for them, would result in ‘less than substantial harm’ to the setting of the Grade II listed Cockfosters Underground Station and to the adjacent Grade II registered Trent Park and Trent Park Conservation Areas, while its public benefits in terms of public realm improvements and the provision of affordable housing outweighed identified harms.

Villiers campaigned against the development because it would involve building four blocks from five to 14 stories in height, “out of scale and character with the surrounding area”, and result in an associated reduction of ‘park and ride’ car parking spaces from 336 to less than 50, replicating concerns she also had about a similar application for High Barnet Underground station, this time in her constituency.

Although the development offered, by unit, 39per cent low-cost rent – 11per cent London Affordable Rent (social rent) and 27per cent London Living Rent – with the remaining 61% to be let at between 60 and 70per open market rents, this was less than the Mayor of London 50per cent affordable housing target on public land despite public grant input. Some objectors doubted that overall the majority of development would be affordable to local keyworkers.

Villiers and other signatories to the Commons motion emphasized that they were not ‘against new housebuilding’, only that it should not be imposed in excessive density on inappropriate sites in such a way that would change the character of a local area and/or threaten Green Belt or other green open space land.

In a December 2022 Ministerial Statement the Housing Secretary, Michael Gove, to all intents and purposes, accepted or caved into that position.

Under the Community Control heading, he stated:

“I will retain a method for calculating local housing need figures, but consult on changes. I do believe that the plan-making process for housing has to start with a number. This number should, however, be an advisory starting point, a guide that is not mandatory. It will be up to local authorities, working with their communities, to determine how many homes can actually be built, taking into account what should be protected in each area – be that our precious Green Belt or national parks, the character or an area, or heritage assets. It will also be up to them to increase the proportion of affordable housing if they wish”.

My changes will instruct the Planning Inspectorate that they should no longer override sensible local decision making, which is sensitive to and reflects local constraints and concerns. Overall this amounts to a rebalancing of the relationship between local councils and the Planning Inspectorate, and will give local communities a greater say in what is built in their neighbourhood”.

The accompanying changes to the NPPF included:

  • weakening the presumption towards sustainable development “where meeting (housing) need in full would mean building at densities significantly out of character with the existing area”;
  • removing the requirement for LPAs to review local Green Belts, “even if meeting local housing need would be impossible without such a review”;
  • ending the obligation on LPAs to maintain a rolling five-year supply of land for housing where their Local Plans are up-to-date, and, in all cases, the requirement for the maintenance of up to an additional 20% buffer over and above that level;
  • The presumption in favour of sustainable development operative where delivery falls below 75% of a local planning authority’s housing requirement over the previous three years will be ‘switched off’ by an additional ‘permissions-based’ test where sufficient permissions have been granted for homes more than 115% of the authority’s housing requirement over the applicable Housing Delivery Test monitoring period.
  • Where authorities are well-advanced in producing a new plan, transitional arrangements over two years would allow them to show a rolling four year instead of a five-year supply of land consistent with the delivery of local housing requirements;
  • LPAs can take account of past over delivery of housing when setting or reviewing local housing targets;
  • increase community protections afforded by a neighbourhood plan against developer appeals – the relevant amendment to the NPPF, in effect, lifts the para 14 presumption in favour of development within an area where a neighbourhood plan (NP) has been adopted for five years or less, regardless of its LPA’s wider land supply and housing delivery position, as long as the NP also contains policies and allocations to meet its identified housing requirement;

The proposed NPPF confirmed that the broader ambition of the PWP had been sacrificed on the altar of Nimbyism.

The government had even regressed from the position that had prevailed prior to the publication of the PWP, undermining the operation of the existing standard method, which, as it had itself highlighted, resulted in figures that even if they had been achieved in total would still undershoot its overarching annual 300,000 new supply target.

According to assessments undertaken by Lichfields and Savills, the proposed revisions to the NPPF will reduce future housebuilding levels to around half of the that target, to c155,000 or lower (not taking account of the impacts of any prolonged housing market downturn).

Mechanisms of central government compulsion over LPA’s reluctant or even recalcitrant to plan for and facilitate increased local housing supply accordingly were watered-down and then reversed in face of local Nimbyism, in apparent fear of its perceived central and local electoral significance.

A sizeable minority of Conservative MP’s, including Simon Clark, Secretary of State for Levelling Up, Housing and Communities from September to October 2022 during the brief Truss administration and MP for Middlesbrough, lobbied against the changes, making the point that they would lead to less housebuilding retarding future the prospects for economic growth and the interests of the young and others needing new development for their economic and social future.

Liz Truss, however, despite railing against the ‘anti-growth’ coalition during the Conservative leadership contest that preceded her elevation to the premiership, had promised to dismantle ‘Stalinist top-down’ centrally set housing targets, in the process rather neatly encapsulating the conflict between prioritising higher growth and housebuilding and assuaging the populist NIMBY concerns especially pronounced within party and conservative voting electorates, between ‘blue’ and ‘red’ wall current and future sources of any Conservative parliamentary majority, and between retaining the vote of elderly owners and winning the future support of the aspiring young and middle-aged cohorts, many of which have been and face being priced out of home ownership.

Short-term political tactical considerations in the event overrode any semblance of strategy, although by the same token, the proposed revisions to the standard measure were themselves badly scoped and thought-out and politically cack-handed in implementation insofar they clearly not underpinned by careful modelling of the results and consideration of or preparation for their immediate political impact that they would foreseeably generate.

That tactical failure itself was related to the fundamental foundational weakness of the PWP as a strategic political project provided with unrealistic aims not matched by demonstrable capacity or commitment to implement them.

3          Nimbyism and planning policy and practice at the coalface

Another unintended but significant consequence of the PWP – again opposite to its declared intention – was that many LPAs delayed producing or updating their Local Plans. Although this was ostensibly to wait until the shape of the new system became clearer, for some LPAs the associated uncertainty provided a convenient reason or excuse not to zone or identify more land for housing: something they didn’t really want to do in any case.

Wealden Council

Take Wealden District Council (WDC) in East Sussex, a largely rural district. More than half of its land space is designated within the High Weald Area of Outstanding Natural Beauty (HWAONB) along with other important Sites of Special Scientific Interest (SSSI), Local Nature Reserves and Ancient Woodland, which constrains future development.

Yet it is also an area of high housing need and worsening housing affordability: the 2021 median Wealden house price was 13.76 times median local earnings, higher than then southeast regional average (10.74) and across England and Wales (8.92).

Its elderly over-65 population in 2019 accounted for 26 per cent of the overall population, compared to 19.5per cent regionally and 18.4per cent nationally with the total number of people aged 65 and over is projected to increase by 56per cent over 20-year 2019-2039 period.

WDC paused its Local Plan consultation in 2022 citing the policy uncertainty surrounding the PWP. It then further delayed the process to respond to the December 2022 consultation on the proposed revisions to the NPPF and other planning issues connected to the Levelling-Up agenda discussed in the previous section discussed.

That response  (WDC response) noted that while its current Local Plan, Provision of Homes and Jobs 2006-2027, adopted in February 2013, anticipated the delivery of 9,440 dwellings between 2006-2027 or 450 dwellings per annum (dpa), its objectively assessed housing need (OAN) figure when assessed under the standard method introduced in 2018 subsequently rose to 1,212 dpa (or 24,240 new homes in total over a 20-year period)

It argued that this large disparity between the adopted housing requirement and current local housing needs was too large for WDC to close in the absence of a new Plan provided with new sites.

In that light, the WDC response went on to largely endorse the government’s changes to the NPPF and LURB Bill, but with significant cavils.

Most notably, it asked the government to go further and remove altogether the five-year deliverable housing land supply (5YHLS) measure that since 2018 has been calibrated to the standard housing need measure, for LPAs (including those without an up-to-date local plan, such as WDC).

This was because the application of both the 5YHLS and the Housing Delivery Test (HDT) measurement “has and will continue to create confusion for the wider public, particularly where local planning authorities ‘pass’ one measurement, but ‘fails’ the other”.

Instead, the HDT, coupled with the proposed ‘additional permissions-based’ test included in the revised NPPF that would ‘switch off’ the application of the presumption in favour of sustainable development where an authority can demonstrate sufficient permissions to meet its housing requirement, should be used as the primary metric.

This would “support a plan-led system, by preventing LPAs who are granting sufficient permissions for new homes from being exposed to speculative housing development”.

The Council’s consultation response also contained much relevant commentary on emerging planning policy.

It advised that very few of our neighbourhood planning groups preparing neighbourhood plans in Wealden District are looking to allocate housing sites, perhaps, in part because of a perceived negative reaction from parishioners at the referendum stage if they did, but also because of the amount of work involved in assessing and allocating sites for only two years of protection from further speculative housing development, and, accordingly, it agreed with the proposal to extend that period to five years.

WDC does not include any Green Belt land, and its response expressed concern the proposed change in the review of Green Belt boundaries would result in LPA’s submitting local plans with potentially significantly lower housing numbers that could consequently result in their neighbours facing additional pressures to meet an increased amount of unmet housing need, even though many of which already face significant challenges in meeting their own identified housing need for other reasons (such as national landscape and ecological constraints).

Highlighting that that considerable areas around cities in the north are surrounded by Green Belt (Manchester, Liverpool, Sheffield, and Leeds, for example) the response questioned whether development supporting the policy programme set out in the Government’s Levelling-Up agenda can be realised given that there may be limited opportunity for the required 35per uplift in their housing need figures of the 20 most populous urban areas, which was supported as making “the optimal use of brownfield land, in sustainable locations, to meet national housing need”, to be realised.

In that light, the response went on to note Wealden District is overlapped by five housing market areas, including the urban areas of Eastbourne and Royal Tunbridge Wells, which  abut Wealden District to the south and north respectively, and that whilst neither of these neighbouring local planning authorities feature in the top 20 most populated cities and urban areas, WDC District faces similar issues in the respect of potential unmet housing need from its neighbouring urban authorities.

A need for further ‘guidance’ was recorded on how it can develop its ‘alignment policy’ (replacing the Duty to Co-operate that will be repealed when LURB is enacted) with its neighbours.

WDC as of 1st April 2022 had almost 7,700 (net) dwellings either provided with detailed planning permission, outline planning permission, or with a resolution to approve planning permission.

Although the response recognised that some of the larger sites cannot be completed within a five-year period, it argued that all new sites for housing should be commenced within a short period of time upon the granting of a detailed planning permission and the discharge of pre-commencement conditions. WDC had sought shorter time limit conditions (rather than the traditional 3-year period) for the commencement of those schemes to incentivise those developers to build out quickly.

Instructionally, WDC suffered two planning appeal defeats in 2022, which the council withdrew from following legal advice that it would be “defending the indefensible”.

The first appeal involved 200 homes on land west of Station Road in Hailsham  (planning reference WD/2020/2509/MAO), and the second, a mixed use development comprising 700 new homes, a new school and community facilities at  Mornings Mill Farm, Eastbourne Road, Lower Willingdon (planning reference WD/2021/0174/MEA).

Hailsham, a market town of 23,000 residents, is the largest Wealden urban settlement, while the Mornings Mill Farm site is located between Polegate (largely a commuter and local transport hub settlement, itself located between Hailsham and Eastbourne) and Lower Willingdon, essentially now an outer suburb of Eastbourne, but lying within WDC.

In both cases planning committee members went against planning officers’ advice, invoking ‘saved’ 1998 LP policies that were out-of-date and highways and environmental objections that the respective inspectors later confirmed were baseless, causing them to award costs against WDC of £440,000 due to the unnecessary delays occasioned as to what they defined as WDC’s unreasonable behaviour.

Because WDC could only demonstrate a 5YHLS of 3.66 years, because its Local Plan was out of date, and because of the scale of its unmet housing need, the planning inspectors granted outline planning permission, even though the two applications in question involved greenfield sites beyond – at least in part (the majority of the Morning Mill Farm site lies inside – the indicative “strategic development areas (SDAs)” set out in the council’s 2013 Core Strategy Local Plan (CLSP), which recognised that the 1998 development boundaries set in the existing adopted Local Plan would have to be breached to deliver necessary growth that the CSLP assessed is required to 2027, while the out-of-date 1998 Plan was based development required up until 2004.

Both outline approvals require 35per cent affordable housing. It was, in one of the schemes, capped at that level at the instigation of the council, to allow CIL contributions towards local infrastructural enhancements to be generated by 65% rather than a lower level of market housing.

These two cases clearly show a preference for the then Council to restrict development in locations that, according to the relevant inspectors, were ‘in principle’ suitable and sustainable and which were needed given WDC’s wider housing supply requirements.

An application for 300 new homes on the settlement edge of Hailsham at Old Marshfoot Farm (ref: WD/2017/0458MAO) had secured outline planning permission in 2018 against some strong local resident opposition. Local councillors had subsequently expressed regret about their decision in face of continuing resident opposition and were advised by officers that they could not revisit it. That memory may have played a part in the subsequent planning history of the above two cases.

Prior to the May 2023 local council elections, WDC had indicated an intention to publish its new Plan for consultation in late summer/early autumn 2023 to include new proposed site allocations and development management policies.

That revised timetable was itself made subject, however, to the highly qualified rider “to the actual timing of the NPPF updates and extent of the final changes and so remains uncertain”. As the Council, following those elections, then passed from Conservative control to no overall control, added uncertainty and probable further and extended delay can be expected.

Windsor and Maidenhead

Windsor & Maidenhead Borough Council adopted its Local Plan (2013-33) in 2022, nine years after its inception, and four years from when it was first submitted for Examination to the Planning Inspectorate. Its predecessor had been adopted in 2009.

This 2013-33 Plan set a 712dpa/ 14,240 dwelling requirement over the twenty-year plan period and made associated provision for some “moderate Green Belt release” to allow that full Objectively Assessed Need (OAN) figure for housing and identified employment needs to be met.

The Planning Inspectorate Examination report, in that light, had noted: “Essentially, the scale and type of housing and employment needed in the Borough cannot be met on non-Green Belt sites. Whilst the need for such development is not unique to Windsor & Maidenhead, the socio-economic effects of not providing it, taken together with the inability to accommodate it elsewhere, do amount to the exceptional circumstances necessary at the strategic level to justify altering the established Green Belt boundaries through the Local Plan, (para 101)”.

However, in February 2023, barely a year after the Council adopted its new Plan, its leader wrote to the Department of Levelling Up, Communities and Housing (DLUHC) to request flexibility in meeting the total OAN figure the remaining plan period, insofar that the Council was “paying the price” for adopting its new Plan in February 2002 abiding by government instructions at the time, when otherwise it would have “paused the examination process, like other local authorities have done, until greater clarity was given”.

Indeed, following Gove’s December 2022 ministerial statement, during a period covering less than four months, another 26 LPAs paused their Plan preparation. All except a handful specifically cited the continuing uncertainty on future local housing numbers they will be required to deliver and the associated impact on their five-year land supply and utilization of brownfield and/or greenfield land positions.

Figure One shows that by the end of March 2023, over 55 LPAs had delayed or stayed the progression of their Local Plan because of PWP policy uncertainty. They were mainly concentrated in high value/cost areas around London and adjacent counties most in need of additional affordable housing.

Balancing beautiful design and conservation with needed development

Whilst he was undermining the practical and realistic progression of the government’s purported overarching annual 300,000 new supply objective/target, Michael Gove in his capacity as Housing Secretary had continued to uphold the canon of beauty and good design, telling the Centre of Policy Studies at a November 2022 seminar: “We will see the wide adoption of design codes. We will use all the powers we have to make sure that developments which are not aesthetically of high quality don’t go ahead”.

The former co-chair of the  Building Better, Building Beautiful Commission was had already been appointed to head up the creation of a new government design body, the Office of Place, with a remit to roll out and evaluate the National Model Design Code (NMDC) – a toolkit to enable every council and community to create their own local design requirements and codes in accordance with the PWP’s vision.

Changes incorporated into the updated July 2021 iteration of the  national planning policy framework (NPPF) and its proposed December 2022 successor underscore that LPAs should ensure that new developments support “beauty and placemaking”, primarily through the preparation and use of local design codes in line with the emerging National Model Design Code.

The Wealden consultation response had complained that the proposed December 2022 NPPF emphasised the importance of beauty, but that the suggested means of assessment (the National Design Guide and National Model Design Code) did not provide a means to do that.

‘Beauty’ is subject to subjectivity and can vary with the beholder, and perceptions can change over time. That said, the definition and importance accorded to good design defined in relation to spatial context and circumstance clearly constitutes an important albeit contestable dimension of sustainability, as demonstrated in a recent case, involving SofS decision discretion.

In April 2023 the SofS decided (taken on his behalf by the relevant Minister, Rachel Mclean) to refuse planning permission for the Turnden, Hartley Road, Cranbrook  (Turnden) development.

The application involved the construction of 165 new dwellings (ref. 20/00815/FULL) within the High Weald Area of Outstanding Beauty (HWANOB).

The application had previously been approved by Tunbridge Wells Borough Council (TWB) and, following a public inquiry convened after the SofS called-in the scheme for decision, the appointed planning inspector had recommended full planning permission approval be granted.

This was because additional to the provision of 40per cent affordable housing (34 rented and 34 shared ownership), the scheme offered a “package of exceptional benefits”, including a biodiversity net gain of 21 per cent, landscape, and recreational enhancements, which, overall, “added up” to the ‘exceptional circumstances’ that under the NPPF is required to justify a development in an AONB.

The existing Local Plan of TWB was adopted in 2009 and it has been unable to demonstrate a 5YHLS for over six years. The proposed replacement Local Plan 2020-2038 (the eLP) is currently subject to Examination.

The entire Turnden site, which includes the Phase One 36 dwelling Turnden Farmstead (reference 18/02571) development separately approved and now close to completion, was allocated under draft policy AL/CRS4 for residential development and significant green infrastructure as part of the eLP.

Permission was granted February 2020 for the construction of up to 180 dwellings on the land at Brick Kiln Farm immediately north (LPA Reference 16/502860). This will subsequently extend the settlement boundary of Cranbrook up to the boundary of the application site. In addition to this, the approval of

Over the 2020-2038 eLP plan period, TWB’s housing requirement is 12,204 (678 dwellings per annum), more than double the previous 300 per annum figure.

The annual affordable housing component of that is 391 compared to delivery of an average c82.

Based on its current policy affordable housing threshold of 35per cent, TWB would require annual net total supply to increase to c1000 dwellings.

The inspector confirmed that as TWB cannot currently show a five-year housing land supply, paragraph 11(d) of the NPPF indicated that planning permission for Turnden should be granted unless: (i) the application of policies in the Framework that protect areas or assets of particular importance (in this case the HWANOB) provides a clear reason for refusing it; or (ii) any adverse impacts of it being granted permission significantly and demonstrably outweigh the benefits, when assessed against policies in the NPPF taken as a whole.

He concluded “that it is not an overstatement to say that it is rare for a scheme to deliver such a package of exceptional benefits, on a site located adjacent to a second tier settlement, delivering much needed housing, including affordable housing above the rate required by the development plan, in a highly constrained area, and which delivers landscape enhancements with limited associated harm, as well as biodiversity enhancements, while developing only a small proportion of the overall site and in doing so provides a strong long term settlement edge. …. (para838) given the limited extent of harm including to the HWAONB, in the context of the area’s particular housing needs and constraints alongside the wider substantial benefits that would be delivered, exceptional circumstances exist to justify the proposed development and it would be in the public interest. In the current circumstances, therefore, the combined adverse impacts would not significantly and demonstrably outweigh the benefits, when assessed against the policies in the Framework taken as a whole”.

His recommendation, however, was overturned by the SoS, mainly because the scheme design was not accessed as of a high standard reached through thoughtful regard to its setting and layout, rather “being of a generic suburban nature which does not reproduce the constituent elements of local settlements”, leading to a conclusion that its design rather than being a benefit of the scheme, as suggested by the inspector, was a neutral factor.

Overall, although the combined weight of the benefits was “substantial” they failed to constitute “a package of exceptional benefits”, while the borough’s current five-year land supply shortfall was “slight”.

The applicant, Berkeley Homes, in the wake of that refusal announced its intention to seek judicial review of the SofS decision that then was self-voided in May 2023 due to an inaccurate five-year land supply figure which was cited in the SofS’s Decision letter. Future developments are accordingly awaited.

The case examples illustrate some key realities that impinge on the planning coalface.

These include:

  1. Translating a national aspirational 300,000 new home target to a minimum local figure through the operation of a mechanistic formula subject to contestable assumptions was always likely to lead to local opposition.
  2. Insofar that the above target cannot be met by concentrating development and densification on brownfield sites within England’s twenty most populous urban areas, the achievement of such a national target will inevitably require densification of urban and suburban areas of a nature that can be perceived as ‘character-changing’ – resisted even within those areas, as at Cockfosters – as well as the extension of settlement boundaries onto previous countryside and greenfield sites, invariably involving some change in rural character and views, occasionally, including some release of Green Belt land.
  3. Some element of central compulsion is and will continue to be required to increase housing supply at the local level, as left to themselves LPAs – exposed to well organized and vocal opposition to new developments from ‘insider’ residents often for reasons that often are understandable and defendable according to their own perspective and interests –will tend to bow to such pressures, especially outside the urban concentrations, which could even be described as local democracy or community accountability at work.
  4. A problem with existing mechanisms of central compulsion, including the use of the Planning Inspectorate to overturn local planning refusals following developer appeals, is that some speculative relatively low density ‘executive box’ or otherwise inappropriate developments are approved, weakening incentives for future developers to select the most sustainable sites and provide dwellings in location and composition of the most local benefit. In many ways, the worst of all worlds occurs where the planning process is elongated by delay and obfuscation at a local level resulting in increased scheme costs and the ultimate realisation of less local benefit, such as this .
  5. The relationship between new speculative market developments – the primary provider of new housing – and the meeting of local housing needs is often tenuous and weak. The phase one Turnden Farm scheme in Cranbrook, for instance, only offered c32% affordable housing, comprising completely shared ownership (SO) dwellings – contrary to the local affordable housing policy that required 75% social rent. These units, as a minimum, will require a £99,000 market share to be purchased along with monthly rental and service charge outgoings of at least £632 in a location that will rely largely upon car use (it is a close to a mile from the nearest shops and will be served by limited public transport).  The Registered Providers (RPs) consulted by TWB considered that it was not a suitable location for affordable housing and declined the council’s invitation to make an offer for the proposed shared ownership properties.
  6. The policy uncertainty engendered by the PWP process and then the December 2020 NPPF revisions during the lead up to the May 2023 local council elections, which will continue to the expected forthcoming 2024 general election and then most probably with a new government initiating and no doubt embarking a further round of fresh reforms and associated consultations, led to LPAs demonstrably delaying the progression of new Local Plans provided with an up-to-date locally determined 5YHLS, hoping that the NPPF revisions, if further tweaked, could release them from the presumption of sustainable development applying regardless of their 5YHLS position. An effective Local Plan-based system presupposes that they are prepared, consulted, examined, and maintained within or very much closer to the timescales set in the PWP and then LURB: an outcome that most LPAs are not geared up to achieve, or as shown, many are even desirous of insofar that it requires them to identify more local sites for development to meet higher housing need figures.
  7. Greenfield former agricultural sites should offer the most potential land value capture for public benefit, but the case examples offer some evidence that District Council LPAs could be less sharp and systematic in their attempts to maximise affordable housing contributions from developers than they need or should be. The achievement of 35per cent affordable housing, where it is composed mainly of accommodation of intermediate housing that is still locally unaffordable could be improved upon, or at least be more tightly defined. That said, it is very difficult for individual LPAs to buck the existing speculative housing model, which itself needs to change for sustainable higher levels of affordable new housing supply to be achieved, an issue that will be subject to dedicated consideration in a later extended post.

4          Future Prospects

The May 2023 election results led to the loss of over 1,000 Conservative councillors with the largest losses occurring across the South-east. There nearly all district councils, as shown in this BBC  graphic, ended up under no overall control, but with the Medway and Thanet towns and Brighton and Hove shifting to Labour, and Eastbourne to the Liberal Democrats, while in Surrey Heath, Michael Gove’s local council also came under Liberal Democrat control.

If his backtracking on the PWP and standard method was designed to bolster Conservative local electoral performance, the effort was not successful, and could have proved counterproductive insofar as it highlighted fluctuating government policy.

Evidence suggests that expressed electoral support for new housebuilding and NIMBYism is quite evenly split. The Centre for Policy Studies recently pointed to polls showing support for local housebuilding and for lower and more stable house prices. But such polls are predicated at the general abstract, rather than the more focused local decision-making individual application level.

Similar such polls also indicate that most people believe that public expenditure on public infrastructure and services should increase; that result does not necessarily translate into electoral support for taxes perceived to directly impact on future household budgets.

It seems likely given some shift to support to local resident group candidates that local concerns over development played a part in the dislodging of incumbent Conservatives in places like Wealden, Windsor and Maidenhead, and Tunbridge Wells.

Although the Conservatives  lost control of South Gloucestershire Council to no overall control following a strong showing by both the Labour and Liberal Democrats, where it was reported Labour’s messages of providing more homes ‘resonated’ more strongly than did the Conservative’s recent move away from a pro-housebuilding stance, but that seems empirically to be an exception to the general tendency that local electorates increasingly dominated by older age and higher income groups proved antipathetic to councils perceived pliant to new developments considered detrimental to their local living environment, whether that was true or not given the applicable planning context, as was demonstrated again at the case example councils mentioned above.

In the wake of the May results, Sir Keir Starmer put Labour in the vanguard of the ‘builders’ against the ‘blockers’, promising that Labour would reverse the proposed changes to the December NPPF connected with lower local housing targets, it would be more flexible on Green Belt land release and that it would ensure more “high quality, genuinely affordable housing’ through planning reform and by giving local councils more powers to compulsorily purchase land for housing at lower cost.

Meanwhile, Ed Davey, claimed for the Liberal Democrats the mantle of record council house builders and that his party’s approach was “community not developer-led”, unlike the “the Tories who get 25 per cent of their money from developers”. Their preferred national housing target is 380,000 – patently a meaningless throw-away without demonstrable policy and capacity backing.

All the main party leaders strive rhetorically to reconcile such claims of community accountability with the increased housebuilding that is needed economically and socially, without explaining how they would overcome local resistance to building by consent rather than by more refined methods of central compulsion.

Given that Labour is committed to ‘ironclad’ fiscal responsibility and the wider need for increased financial support for the NHS on top of its borrowing for Green-related investments, it is difficult to discern the prospects for significant increases in public investment on affordable housing, unless housing was subsumed within its wider stated economic mission.

More likely, if elected, it would encourage and preside over more self-financed council housebuilding, as well as put greater emphasis on increasing the proportion of affordable housing requirements taken by social rent.

The problems it would face other than its self-imposed fiscal restraint, include the limited number of Labour Councils elected outside London, the north-west, and some other urban centres with their own housing stocks, and the fact that social housing and its allocation processes largely does not cater or appeal to ‘aspirational strivers’ priced out of market housing.

The economy certainly requires more and better social transport and housing infrastructure to foster further agglomeration of high skill and value-added activities in areas, such as the Oxford and Cambridge Arc.

Labour has indicated that it will rekindle that project. Again, however, it has not spelt out how it would other than relying upon local initiative, the sources of which are not apparent.

High interest rates, and construction costs, as well as wider economic uncertainty is likely to mean new private housebuilding activity will continue to flatline over the short-to medium term. Given that and above considerations, a 300,000 national target appears over optimistic, a banner for political show, rather than a feasible, if challenging, policy objective, seriously sought and supported by the necessary overarching central government policy clarity and certainty.

A more realistic 250,000 rising to 275,000 target that underpinned and correlated with supporting planning reform and increased land value capture might well offer faster and more effective progress.

Please submit comments/questions to asocialdemocraticfuture@outlook.com

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Filed Under: Housing, Macro-economic policy

Land Value Capture: Potential and Limits

29th April 2023 by newtjoh

What is land value capture? Broadly defined, it involves mechanisms to transfer or use (capture) uplifts in land value for public benefit and purposes rather than for private gain.

Across east Asia, society-specific institutional models of effective direct public land acquisition, development, and commercial release have comprehensively captured land value increases for public benefit.

South Korea, Singapore, and Hong Kong, in different ways have used state ownership and management of development land to help finance the provision of mass housing and transit systems, allowing direct tax burdens to be kept low, a combination that over recent decades have been integral to their wider, cumulative, and transformative sustained economic development outcomes.

Western European countries, including France, Germany, and the Netherlands, allow greater scope for public authorities to finance sub regional and local regeneration projects and supporting infrastructural investment through land adjustment and pooling mechanisms embedded in their planning systems.

These tend to deflate the component of development cost taken by land acquisition allowing sponsoring public authorities to at least partially recover public infrastructural investment that then unlocks further future predominately private investment in housing and employment-creating enterprises with local self-sustaining multiplier effects.

Previously in the UK, the post war New Town Development Corporations were able, using long-term fixed rate public loans (initially at 3%), to purchase mainly agricultural or other land at or close to their existing use values to develop them for housing and commercial purposes.

That made it possible, according to a 2006 government-commissioned evaluation  of the programme and its transferable lessons, to reduce the unserviced land cost component of houses in Harlow and Milton Keynes only about one per cent of housing costs at the time.

Through subsequent disposal of property assets and rising nominal real rental income rolls some of the early New Towns, including Harlow, Bracknell, and Stevenage accumulated surpluses sufficient not only to repay their Treasury loans but to remit substantial sums back to the public purse.

However, their sensitivity to the wider economic performance of the local sub-regional economy they were situated, as well as to the higher interest rates less buoyant national economic environment that shrouded the stagflationary seventies and recessionary early to mid-eighties, led to growing financial deficits for others. Runcorn, for instance, was still in deficit in 2006.

Land value capture mechanisms in their broadest sense can include land, property, and capital taxes covering all landowners.  These tax increases in land value or real estate (combined land and property value treated as an imperfect proxy for land value) are taxed recurrently or on transfer.

Such treatments possess the potential advantage of horizontal equity – all owners benefiting from a similar increase in value are taxed (subject to thresholds, allowances, and exemptions) on the same basis and progressive to the extent that liability is increases with property values.

In the UK no recurrent pure land tax – the most economically efficient tax – is levied. The main property tax in England, council tax, is calibrated to 1991 dwellings valuations that do not separate but combine dwelling and land values. It is levied on a demonstrably regressive basis, poorly or negatively related to current values and household income.

Business rates, currently revalued every five years, are partially but imperfectly calibrated to changes in underlying land values. Capital gains tax is also payable on land transaction profits, but a lower and less progressive rate than is income.

As the fiscal austerity ushered-in by George Osborne in 2010 dragged on well into the decade, an overlapping technical and political consensus on the need for increased land value capture grew.

Self-imposed constraints on public infrastructural and housing investment, political unwillingness to levy salient taxes directly on income and expenditure, declining levels of owner occupation within younger age groups (Generation Rent) amid wider concerns on wealth and generational inequalities, provided political drivers. Studies, such as Griffiths of the Institute for Public Policy Research (IPPR) in 2011, helped to provide evidential foundations.

The emerging consensus increasingly interlinked rising land values to housing market imperfections and malfunction, to housing unaffordability, and to falling levels of, and access to, owner occupation, as well as to infrastructural shortfalls relative to national housing and economic needs.

Given the undeveloped and limited role that general land and property taxes play in the current UK taxation system and the political problems and obstacles involved in increasing their scope, land value capture mechanisms of greater specificity attracted most of the available policy attention.

S106 accidently had become a de facto tax on development value and betterment, while the Community Infrastructure Levey (CIL) was introduced in 2010.

The London CrossRail project was partially funded from 2010 onwards by a Business Rate Supplement, followed in 2012 by a dedicated  Mayoral Community infrastructure Levy.  Both additional levies helped to forward finance this piece of strategic regional infrastructure, which did not come on stream until 2022.

In the short time CrossRail has been operating, usage rates have surpassed expectations. Ample grounds for confidence exist that its future total economic (taking account of not only fare income, but of wider external economic impacts on reduced journey times, congestion, and increased connectivity) benefits will exceed costs.

On the other hand, the linkage between individual contribution of the levies and benefit from the project was delayed; some business owners subject to the additional rate faced increased contribution costs and went of business (for a variety of reasons) before the project was completed. No direct link between contribution and benefit existed, whether derived from increased business profits or capitalised higher land and business premise capital values.

Attention on land value capture peaked across 2017 and 2018. In the wake of the June 2016 Brexit referendum vote, the resulting ouster of David Cameron and George Osborne from 10 and 11 Downing Street, followed by the installation of Theresa May as prime minister, the government’s political commitment to fiscal austerity waned as it became more outwardly sympathetic to an interventionist approach to housing policy, extending beyond the demand-price-and profit-augmenting Help-to-Buy scheme.

May’s government, in February 2017 published a Housing White Paper  (HWP). Its title – Fixing our Broken Housing Market – spoke volumes on the sea change on Conservative party thinking that had taken place since the eighties on the private operation of the housing market. Much of its diagnosis echoed that of Griffith earlier in the decade.

The 2017 Conservative manifesto committed a future Conservative government to “work with private and public sector house builders to capture the increase in land value created when they build to reinvest in local infrastructure, essential services and further housing, making it both easier and more certain that public sector landowners, and communities themselves benefit from the increase in land value from urban regeneration and development”.

Policy changes that followed either side of the June 2017 general election included tightening up on the central definition and monitoring of new local housing targets; the setting of a national annual new housing target of 300,000 dwellings; an increased affordable housing budget; and making it easier for councils to self-fund new council housing again.

Shelter earlier in 2017 had published New Civic Housebuilding. Its core argument was that the speculative market model incentivises developers to squeeze development costs to maximise what they can bid and pay for land sites and thus not lose them to rivals.

They then trim back affordable and other planning obligations, development quality and space standards, and project build out rates to maximise or at least maintain their expected profit levels.

The illustration was made of a developer providing 500 homes comprising 15% affordable housing, no school, a smaller park, and a slow build out rate, paying twice as much (£40m cf. to £20m) for the underlying land than a rival one offering 50% affordable obligations, a school, a larger park, and a faster build out rate. In Shelter’s reading, the additional £20m paid for the land meant a corresponding loss in community and public benefit.

It proposed, in response, a new ‘Civic’ housebuilding model that by “bring(ing) in land at a lower, fairer cost” and channelling competition between firms to raise “the quality and affordability of homes, would be supplemental and in preference to the existing speculative market and directly funded public delivery models.

New Home Zones should also be introduced as “an exceptional planning tool to deliver very high-quality schemes in addition to what the speculative market is building”, covering large scale developments (over 500 units).

Land assembly and acquisition and planning consent for such zones should be both fast tracked and combined through the Nationally Significant Infrastructure Project (NSIP) planning process, compressing development profiles to 12–15 months.

Another key proposal was that the 1961 Land Compensation Act should be amended to take no account of prospective planning permissions; certificates of appropriate alternative development would also cease to apply.

Later that year,  Thomas Aubrey, then Director of the Centre for Progressive Capitalism (now the Centre for Progressive Policy) and Derek Bentley of Civitas likewise argued for the 1961 Land Compensation Act to be amended to exclude prospective planning permission from being taken into account for compensation purposes.

Changing the CPO rules, according to Aubrey would allow public authorities to capture the rise in land values resulting from expected or permissioned change to residential use, estimated at c £9.3bn per annum (over £185bn over 20 years).

The land so acquired could then be serviced with supporting infrastructure, thereby unlocking its potential for residential or commercial development. It could then be either sold back at its new enhanced market development value to private developers and/or retained in public ownership (in full or part) to generate a permanent revenue stream.

In August 2018 a public letter to the Communities Secretary, the late James Brokenshire, signed and supported by a diverse range of campaigning organisations, public stakeholders, and MPs,  co-ordinated by the centre-right Onward think tank (subsequently republished on-line, as per link), encapsulated the overlapping technical and political consensus that had emerged.

“The root of England’s housing crisis lies in how we buy and sell land. When agricultural land is granted planning permission for housing to be built, the land typically becomes at least 100 times more valuable.

We, the undersigned, believe that more of this huge uplift in value should be captured to provide benefits to the community. If there was more confidence that more of the gains from development would certainly be invested in better places and better landscaping; in attractive green spaces; and in affordable housing and public services like new doctors surgeries and schools, then there would be less opposition to new development and much better infrastructure. The Government should think radically about reforming the way we capture planning gain for the community.

First, they should monitor the implementation of their welcome changes to Section 106 to ensure that councils deliver and developers do not continue to wriggle out of their commitments.

Next, they could give local government a stronger role in buying and assembling land for housing, allowing them to plan new developments more effectively, share the benefits for the community and approve developments in places local people accept.

Most importantly, they should reform the 1961 Land Compensation Act to clarify that local authorities should be able to compulsorily purchase land at fair market value that does not include prospective planning permission, rather than speculative “hope” value”.

The Conservative parliamentarian, and former Head of Policy for David Cameron, Sir Oliver Letwin, who had been commissioned in Autumn 2017 to: “explain the significant gap between housing completions and the amount of land allocated or permissioned in areas of high housing demand, and (to) make recommendations for closing it”, published his draft report  in June 2018.

It reported that there were then approximately 107 sites in England with permission for approximately 393,000 units, associated with an average build out rate of 15.5 years, or 6.8% per year.

Letwin’s analysis and prescriptions shared similarities with the Shelter Civic Housebuilding report, focusing on slow build out rates inherent within the existing speculative market business model. Its core3 commercial driver was to limit releasing dwellings for purchase to a level (market absorption or build out rate) commensurate with them maintaining target sales prices and hence their target capital return.

Although accelerating that build out rate could significantly increase housing supply, the “homogeneity of the types and tenures of the homes on offer on these sites, and the limits on the rate at which the market will absorb such homogeneous products, are the fundamental drivers of the slow rate of build out”, according to Letwin.

In September 2018 a Housing Communities and Local Government Select Committee Report on Land Value Capture was published.

One of its central conclusions was that as the value of land arising from granting of planning permission and of new infrastructure was largely created by public action, then a “significant proportion of this uplift (should) be (made) available to national and local government in new infrastructure and public services”, through reforms to existing taxes and services, to compulsory purchase powers and compensation arrangements, or through new mechanisms of land value capture.

The committee had considered evidence (as did Barker) that practice in some other European Union (EU) countries can involve the freezing of land values when land is vested for housing use by a local authority.

It noted that across these countries, compared to the UK, land accounts for a smaller proportion of total residential development value, build rates are much higher, and they exhibited much more steady house price trends: outcomes all supportive of the wider macro-economic ends of steady, balanced non-inflationary growth.

The committee also noted (para 105), however, that during its visits to Friberg in Germany, and to Amsterdam in Holland, local municipalities did not acquire land at either existing or full use value but instead at a value “that offset the cost of providing the infrastructure and services associated with making a development viable”.

In October 2018, Letwin published his final report. It recommended that planning policy for sites providing over 1,500 units in high demand areas should be revised.

LPAs should be given the power to designate areas within their local plans to be developed only as single sites in conformity with a masterplan and set quality design codes, designed to diversify the mix, size, and type of units provided.

Such diversification would then allow LPAs to capture more land value and secure faster build out rates.

Government funding support would be made conditional on S106 conformity with such principles.

LPAs should also be provided with clear statutory powers to compulsorily purchase the land designated for such large sites at prices “which reflect the value of those sites once they have planning permission and a master plan that reflect the new diversity requirements …. to the point where they generate a maximum residual development value for the land on these sites of around ten times existing use value rather than the huge multiples of existing use value which currently apply”.

Their exercise would involve either use of a Local Development Corporation (LDC) or Local Authority Master Planner (LAMP).

LDCs would have a remit to set a masterplan and design codes(s) for designated sites and then obtain private finance to pay for the land and infrastructure through a specially established special purpose vehicle, before then “parcelling-up” the land to sell to different builders in accordance with its masterplan and design code(s).

A Local Authority Master Planner (LAMP) would sell the land to a privately financed Infrastructure Development Company (IDC), which would then provide the infrastructure and promote the same diverse housing offer.

The government response to his recommendations was lukewarm. In March 2019, the late James Brokenshire, the Communities Secretary, in a ministerial statement  agreed that the “increased costs of diversification should be funded through reductions in residual land values” but cautioned that the report’s recommendations had been received with some scepticism within the housebuilding industry.

He went on confirm that while the government was committed “to improving the effectiveness of the existing mechanisms of land value capture, making them more certain and transparent for all developments”, his focus was “on evolving the existing system of developer contributions to make them more transparent, efficient and accountable”.

UK politics by then had long been dominated by Brexit, which now, to all intents and purpose, took over the entire show. Since May’s botched 2017 general election campaign, she had struggled in vain to secure a parliamentary majority for her compromise exit deal.

Her failure to do so culminated in her long-anticipated resignation and replacement by the opportunist Boris Johnson in July 2019 on a promise to ‘get Brexit done’, whatever.

Sir Oliver, old Etonian and former Thatcherite who had evolved into a Conservative ‘one nation’ Remainer grandee in manner and conviction, had the party whip taken away from him by Johnson in September 2019 and then retired at the December election that Johnson and his key advisor, Dominic Cummings, had engineered.

Johnson was returned with an eighty-plus mandate to get, indeed, ‘Brexit done’. Letwin’s report remained on the library shelf as he receded into principled retirement.

The growing overlapping technical and political consensus that had grown for the need for land value capture and wider housing market reform was discernible enough for commentators to note that the Communities Secretary, Sajid Javid, appointed by May when she became prime minister in July 2016 and in that post until April 2018, sometimes sounded more like a ‘Labour Housing Minister’. Toby Lloyd, the author of the 2017 Shelter report, had become May’s housing advisor.

The actual housing minister from July 2016, Gavin Barwell, who after losing his Croydon seat in the June 2017 general election became Theresa May’s chief of staff, in a subsequent book, identified delays and problems that Javid and himself faced progressing the HWP, noting that long-awaited Treasury and 10 Downing Streets responses to departmental policy submissions were “often contradictory”.

May’s chancellor, Philip Hammond, was a fiscal conservative wary of housing policy actions that could increase the deficit and undermine fiscal rules.

And, in any case, the HWP was more well-meaning rhetoric than a base for concrete policy change consistent with the refashioning of the housing system and market it desired – at least without overarching political and institutional drive and commitment. That was absent, whether due or not to the on-going all-consuming Brexit hiatus.

Public policy action in practice was largely limited to changes to the S106 viability process – again led by judicial decision – and to the compulsory purchase legal framework.

S106 viability methodology and process

After the introduction of CIL, the next major landmark in planning policy and practice was the publication in March 2012 of the National Planning Policy Framework (NPPF).

The original 2012 NPPF  commendably consolidated 44 previous central government policy or guidance documents into one 65 page document.

It confirmed that the commercial viability of a development was a material consideration, which LPAs could take account of when setting, or, in the case of stalled schemes, when reviewing planning obligations.

Paragraph 173 advised LPA’s “To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable“.

Paragraph 205 went on to advise that where obligations were being sought or revised, LPAs should take account of changes in market conditions over time and, wherever appropriate, exercise flexibility sufficient to prevent planned development stalling.

Further dedicated guidance issued in 2014 on viability (2014 viability guidance) further noted that “Where an applicant is able to demonstrate to the satisfaction of the local planning authority that the planning obligation would cause the development to be unviable, the local planning authority should be flexible in seeking planning obligations.

This is particularly relevant for affordable housing contributions which are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. The financial viability of the individual scheme should be carefully considered in line with the principles in this guidance”.

A site was viable if the value generated by its development exceeded its total cost and offered sufficient incentive for the land to come forward and then for the development to be undertaken.

The most common way of measuring project viability was (and is) to subtract its expected Gross Development Cost (GDC) from its Gross Development Value (GDV), leaving its Residual Land Value (RLV).

If its RLV was positive and greater than the Benchmark (or Threshold) Land Value (BLV) – defined as the price at which a reasonable landowner would be sufficiently incentivised to sell – the scheme was deemed viable: (GDV-GDC=RLV)>BLV.

The 2014 viability guidance advised that in all cases, estimated land or site value should meet three policy requirements:

  • Reflect emerging policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge;
  • Provide a competitive return to willing developers and landowners;
  • Be informed by comparable, market-based evidence wherever possible.

Their order of priority was left open, however. Should local Plan-set S106 and CIL requirements override evidence adduced from past market sales of comparable sites? And what was an ‘acceptable’ return for landowners and developers?

Developers and their advisers could over- and under-estimate expected values and costs, respectively.

Different assumptions to determine BLV that could include current use value, a premium above that value, alternative use value, as well as market values extrapolated from, say, average sale values for comparable sites, could be applied.

Local S106 and other policy requirements could also be set at different points across the economic and housing cycle not necessarily coincident with conditions prevailing at the time of viability consideration at either Plan or individual scheme level.

The heterogeneity of sites and their associated development value potential also do lend themselves to the application of standard assumptions or requirements.

The 2014 guidance also encouraged the use of scheme-based development viability appraisals to assess the impact of affordable housing obligations on the overall commercial viability of previously agreed section 106 affordable housing obligations, as well as planned new developments, undermining the principle that viability should be assessed as part of the Plan-making process.

These issues and problems remain, but developers (despite many of them receiving substantial public support) during the post GFC years exploited them.

They continued to overpay for land. By reducing site RV to below or close to its BLV they made the argument that LPA enforcement of local policy-defined section 106 obligations – often previously agreed- would now make their scheme(s) unviable. Averaged market values of (sometimes) comparable sites that did not reflect S106 or other planning requirements was also used to the same purpose.

Indeed, the inference many developers took from the 2014 viability guidance was that affordable housing obligations should be considered a variable parameter (their incidence in scale and timing was conditional on not making a development inviable), whereas the need to provide a(undefined) competitive return to a willing landowner and developer was the fixed primary parameter that must be achieved regardless of context, history, and circumstance.

Such entrenched circularity (overpaying for  land made developments unviable, with the resulting unviability then used to justify to reduce the level of housing and other obligations: a process that then further encouraged developers to over pay for land, and so on) provided the backdrop to the April 2018 Parkhurst Road High Court judgement.

This provided a judicial review of earlier 2015 and 2017 planning inspector inquiries convened to consider previous refusal(s) by the London Borough of Islington Council (LBI) of planning applications from the developer, Parkhurst Road Ltd (PRL). The refusals were primarily on the ground that insufficient affordable housing had been offered consistent with LBI published and approved Plan policies.

LBI further contended that the price which PRL had paid for the ex-Territorial Army site was excessive, since it did not properly reflect the policy requirement to maximise the affordable housing component on the site in the context set by LBI’s 50% borough-wide strategic affordable housing target.

 The borough suggested that a viability assessment should look at comparable sites that had been recently granted planning permission in accordance with relevant policies. The prices paid for such land, suitably adjusted, could then be compared to EUVs for those sites to ascertain an appropriate premium or uplift additional to EUV for the Parkhurst Road site.

That approach aligned with that adopted Mayor of London’s Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), incorporated into the 2021 London Plan that stated that a market value approach should only be accepted where it can be demonstrated to properly reflect policy requirements and take account of site-specific circumstances.

LBI assessed the BLV value of the site on that basis as £6.75M – around a half of the £13.25M paid by Parkhurst, but still significantly above the site EUV.

The judge, Mr Justice Holgate, concluded that LBI’s assessment of the BLV site value was correct, based as it was on its set affordable housing policy requirements. These, he added, could not be ignored nor set aside by a developer claiming that ‘comparable’ site valuations were higher, where such valuations did not take account of the borough’s affordable housing requirements.

 In short, he concluded, LPAs when determining site BLVs, should “reflect“, and not “buck,” relevant planning policies (including those for the delivery of affordable housing); on the other hand, the proper application of those policies should also be “informed by,” and not “buck” an analysis of market evidence reflecting those policies.

On the other hand. an “arbitrary” EUV plus valuation, Justice Holgate went on to say, should also not be applied,  where viability evidence of comparable market values that did reflect relevant planning policies and requirements was presented. One or more planning requirements or objectives could then be relaxed where if they would render a development non-viable, according to a viability case “which uses (inter alia) land values which have adequately taken planning policies into account”.

It may be noted in passing that Justice Holgate – understandably, concerned as he was with the law rather than with economics – did not delve further into the extent that ‘market’ evidence could reflect imperfect rather than efficient housing market operations.

Subsequent published 2019 Viability Guidance confirmed that “under no circumstances will the price paid for land be relevant justification for failing to accord with relevant policies in the Plan”.

LPAs should apply existing use value plus’ (EUV+) as a calibrating mechanism to measure BLV with any hope value disregarded, save, apparently, where an alternative use value (AUV) when fully compliant with up-to-date development plan policies could be implemented on the site in question including evidence for market demand for such use.

Specifically, BLV should:

  • be based upon existing use value, “not the price paid and (it) should disregard hope value” (but note AUV rider above)
  • allow for a premium to landowners (including equity resulting from those building their own homes) that “should provide a reasonable incentive for a landowner to bring forward land for development while allowing a sufficient contribution to fully comply with policy requirements”;
  • reflect the implications of abnormal costs; site-specific infrastructure costs; and professional site fees.

Such BLV appraisal values then should fully reflect all relevant policies, local and national standards, including the cost implications of the Community Infrastructure Levy (CIL) and section 106 obligations.

Compared to the 2014 version, this latest 2019 iteration of the viability guidance also appeared to reduce the ‘required return’ to a ‘minimum return’ which was ‘reasonable’ rather than ‘competitive’.

It suggested that 15-20% of gross development value (GDV) should be taken for plan viability purposes as an assumed presumably ‘reasonable’ return to developers (profit parameter). This could vary, however, according to the type, scale, and the risk profile of planned development(s).

Specifically, a lower return may be more appropriate “in consideration of delivery of affordable housing in circumstances where this guarantees an end sale at a known value and reduces risk”.

Developers should also account for and price potential risk within their assumed return: it was for them, not plan makers or decision makers, to later mitigate these risks.

Noting that there may be a divergence between benchmark land values and market evidence the guidance, plan makers “should be aware that this could be due to different assumptions and methodologies used by individual developers, site promoters and landowners”.

LPAs, consistent with the revised 2018 national planning policy framework, should set out the contributions expected from development(s), including the levels and types of affordable housing provision required, along with education, health, transport, flood and water management, green and digital infrastructural requirements. These should be supported by evidence for their need and not undermine their deliverability.

The guidance reiterated that viability assessment should occur primarily at the plan making stage, although it recognised that “in some circumstances more detailed assessment may be necessary for particular areas or key sites on which the delivery of the plan relies”. The onus was put upon developers to justify the need for any further viability assessment at the application decision-making stage.

LPAs were charged at the plan-making appraisal stage to use ‘site typologies’ to set different requirements for different types of development and locations consistent with their deliverability.

This could involve plan-makers making use of average historic land values and costs to allow them to “come to a view on what might be an appropriate benchmark land value and policy requirement for each typology”.

In summary, it took government many years to catch up with abuse of the appraisal process by developers who demonstrated their willingness as profit-maximising organisations to adopt ‘take a mile, if given an inch’ approach to public policy adjustment to the impact of the GFC on the housing market and construction industry.

It is likely that such practice helped to fuel the overlapping political and technical consensus in favour of increased land value capture that that grew last decade.

The 2019 appraisal policy practice government guidance remains extant. Recently republished RICS guidance interprets and operationalises its application as a professional standard for surveying practitioners.

Tension, and a degree of uncertainty, remains concerning the application of EUV+ valuation of Benchmark Land Value and the related issue as to extent that hope value should be eliminated in its computation. The distinction between hope and alternative use values appears unclear and possibly contradictory.

The premium element of EUV+ and its ranking and ordering relationship to the developer profit and set policy requirements remains indeterminate, and, perhaps, inevitably so given site heterogeneity and changes to the wider economic and housing market environment.

The experience of CIL suggests that a focus appraisal undertaken at Plan-making will be reliant on local capacity, while the use of average historic market value data and their shortcomings could result in misspecification of viability and/or a worst-case assumption applied. In any case, most LPA’s do not have an up-to-date Local Plan, which are seldom refreshed at the expected five-year intervals.

Compulsory Purchase Order (CPO) reform

To begin to understand policy development and issues across this devilishly difficult and confusing area, some history is needed.

The 1947 Town and Country Planning Act nationalised both the private right to develop (undertake construction and/or change its use) sites and to profit from any increase in their development value (betterment).

Development henceforth could only proceed subject to planning permission. A 100% development charge would also be levied on betterment. Owners could now only realise, net of the charge, the existing use value of their land.

But in 1954, Winston Churchill’s successor Conservative government abolished development charges. Local authorities, however, retained the right to acquire land at its existing use value thus facilitating continuing council house building at manageable public cost, as did New Towns.

As the demand for land suitable for development rose in response to the government’s wider housebuilding drive, its market value, when traded, increasingly took account of its future prospective use, while land acquired publicly did not.

The resulting dual or ‘two-price’ system threw up the horizontal inequity that landowners with similar plots could get different values depending on whether their land was subject to public acquisition or not.

The 1959 Town and Country Planning Act ended that dual system by making provision for CPO compensation at what it termed ‘fair market value’ in conformity with the principle of ‘equivalence’: requiring the forced seller to be placed in the same position as they would have been in the absence of the CPO acquisition.

In practice, local authorities acquiring land for new council building schemes now had to pay prices reflecting its future perspective or ‘hope’ residential value.

But, as was pointed out at the time and subsequently, the 1959 Act did not address other horizontal inequities resulting from a system where development control and rights continued to vest with the state, but land value uplift or betterment could be realised by private actors.

Some landowners could benefit and realise betterment from the granting of planning permission. Others could not because their land was not zoned for development or because permission was refused. This remains the case.

The 1961 Land Compensation Act (1961LCA) then consolidated statutes dating back to Victorian times and codified case law.

But by common consent it did so in a confused and conflicted manner. That was, perhaps, inevitable insofar that the case law that it tried to codify was sometimes contradictory and the statutes that it attempted to consolidate, rather than to reform or replace, reflected changing circumstances and assumptions occurring over a century.

In Victorian times, for instance, compulsory purchase powers were generally sought and obtained by private competing profit-making operators, such as railway and water companies by privately sponsored specific Act of Parliament, and local juries decided compensation on that basis.

A 2003 Law Commission review of Compulsory Purchase compensation arrangements, in that light, noted that the “The current law of compulsory purchase is a patchwork of diverse rules, derived from a variety of statutes and cases over more than 100 years, which are neither accessible to those affected, nor readily capable of interpretation save by specialists”.

Nevertheless, 1961LCA remains the principal source statute governing the assessment of CPO compensation, notwithstanding that many of its provisions have been amended significantly by subsequent pieces of legislation, sometimes substituted then back into it.

Its Section 14 (s14) gave statutory status to the ‘no scheme’ principle, whereby for compensation purposes any impact on plot value attributable to ‘the scheme’ subject to the CPO was to be disregarded as if no such scheme existed or it was ‘cancelled’ on the valuation date (the date when compensation was determined or when it was taken in possession, if earlier).

It went on to provide for the payment of compensation at market value to reflect permissible and prospective planning use (hope value) and in respect to appropriate alternative development (AAD), “in (the) circumstances known to the market at the relevant valuation date”.

At first glance, interpretation of the ‘no scheme’ or the project disregard rules seems straightforward. If land is to be acquired, compensation should reflect its fair market price “taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise” after applying the assumption that the ‘scheme’ subject or giving rise to the CPO requiring the acquisition was ‘cancelled’ – in effect, did not exist.

Assessing potential hope value is inherently problematic, however. To do so also involves postulating what uses the subject land in question could have been put to in the absence of ‘the scheme’.

For instance, some or all of it could have been zoned for housing or other alternative uses sometime in the future, even though its existing use was agricultural and there was no current planning provision for its future use for housing.

The wider the scope that ‘the scheme’ is in area and purpose, the more difficult it is likely to become to isolate what might have happened in its absence: a wider regeneration scheme possessing sub-regional importance with multiple underlying purposes is likely to affect many more owners, take longer to bring to fruition, and have much more extensive and varying impacts over time.

In the words of the Law Commission, especially when the scheme has a long life, this “may involve a speculative exercise of rewriting history”. Or, put another way, gazing into a crystal ball.

This issue arose in a 1974 Court of Appeal case (Myers v Milton Keynes Development Corporation, MKDC) presided over by the then Master of Rolls, Lord Denning.

In short, MKDC had acquired 324 acres of Myer’s land (designated as part of a New Town scheme to provide housing) at twice agricultural value.

A lower court held that the assumed planning permission was a direct result of the acquiring authority’s ‘scheme’ that must therefore be ignored when assessing compensation.

The Court of Appeal decided, however, that the landowner was rather entitled to 20% of residential value. This it deemed as fair representation, in essence, of hope value pertaining to the assessed likelihood that in the absence of the CPO ‘scheme’ – in this case an extension to Milton Keynes New Town – planning permission for residential use would have been granted sometime in the future.

Such continuing uncertainties provided the backdrop to a consultation on compulsory purchase reform that the former Department of Communities and Local Government (DCLG) and HM Treasury conducted in March 2016 (following an earlier one in March 2015).

Predicated on a central premise that the application of the ‘no scheme’ application as interpreted by case law had in practice become more complex and uncertain over time and that it needed to be made “clearer, fairer, and faster”,  it sought views on government proposals to establish the principle of the ‘no scheme world’ fairly and effectively in the valuation process by codifying it in statute, involving a:

  • clearer definition of the project or scheme that should be disregarded in assessing value;
  • clearer basis for assessing whether the project forms part of a larger ‘underlying’ scheme that should also be disregarded;
  • more consistent approach to the date on which the project is assumed to be cancelled;
  • broadening of the definition of the ‘scheme’ to allow the identification of specified transport infrastructure projects that are to be disregarded within a defined area, over a defined period of time – meaning that where land is acquired for a wider regeneration or redevelopment scheme that is directly linked (facilitated or made possible) to a ‘relevant’ transport infrastructure project, the definition of ‘the scheme’ should include that project.

The uplift in values caused by the public investment in the transport project, regardless of whether it is carried out before, after, or at the same time as the regeneration or redevelopment, should, therefore, be disregarded for compensation purposes, the consultation proposed.

In its published response to that 2016 consultation, the government acknowledged that extending the definition of ‘the scheme’ to exclude the impact of specified transport infrastructure on land values could result in claimants receiving less compensation than they might otherwise have done, but nonetheless noted that “it is right that the public purse, rather than private interests, should benefit from increases in land values arising from public investment”.

These proposed changes were largely enacted in Section 32 of the Neighbourhood Planning Act 2017 (NPA2017) inserted into 1961LPA, replacing former ss6-9 with new ss6A to 6E.

The current legal position is where land is acquired for regeneration or redevelopment facilitated or made possible by a relevant transport project, the definition of ‘the scheme’ will include that project, regardless of whether it is carried out before, after or at the same time as the wider regeneration or redevelopment.

Where different parts of the works comprised in such a transport project are first opened for use on different dates, each part is then to be treated as a separate relevant transport project but only where “regeneration or redevelopment was part of the published justification for the relevant transport project”.

All subsequent development across the whole areas covered by Mayoral Development Corporations and designated New Town or Urban Development is now to be disregarded for the purpose of assessing CPO compensation.

The amount of compensation payable in respect of the compulsory acquisition of the ‘original’ or ‘subject land’ can also be reduced by the quantum increase in the value of the same person’s interest in any adjacent or contiguous ‘other’ land at the relevant valuation date resulting from ‘the scheme’.

However, if the revised ‘no scheme’ assumptions do not apply, the new ss6A-E limit still allows compensation for prospective hope value to be assessed in accordance with s14LPA61.

New powers were also given to the Secretary of State to create Locally-led New Town Development Corporations (LNTDCs) that a local authority, or more than one local authority, would be responsible for, and for Transport for London and the Greater London Authority to jointly acquire land through compulsory purchase on behalf of each other for mixed-use transport, housing, and regeneration purposes.

The Housing Minister, Kit Malthouse, subsequently told the 2018 Select Committee on Land Value Capture (see previous reference link) that he considered the revised ‘no scheme’ principles that NPA 2017 enacted had rendered any further reform of LCA1961 unnecessary.

The published report of that Committee, nonetheless, concluded that (para 111) “the Land Compensation Act 1961 requires reform so that local authorities have the power to compulsorily purchase land at a fairer price (and that) the present right of landowners to receive ‘hope value’—a value reflective of speculative future planning permissions — serves to distort land prices, encourage land speculation, and reduce revenues for affordable housing, infrastructure and local services”.

It went on to propose (para 112) that such a ‘fairer price’ should be set by an “independent expert panel”, before noting (para 113) that enhanced CPO and land assembly powers, alongside further reform of LCA1961, “would provide a powerful tool for local authorities to build a new generation of New Towns, as well as extensions to, or significant developments within, existing settlements”.

Within two months the government published its November 2018 response to the Committee’s report.

This confirmed its commitment to capture increases in land value for the benefit of local communities while cautioning (para 11) that “changes to land value capture systems can have profound impacts on the land market in the short term, even where they are sensible for the long term”.

Compensation for hope value (i.e., value based on the land’s development potential) should be limited to values (para 30) reflecting “the prospects of obtaining planning permission for an alternative development in the absence of ‘the scheme’, taking into account the risks, uncertainties and costs associated with implementing such a development, including the costs of providing the affordable housing, infrastructure and supporting facilities required to make the development acceptable in planning terms, as well as any Community Infrastructure Levy liability”.

Previous government policy guidance, including the 2018 ministerial statement earlier referenced, that developer S106 contributions provide the primary mechanism for LPAs to capture land value uplift, was reiterated.

The government wanted to let recent reforms, including the NPA2017, to ‘bed-in’ while it continued “to monitor their practical application and (to) remain open to considering practical improvements to the (CPO) framework”, including “bespoke mechanisms of land value capture”. The “Oxford-Cambridge Arc and Housing Deals” were mentioned specifically in that regard.

Indeed, the changes made alongside the greenfield amendment recorded below, appear designed to facilitate a strategic project, such as the Oxford and Cambridge Growth Arc  promoted by the National Infrastructure Commission in 2017.

It has suffered from recent policy uncertainty, however, culminating in Michael Gove, reportedly, ‘flushing it down the toilet’, and dismantling the responsible civil service team, although government lip service to its progression still surfaces.

More fundamentally, the respective roles of central government, local authorities remain unclear: it covers too wide an area for a top-down New Town Development Corporation approach, but little evidence exists that constituent LPAs possess either the willingness or capacity to drive progress either at individual LPA or collective sub-regional level. Accordingly, the new 2017 NPA CPO compensation arrangements accorded to New Town Development, whether nationally or locally-led and Mayoral Development Corporations, still may not be applicable across much of the area.

While the government accepted the principle that a greater proportion of land value should be captured for public benefit, it also continued to reiterate that its reforms did not change the bedrock legal principle that compensation should be based on the market value and were made to simply make the CPO process clearer and simpler.

After a four year pause in CPO reform, the Levelling-up and Regeneration Bill, introduced into the Commons in May 2022, put forward further provisions to ensure that where greenfield land is acquired for development that is facilitated or made possible by a relevant transport project, then that any uplift on land values resulting from that that and any linked transport scheme would likewise be disregarded for compensation purposes.

Further government amendments incorporated into Clause 175 of the Bill put the onus and cost of applying for a Certificate of Alternative Development (CAD) under s17 of the LPA1961 onto the landowner/developer.

Compensation will still be payable for ‘hope value’ on the basis that the LPA would have granted planning permission for the alternative use “more likely than not” in the absence of the scheme subject to the CPO.

These amendments also empower LPAs to define planning conditions that it would have attached to any such ‘more likely that not’ hypothetical permission. These, presumably, could include infrastructural and affordable housing obligations impacting on potential compensation values.

In March 2023, the government tabled further amendments at the House of Lords Committee stage, that included 412D to clause 175.

This goes further, insofar – if passed and enacted – it would allow a Minister confirming a compulsory purchase order to direct, in certain cases involving affordable housing, health or education, that compensation should be assessed on the basis that no new planning permission would be granted for the land (and thus eliminate hope value from any compensation payable).

To make the order in the case of affordable housing, the acquiring LPA must state the number of affordable homes to be created and be satisfied that the direction is justified in the public interest.

The effect of that direction could be subsequently reversed if the acquired land is not subsequently used as planned or if a statement of commitments accompanying the CPO was not fulfilled within ten years of the order becoming operative.

In April 2023, the government indicated that it intended it to make changes to the compensation arrangements where valuation takes into account prospective planning permission but directions eliminating or capping hope value should be on a scheme-by-scheme basis and be limited to carefully defined circumstances, but where directions are made they should remove hope value entirely from compensation.

It concluded that certain public sector authorities (eligible acquiring authorities) such as LPAs, Homes England, Development Corporations, and the Greater London Authority (GLA) will be able to seek directions from the Secretary of State that CPO compensation should take no account of the prospects of prospective planning permission (hope value) or establishing appropriate alternative development via a Certificate of Appropriate Alternative Development (AAD) in relation to affordable (including social housing), education provision, and health facilities.

Should hope value be eliminated?

Since the mid-fifties, real land prices (adjusted for inflation) have exhibited bouts of greater volatility within a wider secular medium to long term trend for them to exponentially outpace real house prices (see Figure 1).

Real house prices, in turn, have outpaced average earnings and real disposable incomes, especially and concentrated across the economically buoyant areas of the country.

These trends were accelerated by the financial liberalisation of the eighties that enabled easier mortgage availability at higher income multiples and the secular trend fall in real interest rates that started in the mid-nineties (only recently arrested) that reduced the cost of servicing a mortgage of constant value, which also allowed homebuyers to borrow more relative to their income and price of the home they were purchasing.

Both acted to increase effective monetary demand for housing and hence the demand for residential land.

The supply of developable land, subject to both planning restriction and developer market behaviour, is much more inelastic (less sensitive to price change) than is housing demand, as authors, including Griffith and Letwin, have demonstrated and reported.

The relationship between land and house prices is a complex one that acts both ways. In practice, as described above, market residential land values reflect both market failures and public policy choices.

Construction (C) or build costs increased far less – driven largely by material, labour, and regulatory costs – than did land (L) values that consequently accounted for increased proportions of the total residential plot value.

If C is taken to include other development costs, including financing and marketing, and P for developer profit: H = L+C+P; it follows that the share of combined land and profit share of a dwelling speculatively sold means that L+P=H-C.

By 2020, according to the most recent ONS data, land underlying dwellings accounted for 86% of the total estimated value of land.

Some hard facts can help to paint the real picture. This chart researched and produced by BuiltPlace – an independent group of housing analysts and researchers – highlights how the listed housebuilders have managed to capture the majority of the uplift in house prices in their profit rather than land values.

Staggeringly, average gross profit per plot built by Persimmons in 2022 exceeded £76,000. That year, profit and land costs combined accounted for 43% of total sale price, compared to c38% back in 2010.

Essentially, landowners and developers have been able during the last decade to capture progressively larger windfall gains from changes in land use values in the form of land values and profits.

Such gains are crystallised by planning permission but can also include prospective hope values based on the expectation of future such permissions. They, in effect, represent income transfers from purchasers.

It is that tendency that helped to give rise to the growing pressure documented earlier for hope value to be removed entirely as a potential component of compulsory purchase compensation.

Opponents of such a shift, such as the Compulsory Purchase Association riposte that compensating owners at less than market value is inherently unfair and potentially incompatible with the European Convention on Human Rights, that it would risk inciting opposition to new developments involving compulsory purchase, and it would slow down the process, increase costs, and thereby self-defeat any purported intention to increase infrastructural and housing supply.

Private property rights to windfall and/or super profit gains need to be balanced against competing public interests, such as promoting sub-regional and national economic growth, shared prosperity, and increasing the supply of, and access to, affordable housing, as well as against competing private individual rights to access housing suitable for their needs consistent with their wider effective economic and social participation in society.

The ’human rights’ angle can therefore sometimes be used as a red herring diversion motivated by special pleading or political preference.  Governments restrict individual rights for wider economic and social ends for a variety of reasons and purposes: to weigh the confiscatory and deadweight effects of taxation levies against the need for collectively financed services that they can finance, for instance. Such balancing is the meat and drink of democratic politics.

The real issues revolve around balancing competing degrees of fairness, which tend to merge into shades of grey rather than demarcate into black or white, and the likely effectiveness of interventions in achieving their purported objectives.

In that light, Richard Harwood KC and others argue that CPO compensation is already based on the value of land either in its current use or on the prospect of a planning permission, with that prospect taking account of set planning policy design, size and other quality standards, of infrastructural provision and support, and affordable housing requirements.

In any case, they add, the CPO compensation code does not determine market prices. And, crucially, landowners and developers need to be incentivised to release and use land for housebuilding. Accordingly, further change to the CPO compensation arrangements is neither needed nor desirable.

They recognise from a legalistic perspective that a potential case under European human rights legislation is only conceivable where the gap between compensation and market value is especially large, likely to be confined to greenfield sites. Those are the sites, however, where the landowner windfall gain is likely to be largest providing greatest scope for land value capture for public benefit.

Isolating and attributing land value uplifts specifically to the impact of schemes and their facilitating public investments is inevitably going to be an imprecise exercise subject to contestable assumptions, especially where it involves the delineation of when and to what extent prospective hope value – derived from the prospect of a future planning permission – should be compensated.

It has been a refreshing feature of recent debate on the topic largely has attempted to accommodate that nuanced reality through informed discussion, eschewing polarised and entrenched ideological-based political positions.

On the other hand, it can get a bit circular and semantic, namely that it is OK to compress market values by public policy requirements and interventions but not to cap compensation (even at a premium above existing value) for the same purpose.

In that context, a case can be made that elimination of compensation for hope and alternative use value would further simplify the process and discourage rent-seeking speculative behaviour by developers and land agents.

The core principle of social democracy is to focus on securing the effective and sustainable outcomes – the best that can be achieved in invariably messy ‘present imperfect’ conditions, using individually fair and accountable processes.

The line of least technical and political resistance – following on and progressing on what Harwood describes as a “new consensus on land value capture, which emphasises the effective working of the planning system” would appear to embed design, infrastructural and affordable and housing obligation requirements in a more certain manner.

This means both definitionally and in meshing them to and within future viability assessment and local plan-making process and practice.

Such greater planning certainty should help to deflate land values generally, as well encourage voluntary sales at a premium above existing values at a fair and effective level, consistent with closing local infrastructural and affordable housing provision requirement funding gaps and with providing a reasonable incentive for voluntary land sale.

Letwin’s proposal of a maximum residual development value for the land of around ten times existing use value rather than the huge multiples of existing use value that can sometimes apply seems a reasonable starting point to assess at least the allowable premium for voluntary sale of greenfield sites.

It would also be consistent with using CPO as a last resort and help also to limit the extent of horizontal inequities between landowners where values are uplifted by prospective development.

Aligning property taxes more dynamically to changing values would dilute such horizontal inequities more effectively, but that involves practicability and political feasibility issues, as discussed in Time for a Modern Land Tax?.

On the other hand, certainty of requirements can conflict with site heterogeneity: one size cannot fit all.

Much more clarity is required as to the respective future roles of public and private sectors and their capacity to effectively fulfil them and on associated changes needed to their respective business/provision models to that end, discussed in Affordable_Housing_Partnership_Planning.

At the end of the day, more effective land value capture would expand access to affordable housing through reducing market prices, helping to finance necessary supporting infrastructure conducive to local and sub-regional housing and economic development, this contributing to the future uplifts in economic growth that the nation’s economic and social future depends upon.

But that requires overarching central government policy clarity and certainty connected to a steadfast commitment to securing increased infrastructural investment in line with local affordable housing requirements and economic development needs as part of a wider economic mission to uptick the sustainable  growth rate.

This was, and remains, a key public policy failure of omission that unless addressed and reversed will invariably render any land value capture mechanism ineffective, whatever its label.

Things won’t happen by themselves. The Oxford-Cambridge Arc is a case in point.

This extended post is one of a series concerning housing and planning policy development that will be published during spring and summer 2023.  Comments on this one should be made to asocialdemocraticfuture@outlook.com

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Filed Under: Housing, Macro-economic policy Tagged With: Compulsory Purchase Reform, Land Value Capture, Oxford-Cambridge Aec

Pathways to London inclusive housing affordability

4th December 2021 by newtjoh

Although the Greater London Authority (GLA) was established in 2000, it only assumed responsibility to administer, to allocate, and to deliver centrally funded affordable housing programmes in 2012 within a policy framework set by, and negotiated with, Whitehall.

The current mayor, Sadiq Khan, is responsible for two overlapping centrally funded housing programmes: the Shared Ownership and Affordable Homes Programme 2016 to 2023 (2016-23 SOAHP or 2016-23 programme) and the Affordable Homes Programme 2021 to 2026 (2021-26 AHP or 2021-26 programme).

The GLA was allocated £4.8 billion in 2016-23 SOAHP central government funding to deliver at least 116,000 affordable homes by March 2022, a deadline that due to the impact of Covid on delivery was subsequently extended to March 2023.

By April 2021, around 72,000 dwelling starts and 34,500 completions from that programme were recorded. Of the remaining 43,000, around 17,000, according to the mayor, are to be started in 2021-22 and 26,000 in 2022-23, accordant with targets previously agreed with Whitehall.

In November 2020 £4bn from the successor 2021-26 AHP was allocated to deliver 35,000 affordable homes across London by March 2026. London-wide allocations from the GLA’s first bidding round for that programme were announced on 31 August 2021, when £3.46bn was allocated to 53 housing providers to deliver 29,456 homes, none of which have started yet.

The mayor expects the 2021-26 AHP – running alongside the extended and outstanding preceding 2016-23 programme – to provide a combined total of c.79,000 affordable new home starts by March 2026.

The Housing Committee of the elected London Assembly at its 19 October  meeting(the committee), coincident with the publication of its 2021 Affordable Housing Monitor (2021 Monitor),  considered issues relating to the past and future delivery of these two programmes.

This post uses most current up-to-date information that the committee, other forums, and the official affordable and other housing statistics published in November 2021 provide(d) to illuminate London-wide trends and issues likely to impact on affordable housing delivery until 2029.

Associated policy development implications at both central and local level are identified and related, where applicable, to the core themes of A Social Democratic Future, including the real fiscal crisis of the state.

The core conclusion is that the driving principle of the mayor’s successful 2017 Affordable Housing and Viability Special Planning Guidance should be extended nationally, but in a way cognisant with regional, sub-regional, and local housing market characteristics and values.

Such a policy shift would align to the line of current political least resistance to make the Section 106 process simpler, with greater certainty and transparency, making paramount the principle that the planning gain attributable to granting of residential planning permission should be recycled to the maximum possible extent to the provision of affordable housing and supporting social infrastructure.

It should be combined with changes in the public accounting treatment of housing investment that reflected its productive income and wealth effects and its self-funding capacity over a 30-year period.

This should tap into a discernible overlapping political and technical consensus that the provision of affordable housing must be mainstreamed through measures that directly reduce the cost and price of housing into both public and private business models, and thus blur the distinction between market and social housing, so lessening the trade-off between maximising social rented and total affordable currently aggravated by constrained central housing capital budget allocations.

1          Defining and tracking affordable housing

What precisely counts as an affordable home is itself a complex and contestable concept that tends to be tautological rather than illuminating.

The government’s definition was published in the 2012 National Planning Policy Framework, last updated July 2021.

Broadly speaking, dwellings provided at least 20% below local market rents (including service charges where applicable) and 20% below local market values in the case of discounted home ownership, including shared ownership, are counted affordable under that definition, which must remain at an affordable price for future eligible households or include provision for any receipts to be recycled for alternative affordable housing provision is required when public grant is involved.

Defining a dwelling as affordable, of course, does not make it by itself affordable for households of varying circumstances subject to local housing market conditions.

The GLA definition of affordable housing attempts to address that consideration, whilst maintaining conformity with the government’s definition of affordability and other programme funding conditions, where applicable, by requiring it to be made available “at a cost low enough for eligible households to afford, determined with regard to local incomes and local house prices”.

For example, the GLA defines London Living Rent (LLR) as an: “intermediate affordable housing tenure with a London-specific rent introduced by the mayor that will help, through sub-market rents on time-limited tenancies, households save for a deposit to buy their own home. Rents are based on one-third of the estimated median gross household income for the local borough, varied by up to 20 per cent in line with ward-level house prices, and capped to reflect the maximum affordability for an eligible household. Providers of LLR homes funded through the Affordable Housing Programme (AHP) 2021-26 will be required to offer tenants the opportunity to buy the LLR home on a shared ownership basis during their tenancy and within ten years. Finally, the benchmark rents also vary based on the number of bedrooms within the home”.

In planning delivery terms,  Delivering affordable housing (HP4) and Affordable housing tenure (HP6) policies of the 2021 London Plan, published in March, specified the following split of affordable products delivered (proportion of total affordable units provided expressed as 100%) expected to be provided in a development):

  1. a minimum of 30 per cent low-cost rented homes, as either London Affordable Rent or Social Rent, allocated according to need and for Londoners on low incomes (A1);
  2. a minimum of 30 per cent intermediate products which meet the definition of genuinely affordable housing (A2);
  3. the remaining 40 per cent to be determined by the borough as low-cost rented homes or intermediate products (as A1 and A2 define) based on identified need;
  4. Where the proportion of (total affordable) homes provided in in a development exceeds 35% (50% on public land or on industrial sites, and public sector landowners with agreements with the mayor across a defined portfolio of sites, or 60% in case of an appointed strategic development partner), their tenure (split) is flexible, provided that the homes are genuinely affordable, as A1 and A2

The presumption is that the 40 per cent to be decided by the boroughs under (3) will focus on social rent (SR) and London Affordable Rent (LAR). HP6 does, however, recognise that for some boroughs a broader mix of affordable housing tenures will be more appropriate, “either because of viability constraints or because they would deliver a more mixed and inclusive community”, in which case it should be determined through the local Development Plan process or through supplementary guidance.

Social housing is allocated with reference to statutorily defined need categories and is mainly allocated to those on low incomes or are otherwise medically or socially vulnerable.

Intermediate housing in the guise of LLR mainly caters for potential households in employment with moderate to average (middle) household incomes below £60,000; households with gross household incomes of up to £90,000 per annum can be eligible for some intermediate home ownership products, primarily London Shared Ownership (LSO).

As an indication of prevailing actual affordable intermediate costs, a proposed 100% intermediate affordable development in Ealing will offer one bedroomed dwellings attached with a market value of c£450,000; translating – assuming that purchased equity stake is 25% on mortgage with 10% deposit found paid – into a monthly cost c£1,239, including a £223 service charge; and two bedroomed units attached with markets value between c£550-600,000 translating into a monthly cost of c£1,500, including c£300 service charge. Properties will be initially offered to eligible local households demonstrating annual household incomes of £60,000 before higher income applicants are considered.

The official statistical sources

There are lies, damn lies, and statistics. Official housing statistics, of course, don’t propagate lies. They do, however, suffer from frequent definitional and consistency discontinuities, from subsequent revisions of previously published data, from gaps in coverage, and from reporting shortcomings (such as source data omissions and miscoding). All can impact on data accuracy, completeness, and transparency. Data owners can decide what to publish, in what format, over what period, and what is included and omitted.

Published data then gets subject to competing political spin narratives, selective in what data and what time periods are highlighted, presented to paint a picture of the past, present, and future that the narrator, accordant with their own organisational interests and preferences, want beholders to see.

All this makes the interpretation of housing data over time difficult, time-consuming, and an invariably less than definitive experience: confusion can consequently trump understanding.

It is important to understand what a particular statistical source in each case is describing and what it is not.

Tables 1 and 2 of GLA Affordable Housing Statistics reports affordable starts and completions that the GLA has funded or monitored as part of a wider regeneration programme. It can omit affordable housing activity undertaken by councils and other registered providers (mainly housing associations) not recorded by the GLA. It is thus a subset of total gross new affordable housing supply provided in London over any set period.

The affordable housing statistics series published by the Ministry of Levelling up, Housing and Communities (MLHC) in its Live Table 1011 is more complete, but it is only published annually in November. It “aims to provide a complete picture on affordable housing delivered, irrespective of funding mechanism”, including new build and acquisitions from the private sector, (although not losses through demolitions or sales), as well affordable completions reported in local authority as well as GLA statistical returns to MLCH, some section nil grant 106 units that the GLA in its 2019-23 returns may have omitted, as well as units funded through Right to Buy recycled receipts not counted in the GLA statistical series.

Although Table 1011S of that series reports total affordable starts only from 2015-16, Table 1011C provides a time-series for completions back to 1991-92, reproduced in Annex Table One.

The GLA and MLCH series are compared in Table 1 below.

Table 1 London2029

The MCLG technical note to the latest published 2020-21 series explains the variance between the two series, thus: “local authorities are asked to only record (in their LAHS return) affordable housing that has not been reported by Homes England or the GLA. To assist them in doing so and minimise the risk of double counting, Homes England (outside London) or the GLA (within London) sends all local authorities a list of the new affordable housing recorded in their administrative systems. However, despite best efforts, double counting may still occur if local authorities misunderstand the instructions on the form or if, due to differing definitions of completion of housing, local authorities considered that a unit had been completed in a separate financial year”.

It appears higher for completions, where it can reach 40%, as it did, most recently, in 2019-20, reduced last year to 8%. Around 76% of the 2020-21 starts in the MLCH series were recorded as funded either by Homes England/GLA but only about  a third of the same year completions.

Neither the GLA nor the MLHC affordable housing statistical series report net totals that take account of reductions in the affordable stock, including from right-to-buy (RTB) and from demolitions; both negative flows can be considerable.

A distinction on the margin can be made between losses due to RTB and demolitions: dwellings demolished are lost now and for ever as source of affordable housing and require the rehousing of previous occupants; yet when integral to a redevelopment or regeneration programme, they may be replaced in time.

Right-to-buy completions reduce the affordable stock and (all other things remaining the same) deflate the future flow of affordable housing opportunities (although receipts generated by the sale may enable partial replacement) but not the total dwelling stock: the dwelling sold can still be lived in by current and future occupants.

Also published annually each November, Table 118 Housing and Communities dwelling stock statistical series provides a net additional dwellings time series for London (E12000006) that is broken down into components, including new build completions, net conversions, and change in use, with demolitions netted off.

According to MLCH, it is the primary and most comprehensive measure of housing supply that provides the “only consistent data source for providing dwelling stock estimates and changes in net supply between census years in England (London), at least from 2006-7”.

That the series is adjusted to reflect the decennial Census result suggests the possible margin of error attached to it, however. And, like the GLA and MLCH affordable series it does not breakdown units provided by bedroom size (number of bedrooms).

It is not broken down according to tenure, and therefore it cannot be directly reconciled with the MLCH annual affordable housing series. It can only be inferred from both series, that gross affordable completions accounted about a third of total new build completions during 2020-21.

Programme phasing, starts and completions

The GLA affordable housing programme is subject to successive central government funding allocations, themselves subject to comprehensive spending review decisions. Each multi-year funding settlement then is allocated by the GLA to individual development partners following an application, competition, and moderation phase.

Development programmes then involve long lead-in times, requiring total scheme funding to be negotiated or identified, and the necessary scheme approvals to be secured and preparations undertaken, prior to any start on site.

Complex and multi-partner scheme developments take years to gestate and then complete. For example, the large-scale redevelopment of the Hackney Woodberry Down and Ealing South Acton council estates took or will take up to 30 years to complete.

The GLA’s Capital Funding Guide defines dwelling start as the date when the investment partner and contractor has signed and dated the building contract and the building contractor takes possession of the site or property and undertaken some necessary defined preliminary works, such as excavating for foundations or infrastructural drainage work.

The beginning of each programme cycle for such starts invariably is relatively fallow followed by a rapid pick-up that then is translated into a later bunching or concentration of completions towards the, or even beyond the end, of successive funding programme cycles.

For example, in 2014-15 over 18,000 completions were recorded (see Annex Table One London 2029), more than three times the volume recorded the following year, reflecting the concentration of completions at the end of the 2011-15 Affordable Housing Programme.

The latest stipulated date for 2021-26 AHP funded dwellings to start is March 2026 and the end date for their completion is March 2029: a potential gap of eight years between programme inception and end, and three between the start and completion of individual dwellings.

The preceding 2016-23 programme is attached with no backstop completion date, meaning that completions funded by that programme could possibly trickle-in towards the end of this decade.

In that light, October’s Housing Committee (the committee) was reminded that a family can only live in a dwelling when it is completed, not when it is started; on the other hand, assessments of programme delivery need to relate to the applicable programme funding and associated target arrangements.

Using GLA Table 1  affordable starts within the capital funded or reported by the GLA since 2008 have averaged annually, overall, around 11,000: 12,000 during 2008-12; falling to less than 9,000 in 2012-16; rising again to approach 13,000 during 2016-21, as Table 2 of this post catalogues in the next section.

Much care is needed in interpreting such overall averages, however, as they are sensitive to the choice of period surveyed. And any average taken over a period can mask variations marking that period or an underlying trend within an inherently shifting story, compounded as it is by programme phasing and the gap between starts and completions identified above.

Over 30,000 dwellings under the 2016-23 programme were started during 2019-21 suggesting a total figure of c43,000 remaining programme starts between April 2021 and March 2023, nearly double the average annual of 11,120 starts during the preceding decade (excluding any that may also be funded under the 2021-26 AHP).

Such a level of starts, if achieved, will then feed into subsequent 2021-26 completion figures, pushing them beyond the previously record 2008-12 completion average, plus some.

On the other hand, the smaller 35,000 dwelling 2021-26 programme will subsequently come on stream from 2023, pushing down the average annual start and then the completion rate towards the end of the decade.

A total of c108,850 expected GLA dwelling starts between the decade April 2019 and March 2029 (c30,500 2019-21 starts plus 43,000 remaining 2016-23 programme starts plus 35,000 2021-26 programme starts) by itself, if achieved, would provide an overall annual average of just under 11,000 for that period, and an even lower completion average. That figure, however, excludes the unknown number of starts that can expect to result during 2027-29 from any successor programme to the 2021-26 programme, and from any other additional allocations.

All of this, of course, shorn of context is prone to presentational cherry-picking.

Improving statistical reporting

Neither the GLA nor the MLHC affordable housing series break down start and completion activity according to bedroom category. This is an important omission insofar that much new affordable housing in London, as noted earlier, is delivered through multi-decade redevelopment/regeneration schemes. These often involve the phased demolition and replacement of existing social rented and other housing tenures by a higher number of one to two bedroomed units.

In that light, the 2021 Housing Monitor recommended that bedroom numbers should be included in the GLA data, which should also capture all gains and losses to the affordable housing stock, and that starts and completion data should also differentiate between funding programmes.

This website has asked both the GLA and MLCH to make efforts to reconcile its respective affordable housing series, and the MLCH its affordable and net additions series.

And, as the London Plan highlights, the growing importance of Section 106 in providing additional affordable housing supply within London means that it is crucial that their implementation and review mechanisms are monitored to ensure that the additional homes contractually committed are delivered in the form promised.

Its monitoring of affordable housing (HP7) policy, in that light, requires boroughs to have clear monitoring processes to ensure that the affordable housing secured on or off site is delivered and recorded in line with the requisite Section 106 agreement, and to share that monitoring information with the GLA to incorporate within its annual monitoring process, and, to underpin the accuracy of their statistical returns to MLHC.

These returns, in the view of this website, should record all individual housing obligations contained in section 106 agreements, and to track them according to whether they are:

  • delivered in accordance with the agreement; or,
  • remain outstanding; or,
  • were cancelled; or,
  • differed in quantum and composition to the original agreement.

2          What the published available statistics tell us and what they don’t

The most telling message conveyed by Table 2 below concerns programme composition.

Table 2 London 2029

It shifted from social rent (accounting on average for 64% of starts 2008-12) to affordable rent (55% of starts, 2012-16), then followed by shifts in favour of intermediate housing provision (50% of starts) and of social rent (31% of starts), both away from affordable rent during 2016-21.

The total and proportionate share of social housing should increase significantly further in the future on current plans. An August 2021 mayoral press release advised that 57 per cent of the 2021-26 AHP programme will be for social rent, of which half will be delivered by councils; shared ownership or London Living Rent accounting for the rest.

That increased 57% proportion compares to the 46% share that social rent took of the total number of affordable dwellings started in 2020-21, and the 64%, 30%, and 17% of total affordable completions that on average social rent accounted for throughout the 2008-12, 2012-16 and 2016-21 mayoral terms, respectively.

The 2021 Monitor also broke down starts and completion according to borough. Four boroughs completed over 2,000 affordable dwellings in total between April 2016 and March 2021 (over 500, on average, each year): Tower Hamlets, Newham, Southwark, and Ealing. At the top, Tower Hamlets, 4,306 completions, while the other three ranged from 2,709 in Newham to 2,070 in Southwark.
Four contributed less than 400: Richmond, Harrow, Havering, and Hillingdon, with Richmond reporting the lowest: 210.

With respect to social rent/LAR completions, Tower Hamlets, Newham, and Ealing all reported over 500 completions over the same period (18% to 23% of their respective total completions). Sutton reported two; Kingston, three; Harrow, four; and, Richmond, 16.

These headline figures, however, do not provide a good guide as to the progress of each borough in meeting the 2021 London net additional dwelling requirements that Annex Table Two London 2029 reproduces.

Ealing, for example, has a 10-year net completion target ending March 2029 of 21,570 dwellings. An October Planning Appeal decision noted that the borough is delivering, at best, 40% of its objectively assessed need for affordable housing while the council accepts that it cannot demonstrate a five-year supply of deliverable housing sites (consistent with it delivering its London Plan targets).

As the previous section noted, the GLA affordable housing statistics series only cover programme activity that the GLA monitors, thus excluding some local authority and housing association self-funded and nil grant section 106 activity. Nor does it breakdown starts and completions according to type of provision.

Table 3 provides that breakdown by utilising the more comprehensive and complete MLCH series

Strikingly, more than 50% of the total 10,800-odd affordable dwellings completed during the last two 2019-21 years were delivered through the nil grant Section 106 route – a progressive increase from the 13.7% recorded in 2014-15.

To put that secular trend into an even longer-term perspective, until 2013-14 (when they accounted for 12.7% of the total, a proportion that thereafter rose steadily year-on-year, as above) the share of the total affordable supply accounted for by nil grant Section 106 completions had had previously exceeded 10% in one year only: 2006-07 (see  Annex Table One London 2029).

Table 3: Affordable completions, according to tenure type and section 106 status, 2014-21

Table 3 London 2029

In tune with that,  GLA analysis of planning data, published in March 2021, reporting mayoral approvals of planning applications referred to the mayor during calendar year 2020 (largely because application concerned more than 150 dwellings), advised that 37% – the same proportion as 2019, a record – of the total 38,865 units approved (14,337), and 41% of habitable rooms (a better measure as it take account of dwelling size composition and mix) were affordable. That proportion had only reached 30% in 2017, after previously out-turning in the 18% to 25% range between 2011 and 2017.

Apparently discordant with that secular trend, however, MLCH Table 1011S indicates that only c16% of 2020-21 starts were expected to be funded through nil grant Section 106 route.

 Table 4 shows that successive ten-year average completions have not diverged from the 30-year average by more than 8%.

Over successive five year periods more variation is discernible, but the table provides little evidence that the political complexion of the government in power proved a major factor; the two lowest five year averages reflected, first, a squeeze on public housing investment in affordable housing during the early New Labour years; and, second, the during 2016-21, the tail end of fiscal austerity acting disproportionately on housing capital investment presided over by David Cameron and George Osborne, tempered in outcome by increased nil grant section 106 supply.

Table 4 London 2029

Completions recovered to reach record levels during the later New Labour years; as the previous section noted, new record levels can be expected at some point during the next decade as 2019-23 start levels subsequently feed into completions.

On the whole continuity interrupted by macro-economic, public expenditure, electoral, and programme cycles, rather than any overarching ideologically-led policy intervention, consistent with post-Thatcherite governments recognising the need for additional affordable housing, if not the means.

The primary and overwhelming message is that the delivery of affordable supply has grossly undershot assessed requirements and aspirations, regardless of the political colour of the governing party.

Table 5 below uses the MLCH net additions series. It records a near-doubling of net supply from the levels recorded in the early noughties to reach c32,000 by 2009. The impact of the GFC then resulted in a drop to c21,000 in 2012-13, then a progressive increase (interrupted in 2017-18) took it to a record c41,000 dwellings in 2019-20 (including c37,000 new build completions). It then dropped back, probably due to Covid-related impacts, by 9% to c37,000 (including c33,000 new build completions) last 2020-21 year.

A sharp fall in demolitions was also recorded in 2020-21.

Table 5 London 2029

Table 6 below advises that new builds account for most net additions, although between 2015-17 changes in use from office and other uses to residential reached 22%, prompting wider concern about the space and other standards. It dropped back later in the decade.

The source statistical series (MLHC, Table 118) is not broken down according to tenure. The relative negative impact of demolitions on affordable net supply outcomes can be expected to be higher: large scale demolition of existing social housing estates has generally been more prevalent in recent decades than redevelopment of privately owned stock, more predominant in in the 60’s and 70’s.

In that light, a Southwark Monitoring Report  covering the April 2004-19 period reported 15,237 planning affordable home planning approvals but a net increase in affordable supply of only 9,924.

The demolition of estates, such as the Heygate, close to the Elephant and Castle, subject to comprehensive and long-term redevelopment and replacement programmes can cause net affordable housing supply, taking account of demolitions, to subtract from gross affordable supply.

 Table 6 London 2029

The committee was told that housing associations and other social landlords face ‘competing priorities’ between maintaining existing buildings and developing new homes, with the cost of remediating fire safety defects and decarbonising homes reducing the capacity to build new ones. A central headwind echoed in the last meeting of the London First convened  Council-Led Housing Forum (the forum) held that same morning.

Richard Hill, vice chair of the G15 group of housing associations within London, advised the Housing Assembly committee that the ‘operating environment’ its members faced required them to re-focus on building safety and investment on their existing stock, causing their development numbers to go down, noting that housing associations face multi-million billion bill to fix safety issues over the next 15 years that came attached with an opportunity cost of around 72,000 new affordable homes foregone.

The London Plan, indeed, includes requirements for all developments of ten or more homes to be net zero-carbon and to incorporate sustainable urban green spaces as part of a wider drive for London to be a zero-carbon city by 2030.

The mayor in his August press release also confirmed that housing providers building homes funded by the new 2016-23 programme, on top of that core climate change sustainability requirement, will also have to meet new conditions on building safety and design, including:

  1. The installation of sprinklers or other fire suppression systems in new blocks of flats;
  2.  A ban on combustible materials being used in external walls for all residential development, regardless of height;
  3. Minimum floor-to-ceiling heights and a requirement for private outdoor space;
  4.  A ‘sunlight clause’ requiring all homes with three or more bedrooms to be dual aspect, any single aspect one- or two-bedroom homes to not be north-facing and at least one room to have direct sunlight for at least part of the day.

Switching to the crucial wider economic environment, deputy mayor for housing, Tom Copley, advised the committee that rising building costs along with shortages of materials and labour in the construction industry could “have a serious impact on scheme viability”, while Darren Levy, director of housing for the London Borough of Newham, starkly warned that: “We’re seeing materials, labour all increasing in cost. [There are] supply chain issues. There’s a general lack of stability. The labour market is becoming more challenging, there are fewer skilled operators available, and they have to a certain extent got a number of suitors in the construction industry in London… I do think, going into the next five to 10 years, it will have a significant impact into that future pipeline”.

On top of that, NIMBY-related opposition to developments that might meet London Plan and local plan requirements but are perceived as detrimental to the local environment and/or future house price prospects, will also need to be navigated.

One of the appealing characteristics of many parts of London is that high quality and high value residential areas are often cheek-by-jowl to social housing or mixed tenure developments. But residents of the former tend to possess more effective voice power in a local planning decision context to oppose and sometimes block high density new affordable housing developments.

The role of councils

On a positive note, a ‘renaissance of council housing’ was celebrated, which the forum was advised involved the delivery since 2018 of more than 8,000 affordable dwellings by London councils; a figure expected to rise to c.10,000 by March 2022, notwithstanding the recent impact of Covid.

As was noted earlier, councils have been allocated more than 50% of the 2021-26 programme for social rented accommodation, which is expected to translate into an additional c12,000 such units funded with GLA support over the next five years.

Southwark, for instance, has a longstanding commitment to provide an additional 11,000 council homes through ‘various means’ by 2043, as part of its efforts to maintain a net increase in the council stock; an aim helped in recent years by rising values that makes the right-to-buy increasingly unaffordable to existing tenants and by higher social housing re-provision levels after a period when losses of social rented stock resulting from estate -regeneration -linked demolitions and RTB’s exceeded gross new affordable provision..

Barking and Dagenham established in 2017 a wholly owned company, Be First, that with 400 hectares of development land, proclaims plans to “provide 50,000 high quality new homes and 20,000 new jobs by 2037”. More modestly, its 2020-25 business plan that the local cabinet approved in April 2020, envisaged “the delivery of 116 new homes in 2020/21 from four development projects and the commencement of seven new development projects to deliver a further 938 homes up to 2024-25, with an average of 73% affordable housing”.

Moving west, Ealing’s November 2020 Cabinet approved a £390million business plan for BLRP, a subsidiary of its wholly owned housing development company, Broadway Living. Along with the £99m grant that the council secured from the Greater London Authority in 2018, the investment will be used to build at least 1,300 affordable homes within the next six years. In total, the plan expects to see BLRP build 1,513 homes, with the sale and let of some of the homes subsidising the development of more homes for affordable let. The business plan projected that BLRP to pay for itself over the course of half a century by “recouping the initial investment through sales and rents”.

A lot can happen over such timeframes, however, and such local development company initiatives come attached with uncertain and elongated risk profiles embracing, but not exclusively, execution, development linked to market conditions, interest rate, and funding source, risk.

The experience of Croydon’s locally owned development, Brick by Brick, created in 2016 demonstrates their potential impact provides a salutary warning. It received £200m in development loans from the council, but by 2021, after its development programme stalled, had not produced any dividends or returns, contributing to its parent council and owner becoming in effect insolvent and unable to make a balanced budget.

Mr Hayes at the forum related a shift from the previous reliance on housing associations to develop affordable or acquire housing from developers to a reaction to the growth of ‘mega’ associations with confused commercial and social ends, drawing on his previous experience as Ealing’s regeneration-lead to note the actions of two associations in embarking on a bidding war for sites contrary to the local public and social interest.

Councils with their greater democratic accountability and their ability to co-ordinate planning with provision activity and to overview local housing and other markets are relatively well-placed to step-in and step-up provision to fill the gap left by HA’s hamstrung by post-Grenfell pressures to spend on their own stock.

Councils, however, compared to private housebuilders, face higher development costs, including across their material supply chains; in that light, moves to aggregate purchasing across organisations and to secure greater vertical integration of their development activity (such as setting up in-house construction arms) can be expected.

On a different but related note, drawing on his current role at Be First, he also noted the rising value of industrial land, reaching £6m per acre, as a constraint on direct provision, although he felt that values would plateau into the medium-term.

The forum was also told that some London authorities are also approaching their Housing Revenue Account (HRA) borrowing cap and that, overall, the scope for councils to expand further direct provision beyond current plans is likely to be limited.

Taken in the round, the conclusion must be that council provision of social housing will remain a sub-theme rather than a transformative one in London housing the next decade.

The funding environment

Pat Hayes, the current managing director of Be First, also highlighted at the forum possible policy risk, cautioning that the current mercurial ‘right-wing populist’ Johnson-led government, gyrating between radical market- and state-led interventions, could simply decide to move the policy goalposts concerning council provision.

The biggest risk, as it seems to this website, is the replacement of Johnson by a successor more wedded to Rishi Sunak’s proclivity for a smaller state and fiscal conservatism – a far from unlikely scenario, even though one still likely to be tempered by the wider political imperative to retain the recently won Conservative – in the absence of a more precise description – ‘working class’ and ‘red wall’ vote.

Certainly, central government cannot be relied upon to provide increased funding support. Although the 2021 Spending Review (SR21) did announce an additional £1.8 billion in total for housing supply, on top of the existing £11.5 billion investment through the Affordable Homes Programme (2021-26), of which £7.5 billion is over the SR21 period, 65% of the funding will be for homes outside London.

The government’s political driver to target resources to the North and the Midlands – the home of its ‘red wall’ seats – to further its Levelling Up agenda combined with the chancellor’s commitment to bring down the share of national income taken by public debt within three years, means that any further increase in centrally supported housing investment for London is unlikely.

The £4.9bn that Tom Copley advised the committee that is needed ‘every year for 10 years’ to provide affordable housing on the scale needed will remain ‘for the birds’ in the absence of imaginative and radical systemic change to the housing finance system, requiring at least some measure of cross-party support.

The concluding section will return to that.

Changing programme composition

The funding and other sources of affordable housing are multiple subject to frequent change. The average amount of public grant or other support required to deliver affordable housing varies according to tenure, location, and bedroom mix, the prevailing policy environment, as well as wider macro-economic and housing market conditions.

Public grant support was squeezed down practically to nil during the 2014-19 period when public housing investment became a key victim of fiscal austerity. A social rent unit will require more than twice as much public support than an intermediate unit.

As way of example, the GLA’s Building Council Homes for Londoners fund offered £100,000 per Social Rent/London Affordable Rent compared, compared between £28,000 and £38,000 for London Living Rent, London Shared Ownership (LSO) or other genuinely affordable intermediate unit started between April 2018 and March 2022.

Programmes comprising 90% social housing and discounted home ownership, respectively, will generate quite different numbers of additional housing opportunities for households of different social-economic characteristic.

Politics abhors a vacuum, and Tom Copley at October’s committee highlighted that the mayor had successfully argued (or, put another way, the government for its own reasons had been willing to accept the principle) for the majority of the 35,000 homes to be provided (started) by 2026 to be social rent dwellings, the “most affordable and most needed” homes, noting that “the government has come full circle from when it originally wouldn’t allow social rented homes to be created”.

He further pointed out that the 2016-23 programme of 116,000 dwellings was attached with £4.9bn grant support compared to £4bn for the 35,000 dwellings currently expected to be delivered through the 2021-26 programme.

The average unit public grant cost of £42,000 to provide each of the 116,000 affordable dwellings under the 2016-23 programme will rise (mainly due to the change in programme composition towards the more grant-intensive social rent, but also due to build cost inflation and the cost of design, quality, sustainability, safety and equality, diversity, and inclusion benefits) to a projected c£114,000 for each of the expected 35,000 dwellings of the 2021-2026 programme dwellings.

The reversion back to social rent should help to contain the central government housing benefit bill to a lower figure than would be the case if the same units were to be provided at the ‘affordable rent’ tenure (higher rents require more benefit where tenants are eligible, which the majority are) and at the margin should enhance work incentives; crucially, too, the shift from intermediate to social rent should more directly assist authorities to get a greater number of homeless families out of expensive and unsuitable temporary accommodation.

The downside, however, is the much higher subsidy requirement involved in providing a social unit and the resulting trade-off that exists at any given total level of grant availability between, on the one hand, maximising social housing and, on the other, total affordable numbers, largely explains why the total number of affordable dwellings that the 2021-26 programme will deliver (start) will deliver less than a third than its predecessor (expected delivery according to current conditions and plans).

The cross subsidy model

Providers, mainly the mega housing associations, ‘stretched’ receding levels of public grant over the last decade, buttressed by reserves providing a capital risk buffer, and by building units for market sale to cross-subsidise the provision of affordable homes, between and within schemes, for example, when large council estates are progressively demolished and replaced with a higher number and density of predominately private dwellings, which when sold to finance succeeding scheme phases.

But, as noted above, post-Grenfell and other spending pressures bearing down on such providers will curb its future scope.

Across recent decades the predominate development model has been cross subsidy, certainly within London and the main urban conurbations. The process has helped to maintain gross affordable supply during a period of constricted public grant support availability.

But the cross-subsidy model will not by itself provide the affordable housing on the scale required; certainly, in the absence of a scale increase in public grant that the current unreformed public expenditure and wider policy environment will not provide.

It suffers also from other shortcomings that can militate against or even undermine its purported purpose. Cross-subsidy is intrinsically sensitive to wider market conditions, which – as in the wake of the 2009 Global Financial Crisis (GFC) – can interrupt, delay, or even forestall development progress.

The model encourages – and even at the margin is dependent – on providers to maximise market sale proceeds. This incentivises them to market and sell units, for example, to foreign investors or wealthy parents of foreign students, pushing-up prices way beyond the reach of local people on moderate to above average local incomes.

Even where developers can only maximise sale proceeds by targeting local buyers, many of whom are likely to have far from high household incomes, who then, in effect, cross subsidise the affordable units, the numbers of which, in turn, in the absence of additional public grants support, can be crimped when market sales proceeds are limited by local purchasing power.

More fundamentally, but related to above, the cross-subsidy model is predicated on, and perpetuates, a housing system that become increasingly riven and driven by multiple market failures, concentrated in the more economically buoyant sub-regions concentrated south of the Humber and Trent and east of the Tamar.

Use of nil grant Section 106

London in recent years have, as Table 3 demonstrated, increasingly has come to rely upon nil grant Section 106 planning agreements (obligations) to deliver affordable housing. It is, in effect, a mechanism to partially recycle or ‘tax’ the uplift in value secured through residential planning permission; as such it is integral to the cross- subsidy model: a palliative to the imperfections of the broken wider housing market on which it relies.

In the past, information and expertise imbalances between local authorities and developers allowed the latter to game the Section 106 system to their own advantage, increasing developer profit at the cost the number of affordable units provided: St. Mary’s Residential Case study provides a high profile Southwark example

The progressive step-increase in the proportion of total new gross affordable supply taken by nil grant Section 106 since 2013 provides some evidence of greater local authority focus and effectiveness in negotiating and then securing delivery of higher levels of affordable housing within regeneration and other schemes using the cross-subsidy model (as well as to the sterling and painstaking work done by organisations, such as the Southwark-based 35% Campaign.

A key catalyst of that step-increase was the 2017 Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), now formally enshrined in the 2021 London Plan, supporting its polices including HP5 and HP6 (discussed below), are to be implemented, which must be taken into account as a material consideration in planning decisions.

A streamlined Fast Track Route was introduced for schemes that include at least 35% cent affordable housing, and 50% on public or redeveloped industrial land that enables them to progress without the need to submit detailed viability information and without late viability review mechanisms which re-assess viability at an advanced stage of the development process.

This, according to the mayor, “provided greater certainty to the market, sped up the planning process, and has helped to increase the level of affordable housing secured in new developments”. The consequent greater consistency and certainty has substantially improved outcomes.

Schemes that conversely do not provide the threshold level of affordable housing or meet other relevant policy criteria, or that provide off-site or cash in lieu contributions, must continue to follow the Viability Tested Route and are subject to viability scrutiny and late, as well as early, review mechanisms.

Tom Copley was asked at the committee whether more affordable housing could be squeezed from private developers through the Section 106 route.

He was not hopeful, however, no doubt taking his cue from his peer, the Deputy Mayor for Planning, Regeneration, and Skills, former Hackney mayor, Jules Pipe, who a month earlier advised the September London Assembly Planning and Regeneration meeting in a Question and Answer session that continuing to rely on developer section 106 contributions to provide affordable homes,  is “not a viable way of delivering the amount that we need as a capital city even combined with housing grants. Neither is sufficient….it is still obviously a very valuable tool and we would be loath to lose it. If anything, it needs to be enhanced, but quite how … when you are still requiring all these other things from a development, it will only pay for so much. Going back about ten years, it would have been standard for developers to expect about a 20% return. I think we are getting them down to about 12.5% on many of the developments that we see. Much below that, the real estate community will say, “Well, actually, we do not get enough return in London, we will go and develop elsewhere, thank you very much.”

That last point is addressed below.

4          What needs to be done  

The 2021 London Plan (plan), based on a Strategic Housing Market Assessment (SHMA) undertaken in 2017, publicised that London needs to deliver each year c66,000 net additional completions across all housing tenures for the next ten years, two thirds (c43,500 or 65%) of which should be in social or affordable tenures.

Yet the Planning Inspectorate report that reviewed it concluded that over the next 20-25 years capacity only existed to deliver only 52,000 net new homes per year. Consistent with that, the total ten-year target for new dwelling additions across London contained in the London Plan (reproduced in Annex Table Two) only totals 522,870 dwellings. Little evidence exists to provide confidence that authorities are on track to meet their targets with some, such as Ealing, reported earlier, unable to demonstrate sufficient progress.

The stark fact is that the past, the current, and the planned future provision of both total and affordable homes within London, as demonstrated in this post’s data tables, will continue to fall well short of the plan’s target and capacity.

The improved levels of annual net additions achieved in recent years, reported in Table 5, running at c40,000 still are less than two-thirds of the SHMA requirement, while the proportion of that total taken by affordable dwellings seldom exceeds a third.

Much therefore must change if future delivery is to approach declared needed levels.

On a positive note, a general cross-party – national and local – political acceptance has developed that new dwelling supply, and the share of affordable housing within that total, should, indeed, increase.

That acceptance, albeit sometimes masked by tactical discordant rhetoric – whether emanating from Whitehall or City Hall – has, however, been largely limited to the payment of lip service to a recognition that the ‘housing market’ does not work, save for some measure of government pragmatism in terms of policy change at the margin, such as lifting of the HRA borrowing cap.

But the radical and concerted changes to the strategic policy framework that real progress requires has stubbornly remained backstage.

Why land and multiple housing market failures bedevil new housing opportunity

The slippery slope began with the progressive divorce of the twin-principles enshrined in the 1947 Town and Planning Act that both development control and value vested with state. During the 50’s and 60’s the reduction and abolition of development (betterment) and changes in compulsory purchase legislation, in combination provided scope for developers to realise future gains from value uplifts attributable to the granting or even hope of residential planning permission.

That process and its resulting consequences has been clearly charted by the work Derek Bentley has done for Civitas, most specifically in The Land Question, which by piecing together various sources, noted that between the mid-1950’s and 1990’s, the average price of land attached with residential planning permission, at 2016 prices, spiralled from £150,000 per hectare to £1.3m, surging again to £5m by 2007, reaching £6.2m prior to the onset of the GFC. Values have risen subsequently. Land in agricultural use without prospect or hope of development is attached with an average value of £22,000.

This website in  The Measurement of Land Prices used similar sources to report 1994-2010 valuation trends of land vested with planning permission, while noting problems inherent in the compilation of land price indices (largely ceased since 2010) which try to provide weighted averages of an enormous array of transactions that vary according to site size, location and connectivity, other site circumstances, on the density of its development, and on the planning conditions imposed, as well, of course, on actual and expected future market conditions,

More recently, indicative land values of a hectare of land attached with residential planning permission across London ranged from £6m to more than £35m.

Technical detail should not, however distract from the clear and instructive story that Figure 1  below paints of the upward step-change in land prices that commenced in mid-fifties accelerating across cyclical oscillations, subsequently.

Figure 1

The financial liberalisation of the eighties, lubricated by the secular downward trend in interest rates, easier access to mortgage finance, and growth of dual income households, increased monetary demand for housing.

It was not accommodated by supply, constricted, as it was,  by the cessation of mass council building programmes and by a tendency towards market concentration in the private housebuilding sector.

The prospect of higher market sale proceeds, crucially, bids up the future cost of development value of land, propelling prices further upwards, sometimes in a frenzy to be followed by a subsequent bust that then compresses supply even further. Higher and rising proportions of residential development value, up to 70%, are now accounted for by land.

The housebuilding industry has been transformed from one marked by dispersed multiple small and medium-sized suppliers in often local markers competing on both quality and price to an oligopolistic structure dominated by a few large, mainly national, builders. The three largest Persimmon, Wimpey and Barratt, account now for around a quarter of the market, compared to 1988, when Daily Telegraph columnist, Liam Halligan, in his recent book, Home Truths, advised that 40% of completions were provided by 12,200 companies.

The end-result, now widely noted and recognised across the political and ideological spectrum, is that the these now dominant companies have become price-givers driven by an incentive to restrict supply to maximise their short-term profit rather than output, allowing them to make supra-profits – as much as £60,000 or more per house built, and to pay chief executive and other salaries and bonuses in the millions, while engaging in restrictive practices, such as inserting covenants that involve regular doubling of ground rents on properties that could be sold freehold.

It is a ‘market’ in name for a product – vital to individual and community well-being – distinctive in that it has risen in price so much in both absolute and relative terms in tandem with a quality decline, where consumers can exercise so little real choice. It is truly a market broken by the imperfections and distortions outlined above.

Two pathways – given the prevailing and expected future political and financial environment – appear to provide the best and most feasible routes to future London and national housing affordability.

1         Public accounting for productive housing investment

Across the short-to-medium term, there is little or no prospect of any further step-increase in central government housing investment funding arriving to push up that total substantially to lessen that trade off; the downside risk, rather, is that fiscal conservatism will have re-exerted itself within the Conservative government by the time of the next spending review.

Even in the unlikely event that a Labour or hung parliament was elected in 2023-24, a scale increase in housing investment would require it, not only to set fiscal rules that lift the current 3% of GDP ceiling on investment expenditures, but to juggle and prioritise competing public investment demands in such a way that both maintains financial market confidence and avoids construction industry material and labour shortages.

Recent speeches by the Labour leader and his shadow chancellor have emphasised that Labour next in office will be ‘fiscally responsible’ and will not ‘throw public money’ at problems for the ‘sake of it’.

Quite so, but also redolent of New Labour whose early headline adherence to previous Conservative spending plans to demonstrate its fiscal probity resulted in a squeeze on affordable housing investment during the early noughties, which had deleterious economic and social consequences.

A symptom of the real fiscal crisis of the state marked by a mismatch between the public expenditure requirements of the UK and the political and electoral willingness for them to be met through salient and efficient forms of taxation, or borrowing where economically and financially sustainable and appropriate.

Given that, it is both vital for, and incumbent on, the housing sector to make as strongly and clearly, as possible, both the economic and financial, as well as social, case for increased affordable housing investment, and to integrate that with supporting supply side reform to the construction industry.

Affordable housing investment due to rising rents and values, can be self-financing over a 30 year or plus time span. An increased supply of social housing should reduce and deflate the future costs of keeping priority households in expensive and unsuitable temporary accommodation.

A strong invest-to-save case, therefore, can and should be made, alongside, and integrated, where possible, with innovative reforms to the financing of affordable housing and its associated public accounting treatment consistent with the above.

2        A root remedy to engage with an overlapping political consensus: deflating future land prices directly by embedding affordability requirements 

The 2017 SPG  adopted the Existing Use Value Plus (EUV+) approach (current use value of a site plus an appropriate site premium), to determine the benchmark land value. It serves to embed known and increased affordable housing requirements, crucially, into the generation of shared future public and developer expectations on expected sale receipts and thus acceptable planning gain surpluses, then feeding into future land value and price expectations. That is getting to the root of the matter (addressing a core housing market failure: escalating land prices based on speculative rent.

Housing Policy Five (HP5) incorporated into the 2021 London Plan (para 4.5.4) confirmed that the approach seeks to embed affordable housing requirements into land values and create consistency and certainty across London, noting earlier where there had been a relaxation in affordable housing and other planning requirements, it typically led to higher land values, not an increase in housing delivery. It further advised that the 35 per cent affordability threshold level will be monitored and reviewed in 2021 to determine whether it should be increased, with any changes consulted on as part of an updated Affordable Housing and Viability SPG or through a focused review of the London Plan.

Jules Pipe did shed doubt, however, in September, as the preceding section noted, whether much more affordable housing can be squeezed out of the Section 106 route at the London-level, at least without wider, supporting, and concerted changes to the national policy framework.

A point, indeed, that this website’s  March 2018 Response to London Plan consultation advised that it : “fully supports the aim and content of the Mayor’s AHVSPG (2017 SPG) and believes that it sets a needed template for national housing policy reform as part of a needed package to repair Britain’s broken housing market. This requires the effective direct deflating of land values and a reduction in developer profit margins. But by the same token it is concerned that its intentions to be achieved requires similar reinforcing strategic policy reform at the national level, without which there is a possible danger of a developer ‘strike’ occurring at London-level as the largest housebuilders/developers migrate to locations where they can continue to enjoy excess super-profits. Cross party support for a sustainable reform – based on a credible and sustainable tailored incremental approach – is again a pre-requisite for the effective implementation of the needed package of reforms”.

The driving principle of 2017 SPG to close the gap between existing use and developed land value across all planning authorities should now be extended nationally, but in a way cognisant with regional, sub-regional, and local housing market characteristics and values, where necessary. In some lower value areas an EUV+ of, say, 30%, could, unlike London, render specific affordable housing thresholds almost superfluous.

In short, greater universality and consistency in ends and purpose at a national policy level, which allows a locally tailored treatment, rather than a uniform ‘one size fits all’ prescription, is required.

Such an extension and deepening of the principles of the 2017 SPG would directly reduce the cost of new housing: the root of the matter.

It would align along the line of current political least resistance to make the Section 106 process simpler, with greater certainty and transparency, making paramount the principle that the planning gain attributable to granting of residential planning permission should be recycled to the maximum possible extent to the provision of affordable housing and of supporting social infrastructure.

To take one example of that, the 2017 Conservative Manifesto  (p41) committed a future Conservative government to ‘work with private and public sector house builders to capture the increase in land value created when they build to reinvest in local infrastructure, essential services and further housing, making it both easier and more certain that public sector landowners, and communities themselves benefit from the increase in land value from urban regeneration and development’, consistent with an overlapping political and technical consensus that the provision of affordable housing must be mainstreamed through measures that directly reduce the cost and price of housing and that blur the distinction between market and social housing, into both public and private business models.

The corollary is, of course, is that London political stakeholders should gravitate towards such a broad-based cross- party campaign given that London’s housing outcomes largely depend upon the national policy framework.

Whether any government, especially a Conservative one with strong links with the housebuilding industry with its now entrenched vested and lucrative private interests, would possess the will, focus, and strength of purpose to secure such a change, remains open to doubt. After all, not much has come from the 2017 manifesto pledge.

Perhaps, before long, political necessity will breed boldness to do what is right. The time for helping that moment along is now.

Annex Table One London 2029

Annex Table Two London 2029

 

Introduction

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Filed Under: Housing, Macro-economic policy, Time for a Social Democratic Surge, Welfare State and social policy Tagged With: London

Making Public Investment Smart

12th June 2019 by newtjoh

The level and quality of public infrastructural investment must meet macro-economic and social requirements and be efficient in selection and execution.

The establishment of the Infrastructure Projects Authority (IPA) in 2016, and the National Infrastructure Commission (NIC) in 2017, was a move in the right direction in line with that. It provides potentially a stronger institutional footing for the effective planning, funding, selection, and execution of infrastructural projects, which, hopefully, is associated with a better shared political understanding of the role that productive public infrastructural investment must play in underpinning a future sustainable productivity-driven growth economy.

Yet the fiscal and institutional environment for the funding, selecting, and delivering of infrastructure, remains, unfortunately, unfit for purpose.

The need to change that, and how, provided the tread for the Submission that A Social Democratic Future made this month in response to HM Treasury’s Infrastructure Finance Review, which closed on 5th June, (the Consultation).

The Consultation sought views on securing private finance in support of productive infrastructural provision in such a way that the ‘benefits brought by private finance must outweigh the additional cost to the taxpayer of using private capital’, (para. 1.9), and on the future institutional options for delivering government support for infrastructural finance, including establishing a new operationally independent institution in the expected post-Brexit environment, when the UK will no longer benefit from access to the European Investment Bank (EIB).

Continuing under-investment in both productive economic and social infrastructure will retard the achievement of the step-increase in growth and productivity required to escape continuing stagnation. That is the prime issue.

This means fostering and reaping the potential productivity gains that follow the agglomeration of specialized economic activities in the largest urban areas and other concentrated clusters, including improved matches of jobs and people, the sharing of information, knowledge and innovation, as well as facilitated market access.

Bigger and more people-dense high-productivity cities, in turn, will depend upon high quality transport, digital, and social infrastructure in housing, education, and, to a degree, cultural services.

In the UK context, that means supporting primarily the densification of London, and other high-productivity clusters that could potentially conflict with regional spatial and social equity and cohesion aims, and, certainly, is in tension with them.

The post-Brexit referendum environment has further highlighted that tension, and underscored both an economic and social imperative to support and foster the recovery and rejuvenation of ‘left-behind (or neglected) Britain’  for choice of a better descriptive phrase. Coastal and smaller cities and towns, especially in sub-regions located north of a line drawn between the Humber and Wash and in Cornwall spring to mind. They have borne the brunt of decades of de-industrialisation and/or relatively stagnant or declining service sectors – the same areas that tend to the most exposed to the future loss of EU Structural Funds.

Both these strategic policy drivers put an added premium on moving to a reformed and inter-linked fiscal and institutional environment that can best deliver efficient productive infrastructural investment.

Take a sustained increase in affordable housing investment to a known broad steady-state level, planned and meshed with the targeted and planned expansion of apprentice and training opportunities to indigenous workers: although it should help to secure structural change in the construction industry and a step-change in its productivity, it is presently prevented, however, by the operation of the current public expenditure system, where housing capital allocations are constrained by rigid fiscal limits.

The current unitary cash-based public expenditure system lumps together recurrent revenue and lumpy investment expenditures producing future financial, economic, and social benefits into the future.

The construction and provision costs of providing new dwellings is consequently front-loaded  as public expenditure contributing to the deficit into the short-term, leaving public investment, and the housing programme in particular, disproportionately prone to cuts during periods of fiscal stress or austerity (generally when increased counter-cyclical investment is required, as was the case in the wake of the-GFC, nut when it was by cut by 40% in the 2010 SR), and, more generally, constrained below optimal economic levels by undiscriminating unitary fiscal targets, such as when Parliament in January 2017 committed the government to reducing the cyclically adjusted deficit to below 2% of GDP by 2020-21 and having debt falling as a share of GDP in 2020-21.

In contrast, homebuyers budget to meet their recurrent mortgage costs, not the full value of their mortgage; nor are they double-counted.  Nearly all first-time buyers could not purchase if the same accounting treatment was applied to them.

The Fiscal Remit imposed on the NIC by HM Treasury – itself constrained by that same  discrimination against investment expenditure, intrinsic within the current cash-based unitary public expenditure system – sets a gross public investment funding envelope or limit of between 1.0% and 1.2% of GDP in each year between 2020 and 2050, within which NIC recommendations for economic infrastructure must adhere, after taking account of existing funding commitments, including HS2, CrossRail 2, and Northern Powerhouse Rail. This is even though that existing commitments – combined with expected maintenance spending on existing assets – will consume an estimated 1.1% of GDP between 2020 and 2025, and 0.9% between 2025 and 2030.

Very limited fiscal space, over the short-to-medium term, therefore, will be left for the NIC, by its own reckoning, to recommend new and additional projects, such as the upgradations and new additions to the intra-and inter-urban transport network needed for the posited benefits of HS2 for London and other urban conurbations to be substantively harnessed.

Likewise, projects that could step-up the productivity of under-performing urban agglomerations such as the West Midlands, currently held back by congested and inadequate public transport connectivity, closer to European average levels, will almost certainly be stuck on the drawing board or stillborn.

Its constrained Fiscal Remit will also undermine any effort of the NIC to select, rank, and sequence projects – given their lumpiness and interdependency – efficiently.

For example, it is unlikely that the London transport system could cope with increased HS2 numbers without the prior of completion CrossRail at the London Euston terminal end.

Most HS2 passengers arriving and departing at Birmingham will still also need to get to the terminus station by public transport, unless they can walk to a central destination or get a taxi to a poorly connected destination within the West Midlands conurbation.

Already, productive infrastructural projects have been pared back due to fiscal constraints linked to the achievement of short-term fiscal targets. Trans-Pennine Rail provides a recent example with likely significant sub-optimal economic effect on the Greater Manchester and West Yorkshire economies.

Another problem with the current fiscal rules is that debt raised by Public-Private Partnerships (PPP)’s to construct assets – within the current cash-based public expenditure planning system (if it meets defined accounting tests) – is not recorded as public spending or debt.

Unless public procurement and PPP’s are put firmly on a level playing field, the ‘fiscal illusion’, as the Office of Budget Responsibility (OBR) in 2017 described the Private Finance Initiative (PFI) programme, which Budget 2018, PF1/2 curtailed, risks repeat.

Private finance will then continue to be used to meet the infrastructural funding gap, even where it involves net higher public costs and hence public debt and borrowing over entire project lifetimes.

Alternatively, private financing of new water and energy assets under the current Regulated Asset Base will rely upon their ultimate funding on hidden subsidies and higher charges on consumers, with resulting regressive incidence on household budgets.

The effective development of the NIC’s proposed analytical framework for comparing the whole life costs and benefits of private financing and traditional procurement on an objective whole-life project basis, accordingly, and in addition, also depends upon inter-linked fiscal and institutional reform.

The Submission recommended integrated reform across three primary areas: the fiscal rule framework; the institutional environment governing the selection, ranking, and delivery of productive economic and social infrastructure projects; and tackling the root causes of the rising relative real cost of providing of such infrastructure.

Fiscal Rule Reform

The 2019 Spending Review (2019SR) should increase the NIC’s current Fiscal Remit funding envelope and disentangle it from unitary cash-based fiscal targets, while the NIC should provide evidenced assessment of the future volume need for public investment, and its sequencing, to the Treasury.

Capital spending on both conventional and PPP’s should be freed from year-to-year financial cash-limits, but their modelled future revenue liabilities included in future government debt projections used to assess future debt sustainability.

And the IPA and NIC should ensure that choice of procurement route for future publicly supported or regulated infrastructural provision should strictly and wholly be determined by relative whole-life project efficiency, taking account of the cost of finance, according to the best-available tools and evidence-base.

The selection, ranking, and delivery of productive economic and social infrastructure projects.

It is not apparent that the impact of future technological change on the economic value attached to shorter journey times between Birmingham and London, nor the actual scope potentially available in the future for existing networks, such as the Chiltern line, to increase capacity and average journey times, were adequately addressed during the original HS2 decision-making process.

At any rate, a fully transparent evidence-base does not seem to be available to convincingly rebut rising doubts, currently raised within and outside Westminster, concerning the vfm and the ultimate economic utility of the project – attached with an expected price-tag of over 55bn – relative to alternatives.

The Thames Tideway project – a 25km tunnel, currently in the process of construction, to upgrade and expand London’s Victorian sewer network will cost an estimated final c4.2bn at 2014 prices. A Special Purpose Vehicle (SPV) bears primary construction and execution risk. That feature and an innovative patchwork of public guarantees and retention of high impact but low likelihood risks, designed to avoid expensive and inefficient risk pricing, has led many to tout it as an emerging PPP model, but the business case need for the project relative to cheaper alternatives, such as improved maintenance and repair of the existing network to prevent leakages, has been questioned.

Ultimate project risk will rest upon the consumer and the taxpayer, with its costs mainly met by increased consumer water bills. The construction of the project will both foster and pre-empt engineering and tunneling resources.

All that said, the optimal ranking of the relative macro-economic worth of competing projects is difficult to achieve in practice for many reasons.

These include the complexity of the wider policy environment in which the selection and prioritisation takes place; the related need to balance competing multiple objectives; the existence of contingent political pressures favouring some projects for reasons other than their economic and overall worth, as well as capacity constraints within the public sector to apply effectively project appraisal methodologies, which like all economic tools are also only as robust as their underlying assumptions allow them to be.

It is vital, nevertheless, that the institutional environment in which both economic and social infrastructural projects are planned, selected, and delivered is improved in step and consistent with fiscal reform.

The NIC should, therefore, be empowered to assist each government department to publish a required annual Departmental Investment Plan (DIP).

Each DIP should prioritise projects according to their estimated economic and social return, incorporating auditable information on the methodology applied to rank projects, according to their expected whole project-life return.

The IPA should also be specifically tasked and resourced to expand the pool of personnel skilled and experienced enough to conduct the project appraisals underpinning DIP’s.

Partnerships with universities and the private sector should develop the methodological base and to enlarge and deepen the skill set of appraisers.

Progress towards such an improved fiscal and institutional environment should foster efficient public planning and programming of projects and a greater degree of partnership planning between the public and private sectors.

Improved growth and productivity outcomes, balanced in income and spatial distributional terms, should follow.

But, even with their adoption, the sheer scale of future infrastructural funding requirements requires alternative and innovative public funding mechanisms.

Tackling the root causes of the rising relative real cost of providing of productive economic and social infrastructure.

The costs of providing infrastructural investment have escalated much faster than general inflation: the public investment relative price effect. The escalating cost of land as a component of housing investment since 1955 is a striking instance of its operation and effect.

The true fiscal crisis should also be recognized: the demand and need for productive public expenditures across both current and capital budgets will inevitably outstrip public willingness to pay through efficient and salient sources of taxation, at least within a current competitive political system focused mainly on the electoral short-term.

Overcoming that crisis, therefore, requires further concerted and systematic institutional and policy reform. Lateral, radical thinking across the political spectrum, capable of fostering an overlapping consensus, is required, as much as is incremental reform.

In that light, Sectoral and Departmental infrastructure strategies should identify, address, foster, and integrate joined-up policy efforts to make public investment less costly in net public expenditure terms.

Housing provides a case-in-point example where market failure and rent-capture unnecessarily increases the cost of provision. These should be identified and addressed directly, along and innovative public funding mechanism,  within the DIP process.

The most direct and effective way of reducing the public cost of affordable provision is by deflating its land value component. This could be done by a mixture or combination of measures focused on ensuring that the land value of affordable housing sites are limited to existing use value plus an agreed premium of, say, 30%, backed up by stronger compulsory purchase powers and an affordable housing obligations system that is more robustly, transparently, and uniformly applied than at present.

In parallel, the future long-term rental income and sales of a steady-state affordable housing programme could be securitised to provide collaterised backing for its public funding.
At an overarching level, a dedicated funding intermediary that could take equity stakes in economic and social infrastructure, where long-term returns (for example, linked to revenue streams, such as rents rising with inflation, interest on loans, profit-shares) could be realized and recycled across the lifetime of the project.

Links follow to the  A Social Democratic Future‘s full  Response to Treasury consultation June 2019, its Appendix Table 1, and a summary of the Recommendations.

The major issues that will need to underpin future assessments of the whole-life project efficiency of conventional and PPP projects are outlined in Table 1.

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Filed Under: Macro-economic policy Tagged With: housing, Investing for the Future, NIC

Reforming the Current Macro-Economic Policy Framework

23rd May 2018 by newtjoh

Since the mid-nineties, the prevailing macro-economic policy framework – or ‘consignment’ as it sometimes called – has relied upon monetary policy to smooth the business cycle at a sustainable level of output and employment. In the UK, in 1997, it was given institutional backing, when the Bank of England (BoE) was given an independent mandate to achieve a medium-term set primary inflation target. The role of fiscal policy, in macro-economic terms, was relegated rather to the management of public deficits and debt.

This framework seemed to work during a period, often called the Great Moderation, when nearly all the advanced industrial economies, including the UK, enjoyed an unbroken period of steady sustained growth and low inflation. The business cycle appeared to have been all but neutered, if not banished.

That illusion was popped abruptly by the Great Financial Crash (GFC). The BoE in response reduced the base rate it charged for the use of its own funds from 5.5% in February 2008 to 0.5% in March 2009, when it also introduced the first phase of what has become known as the quantitative easing (QE) programme. £200bn of new money was electronically created and added to the BoE balance sheet to purchase long-dated government debt (gilts). This was in recognition that its main conventional monetary policy lever of base rate management had been rendered ineffective by short-term interest rates reaching their effective lower bound (ELB) – the point where reducing them further has little or no, and insufficient, effect on economic activity.

Rates remain at their ELB, reflecting the empirical reality that the UK has not had a proper recovery yet, nearly a decade on. Real gdp per head and average household income are barely above the level that they reached in 2007. The needed recovery in both growth and productivity is not currently on the horizon.

The macro-economic framework conceived during the Great Moderation – its application based on economic models that ignored the potential of liberalised financial markets to leverage debt – contributed to the GFC. It has been beached by the subsequent stagnation. In short, in its existing form, whether in design or operation, or both, it appears to be incapable of shifting the UK economy out of stagnation. It is thus unsurprising that policy attention is rotating back to the definition and ordering of the first-order principles of macro-economic policy, and to whether the BoE’s independent mandate should change.

The IPPR reform framework
A spring 2018 paper by Alfie Stirling, Just About Managing Demand, takes up that challenge. Produced as part of the centre-left Institute of Public Policy and Research (IPPR), Commission on Economic Justice , it reflects the view of the author, but follows the research and policy tramlines furrowed by the Commission; and no doubt will inform its final report.

Since 2010 monetary and fiscal policy has effectively pulled in opposite directions; monetary interventions injected demand into, while fiscal policy took it out of, the economy. The tendency of governments, with their short-term electoral horizons, to exhibit deficit bias, Stirling argues, has been supplemented by surplus bias: discretionary fiscal contraction or consolidation (fiscal austerity) is ostensibly used to reduce the deficit as a matter of economic necessity, but is effectively applied as a smokescreen to ‘shrink the state’ largely for ideological and political reasons.

The paper’s centrepiece proposal to overcome surplus bias, when interest rates are at their ELB, is to provide the BoE’s Monetary Policy Committee (MPC) with added independent powers to decide whether fiscal policy is ‘overly restrictive’ and in that event to set and quantify a rectification stimulus sufficient to substitute for the cut(s) in base rate cuts that the MPC would have otherwise made.

The operational implementation of that surrogate stimulus would then be delegated to National Investment Bank (NIB) – an institution presumably based on Labour Party proposals to establish a new National Investment Bank . The MPC to achieve its primary inflation target (as may be amended, as discussed below) would, in effect, align monetary and fiscal policy in default of the government.

A reformed and comprehensive set of fiscal rules, echoing and extending Labour’s Fiscal Credibility Rule, is also set out. The separation of current and investment public expenditure for control purposes (as New Labour’s Golden Rule did) would be reinstated. Five year rolling targets would be set for a zero-current balance, and for an operational debt target linked to a longer-term target level for debt.

Public investment (which supports long-term growth) would also be provided with a separate dedicated target, expressed as a minimum percentage of gdp over the same five-year rolling period. This minimum investment rule, however, would be subject to the proposed debt target; however when interest rates reach and remain at their ELB the zero-current balance and debt rules would be suspended, leaving the investment rule in place and operative.

The long-term debt target (which could be higher, lower, or the same, compared to a set baseline level) would no longer require the debt/gdp ratio to be lower at the end of each five-year Parliament. Rather it would be based on an assessment of the UK’s fiscal space – that is the scope available for increased public spending and/or lower taxes without threatening long-term fiscal sustainability and market confidence.

That assessment would be undertaken by the Office of Budget Responsibility (OBR) as a complement to its existing UK’s Fiscal Council (independent bodies set up by governments to evaluate fiscal policy),  remit. It would involve, a macro-economic ‘cost benefit analysis (comparing) lower levels of debt against higher taxes or lower levels of spending’. The OBR would also be given the independent authority to assess the long-term impacts of different investment projects on gdp in line with methodologies agreed with government and independent economists at different levels of debt.

It would also be mandated to conduct a review of accountancy classifications of investment, identifying areas where revenue spend on human capital, on software, or other sources of innovation and growth, in addition to capital expenditure on physical assets, should be counted as investment for expenditure control purposes. Borrowing that adds to future productive capacity of the economy or provides a revenue stream would not be subject to the zero-current balance rule. Borrowing by ‘independent’ public corporations – as defined internationally – for investment purposes would no longer be scored as government borrowing or debt.

Stirling highlights that recessions tend to recur on average every 10-15 years, with the next one expected before long. To prepare for that inevitable – although time-uncertain – eventuality, Stirling moots some more radical revisions to the BoE independent mandate.

The BoE’s primary inflation target could be increased by up to two per cent. This would be to allow the economy to ‘adjust permanently to a higher rate of inflation consistent with interest rates settling at a higher resting point above their ELB’. Unemployment and nominal (money) gdp targets, acting alongside, or as intermediate guides to, that target, could also be put in place.
These revisions would serve dual but related aims: pushing up interest rates above their ELB would enable the MPC once again to use interest rates management as an effective policy instrument to prevent or forestall a future recession; they could also prevent monetary policy being prematurely over-tightened during a period of above-target inflation, driven, say, by an external price shock, such as an oil price hike induced by international political instability.

In sum, changes to the BoE mandate could involve the toleration of higher future actual and expected inflation levels to get interest rates above their ELB and hence to provide reserve monetary firepower to counteract the next recession; but if they remain or reach their ELB, an activist fiscal policy of a path and magnitude determined by the MPC could then be deployed to overcome government surplus bias, as a more effective fiscal alternative to QE. Changes to the fiscal rule framework and to the classification of expenditures for deficit accounting and control purposes, if implemented in their entirety, could institutionally prevent the cutting of economically productive expenditures during a recession, while providing a target for their expansion across the economic cycle, subject to a long-term debt target, which, however would only apply when interest rates are above their ELB. Borrowing for investment by public corporations defined as independent in any case would not count against the deficit or debt total.

Political timing and feasibility
The package covers a lot of policy reform ground. It does come across a bit as a future strategic policy primer for the Shadow Chancellor, John McDonnell and his team; providing, perhaps, both its strength and weakness.

The next government would need to wrestle with the impact of Brexit on the economy and the public finances. Where not already ceded by the May government, fiscal demands on the current budget on ever-rising health and social care demands, local education quality and effectiveness, on training and apprenticeships, and manifesto commitments would have to be faced.
An incoming Corbyn administration would raise borrowing to finance its re-nationalisation, affordable housing, and industrial policy programmes, including the establishment of the NIB, where not shuffled off-balance-sheet. The political context can only be expected to be febrile in the first place – whether related to a Brexit-related hiatus and/or a media-hyping of the first ‘marxist’ Labour government – however unfair and politically-motivated that charge may be.

Making substantive changes to the BoE inflation, to the OBR fiscal mandates, and to the fiscal rules, all in parallel, could risk political over-load. And, to work and to stick, substantive changes to certainly the BoE and OBR remits could not simply be foisted on, but rather would require extensive consultation with, and the support of, the key institutional stakeholders involved. That would take time; as would the establishment of the NIB.

Although a Brexit-hiatus could precipitate a general election before 2022, it remains the due date. A freestanding NIB that relied upon the election of a Labour government in 2022 would be hard pressed to be operationally ready to expand lending on a scale sufficient to counteract any future recession much before 2025; that is unless the present Conservative minority administration decided to develop its own prototype, which it should, but probably won’t.

Changing the fiscal rules – and changing the BoE mandate even more so, as discussed below – would in themselves be political acts. The 1997 new Labour reforms to the fiscal rules and its establishment of BoE independence and were made on back of an already emerging strong technocratic and political consensus in their favour and were introduced within a supporting economic environment. The new economic settlement it represented – along with Gordon Brown’s self- denying ordinance to keep within Conservative spending limits – a tilt towards the centre ground and the assumption of the mantle of economic competence.

This time round, one can almost already hear the crescendo din already that would envelop the new government; that it only wants to change the fiscal rules to pass on the consequent debt burden to its successors for its own political purposes etc. Although is unlikely that Labour would be elected in the first place without a compelling economic and political narrative that underscored the necessity and desirability of substantially increased levels of public productive investment to spearhead the economy’s escape from stagnation, it is far from certain, however, that narrative would be sufficient to persuade the OBR to sign-off the government’s spending plans, whether in terms of the ‘fiscal space’ available for increased investment or their long-term fiscal sustainability.

Economically beneficial public investment also not only needs to be sufficient in volume, but efficient in selection, in composition, and in execution. Varying public investment levels for counter-cyclical stabilisation purposes could, however, risk a return to fluctuating famine and feast conditions, unconducive to such efficiency. https://www.asocialdemocraticfuture.org/investing-productive-infrastructure/ in that regard it proposes remedial reforms to the public expenditure and planning system that are designed to better reflect the long-term economic benefit of efficiently selected and executed infrastructural investment.

They include providing the National Infrastructure Commission (NIC) with a statutory remit to assist each government department to publish an annual Departmental Investment Plan (DIP). Each DIP should prioritise projects, according to their estimated economic and social return, incorporating auditable information on the methodology that it has applied to rank projects with reference to their expected economic return.

Such reforms could tie-in with changes to the fiscal rule framework that provide the OBR an added remit to assess the fiscal space available for increased public borrowing and debt. Splitting the function of assessing the micro-efficiency of individual projects from the more macro-task of assessing the overall fiscal space available for increased borrowing appears to align better with the respective roles and remits of the NIC and the OBR.

The point and sequencing of the proposed fiscal reforms referenced to likely future political and economic scenarios is not wholly clear. If Labour came to power in the aftermath of a Brexit hiatus it is almost certain that the economy would be in such a state that interest rates remained at their ELB. In that case, the new government could simply rescind the existing rules, and proceed to inject a fiscal stimulus financed by borrowing and begin to implement its industrial policy, including the establishment of the NIB. The OBR-brokered interaction between the investment and long-term debt rule in terms of assessing available fiscal space would come into play only when interest rates escape their ELB again.

The government would be able to call upon some substantive technocratic support to use fiscal policy as its primary instrument to escape recession. Prominent New Keynesian economists, such as Paul Krugman in the US, and Simon Wren Lewis in the UK, consistently made the case that monetary policy (MP) should have been complemented post-GFC, at the very least, by a fiscal stimulus, not contraction – a position that many mainstream other economists and organisations, including the IMF and the OECD have subsequently endorsed.

It could also point to empirical experience: the results of the Coalition’s conjoint reliance upon QE and fiscal austerity support the case that QE should have been, at the very least, combined instead with a conventional Keynesian fiscal expansion in public investment. Such an expansion where it utilised and safeguarded unused capacity within the economy could have protected and extended its future productive capacity, helping to lift the economic drag of falling and stagnant productivity.

A new Chancellor could also loosen fiscal policy in tune with the government’s own assessment of economic circumstances and requirements, without recourse to the MPC, as he could change the fiscal rules. In any case it would be unlikely that a newly-established NIB would be ready to spearhead the counter-cyclical response through expanding its ‘lending for business growth, housing, innovation, and social and physical infrastructure’ on sufficient scale to bring the economy back to a sustainable growth path.

For a new Labour Chancellor to press for a change in the BoE mandate, providing the MPC a power to initiate a fiscal stimulus, even though the BoE on number of occasions has disclaimed any wish to intervene in the direction and composition of fiscal policy, appears superfluous, save that it could provide an obstacle to future surplus bias if exhibited by a future government; that same government could then change the mandate again, however. Such a yo-ho would do little to bolster the credibility and purpose of an independent mandate.

Designing policy architecture to better prepare for the ‘next recession’ rather than escaping systemic stagnation now or, even worse, the prospect a Brexit-induced recession could therefore possibly put the cart before the horse. Without a period of economic expansion accompanied by rising pressure on wages and competition for loanable fund, neither interest rates nor inflation are likely to rise above their ELB to a point where rate reductions could be made to respond to a recession. The immediate policy reform priority is to escape stagnation in a sustainable way.

How necessary is (are) a BoE mandate change(s)?
A 2022 election could offer at least a time window for macro-economic framework reform to be considered and anchored to some semblance of a supporting cross-cutting and over-lapping political and technical consensus. On that score, the proposed reforms to the BoE’s mandate appear a rather tentative shopping list or one of possibilities. Many of the issues attached to raising the inflation target rate and/or providing it with a greater output and employment focus are not evidentially justified or explored – more attention is given to the proposal to empower the MPC to specify and delegate a fiscal stimulus to a newly-established NIB, as discussed above. The references, however, do provide a starting point.

With respect to raising the inflation target, the MPC has so far has recoiled from raising base bate above 0.5% This is despite headline inflation even exceeding three per cent – more than one per cent above its medium-term target – thus triggering the requirement for the BoE Governor to write an explanatory letter to the Chancellor. The majority assessment of its members has been that above target-inflation is mainly owed to conditions or factors external or outside (exogenous) to the domestic labour market, including rising oil prices and sterling depreciation linked to Brexit.

The BoE’s May 2017 Inflation report, in line with that, highlighted that the post-2015 fall in sterling was likely to keep domestic inflation above the two per cent target throughout the next three years, (author italics), further noting that where inflation settles once that upward pressure fades will depend on domestic (wage-related) price pressures, concluding that these were expected to build by 2020.

The MPC hitherto has been careful to apply its constrained policy discretion in accordance with its current mandate, focused on the medium-term not the short-term headline CPI inflation figure, so as not to chock-off any nascent or uncertain recovery, at least while spare capacity exists within the economy.

Given that institutional monetary policy context, what would be the economic point of modifying the primary inflation target to accommodate higher inflation and/or giving employment and output a greater weight within the BoE mandate? A slightly different answer to that of simply an interest rate buffer to counteract the next recession, which Stirling emphasises.

The underlying key problem is that the UK economy has failed to recover its pre-GFC secular real productivity and growth trend of annual average c2.3%-2.5% growth. The result: an unrecoverable massive 15-20% loss of potential GDP calibrated to the level it would have reached if that historic trend had been interrupted and thrown off-course by the GFC, the Great Recession, and then counter-cyclical fiscal austerity.

That lost stock of output and income foregone will rise further inexorably, if growth and productivity remain stuck in stagnation mode. In technical economic jargon the economy has suffered hysteresis (a change – in this case on UK gdp, whose initial effects persist, even when its proximate causes or source no longer exist).

A fiscal expansion combined with falling immigration that causing the labour market to further tighten and thus trigger wage inflation, but without it accelerating, could usher-in a new expansionary economic environment that could allow the economy to break out of that circle. How and by what mechanism(s)?

As labour inputs become relatively more expensive, investment in the upskilling of the indigenous labour force, as well as on additional and improved physical capital stock, should be encouraged, in turn, inducing an associated shift in the employment structure towards the formal and away from the insecure gig economy, pushing-up both overall (total factor) and labour (per unit period) productivity.

Infrastructural investment should also increase both the capacity of the economy and its total factor productivity; for example, improved connectivity should lower costs and expand the pool of labour that is available to work in higher productivity and thus higher paid jobs.

But if the MPC references the likelihood of rising domestic wage pressure to the current supply side-capacity of the economy, it risks taking the current compressed productive potential of the economy (for the purposes of MP) as an immutable given. The associated output gap (the difference between aggregate demand and the capacity of the domestic economy to meet it without inducing above-target inflation), has been significantly revised downwards since the GFC by the OBR.

The latest May 2018 BoE Inflation report appears to fall into that stagnation trap. Striking a more hawkish tone than its predecessor a year earlier, it notes that ‘labour demand growth remains robust with a very limited degree of slack left in the economy’ with productivity growth remaining muted, limiting ‘the pace at which output can grow without generating inflationary pressures is likely to be modest’, before diagnosing that ‘ongoing tightening of monetary policy (up to 2020-21) would be appropriate’ albeit that any future increases in Bank Rate are likely to be ‘at a gradual pace and to a limited extent’.

It is not altogether clear what that could mean in practice. It does suggest, on one hand, however, that the BoE does not intend to raise interest rates at a speed and magnitude sufficient for the MPC to draw upon a four to five per cent interest rate buffer to counteract the next recession, assuming that a Brexit-related one is avoided. On the other hand, even modest and slow rate increases could impede or even reverse the productivity-enhancing economic expansion outlined above.

In that case desired increases in personal and household income and improvements in public services will not be possible. Given the existing linkage between consumption and confidence to house prices in the UK, if rates were raised more substantively, such increases could even precipitate a home-grown recession, especially in a post-Brexit environment, which can only be anticipated to be uncertain at best.

Is increasing the inflation target to, say, four per cent, the answer, then? Raising the inflation target by up to two per cent could allow the economy in Paul Krugman’s words to ‘adjust permanently to a higher rate of inflation’, offering space for rate cuts to be made in response to a future recession. The ghost of accelerating inflation continues to lurk in the background, however. Economic actors might well take a supposedly one-off increase in the medium-term inflation target to be the thin end of a wedge that they should grab while they have the chance, resulting in insufficient passage of time for any productivity-enhancing adjustments to take root before pressures to tighten to retard insipient accelerating inflation become difficult to resist. It would also entail a quite marked discontinuity in the BoE mandate that could suggest instability and further changes, undermining its credibility.

What is not open to doubt is that allowing inflation to rest at a higher level would require – if international competitiveness is to be maintained – a commensurate increase in productivity across the tradeable sections of the UK economy; relying on sterling to depreciate in compensation instead, itself would add to domestic inflationary pressures.

Also, the Chancellor, facing higher public-sector nominal wage claims from health and other public-sector workers could well be forced to resort to fiscal drag and/or additional taxes to protect the current budget balance, dampening the translation of real wage into real disposable income growth in the process. Such dampening might well be desirable in terms of securing a shift in resources within the economy towards investment, but such suppression of real wage growth by stealth taxes cannot be expected to hold for any extended period.

An alternative might be to suspend inflation target temporarily while the economy escapes stagnation. It cannot be expected that the BoE would instigate such a change itself. But if imposed by the Chancellor, the effect would be nearly akin to abolishing the independent mandate of the BoE altogether.

Yet another variant could include raising the inflation target explicitly only for a temporary or time-limited period, on the basis that the retention of two per cent medium term target would conserve continuity. The aim would be to influence wage-bargaining behaviour so that real wage inflation tracks productivity, rather than inducing beggar-my-neighbour escalating, rises. That desirable outcome would tend to depend on, however, not only on the credibility of the new temporary, and necessarily, contingent target rule, but also on other emergent factors that may affect the labour market and wider economy. Perfect alignment of real wage inflation and productivity remains a heroic assumption.

Besides the existing inflation target is a medium-term one, although its precise time-span can be open to definition. The same desired end-result of a productivity-enhancing expansion could therefore possibly be engineered by more informal and less disruptive institutional means. The annual Chancellor’s letter to the Governor could be used to adjust the weight balance accorded to price stability and real economic activity, for instance. The MPC could continue to operate within its existing 1997-set medium-term two per cent target but with reference to a political tilt for it to be administered it in future with greater regard to employment and output considerations, as new economic conditions and times require.

An imperfect analogy might be a judge instructing the jury to decide a case on the balance of probabilities rather than beyond reasonable doubt. The underlying and overarching importance accorded to price stability would necessarily be diluted, however, with attendant possible implications for the credibility and certainty of the target. That said, a case can be made that the advantages of price stability was overstated within the existing framework and that events have tended to suggest that in some conditions its strict adoption can retard rather than induce strong and sustainable growth.

In that regard, tilting the MPC mandate towards output and employment considerations could also be achieved by moving to a nominal annual gdp target of, say, five per cent. This would combine or mix real output and inflation into a single target; it could be achieved by various permutations of both: for example, two per cent real growth and three per cent inflation, and vice versa. Such variability could gnaw at its overall credibility and certainty, however.

Or the target could be split equally, 2.5% for each; reducing uncertainty but at the same time also the flexibility that may be needed to allow the economy to recover its historic secular growth and productivity path. When taken in the round, as a 2013 Deputy Governor Speech on nominal income targets, pointed out, insofar that the existing mandate does take cognizance of output and employment objectives, many proposed alternatives can appear more different than they are actually are.

The issue really boils down to the relative weight that should be accorded to employment and output relative to medium-term price stability, for what period, and in what circumstances. Incremental evidence-driven change in emphasis subject to continual review might ultimately prove the best friend of radical reform.

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Filed Under: 2018 Housing Policy, Economic policy, Macro-economic policy, Time for a Social Democratic Surge Tagged With: Alfie Stirling, economic policy, fiscal rules, IPPR

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