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Making the Most of the Budget

17th November 2024 by newtjoh

The first Labour budget for 14 years and the first ever delivered by a female chancellor was also momentous in its expected expansionary impact on the economy (net fiscal loosening adding to aggregate demand) notwithstanding that its planned annual tax increases of around £36bn will take the share of tax to GDP to record levels.

This post reflects and focuses on its implications, according to three main headings:  the real crisis of the fiscal state; fiscal institutional reform and public investment planning and delivery (which includes investment in public (social) housing as a case study); and Labour’s 1.5m housing target – scaled down to putting the annual new supply of 300,000 dwellings onto a sustainable footing by the end of this current parliament.

The Autumn Budget 2024 Treasury Red Book (Red Book) and the Office of Budget Responsibility (OBR) October 2024 Economic and Fiscal Outlook  provide its main source documents.

The fourth section, waiting for Mr Growth, notes that although the OBR post-budget assessment and its five-year forecast indicate continuing levels of stunted growth during the lifetime of this 2024-29 parliament, it does not take account of the future policy and economic impacts of the Spring 2025 Comprehensive Spending Review (2025 CSR), or of planning reform, or of the future operation of the National Wealth Fund combined with pension fund reform.

Together they will prove pivotable as to whether the actions of this Starmer government (besides external shocks and events) can and will uplift the annual growth rate towards the 2.5% level more consistent with both a sustainable welfare state and public finances.  

1             The Real Crisis of the Fiscal State

The real crisis of the fiscal state (RCFS) is the mismatch between the public expenditure requirements of the UK (assuming a continuing public desire and demand for accessible and universal public services and goods 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.

It means that the dominant political parties promise to reduce or at least not to raise taxes while also claiming that they will improve or at least protect public services that require real (inflation-adjusted) increases due to the increased demands of an aging population, higher relative costs and other related reasons.

Essentially, that is an incompatible combination with the stunted levels of growth that the UK has clocked-up since the Global Financial Recession (GFC) a decade and half ago.

The October 2024 budget (budget) followed an election where the previous Conservative government had within a six-month period twice reduced employee national insurance rates by two per cent, despite knowing that doing so would either require unsustainable future levels of borrowing or unachievable future cuts to already unrealistically low planned spending plans.

Labour when in opposition supported both these cuts (in essence, pre-election bribes) while committing itself in government not to increase headline rates of income tax, national insurance or VAT: its tax self-denying ordinance.

Notwithstanding previous and some continuing protestations to the contrary, the budget will increase taxation substantially on non-affluent working people.

First and foremost, the continuing freeze until April 2029 of income tax thresholds, to all intents and purposes, is a tax increase, chipping away both nominal and real increases in pay, bringing either into tax or into the higher tax bracket millions of extra taxpayers.

It is an expedient and effective but also an invidious, distortive, and stealthier way to raise revenue compared to increasing headline rates, raising around £28bn for the public coffers in 2025-26, rising to nearly £38bn by 2028-29.

Second, the increase in employer’s national insurance contributions (NIC) from 13.8% to 15%, made effective at a lower threshold and without a limitation of a higher threshold, is expected to raise around another £25bn annually from 2025-26 to 2029-30 (static effects not taking account of behavioural responses by economic agents), more than offsetting the £20bn reoccurring annual cost of the previous government’s successive employee NIC cuts (see OBR Table 3.9).

Workers will consequently receive lower wages and/or pension contributions than they would otherwise have done without the NIC increase.  Future real wages will be further dragged down by businesses, where and when they can, levying higher prices rather than lower profits accommodating their resulting higher costs.

Increasing in employee NIC or income tax rates instead would have had a more immediate, direct and thus salient impact on nominal post-tax employee incomes; the employer NIC increase is likely to have a more muted, delayed, and hidden although still real effect over the forecast period. The employer NIC increase is a direct and salient cost for businesses.

Where businesses take the hit of employer NIC increase through lower profits that is potentially redistributive in terms of its relative incidence between capital and labour. The lack of threshold limitation is also possibly redistributive (but less so than a direct increase in the income tax rate) although it could incentivise off-PAYE employment and other distortionary arrangements, reducing its yield.

On the other hand, the increased liability to pay employer NICs at a lower threshold combined with an increased minimum wage is likely to bear down on lower-wage workers through reduced employment effects.

According to the OBR forecast, the combined impact of the continuing tax threshold freeze and the new employer NIC increase (plus some other smaller tax increases) will take the tax take by 2029-30 to a historic high of 38 per cent of GDP, causing private consumption to fall as a share of GDP.

That, along with the short-term squeeze on profit margins occasioned by the employer NIC rise, is expected to further deflate business investment further. Already, its share of GDP is one of the lowest in the industrialised world, representing a core and chronic determinant of the UK’s stunted post GFC growth and productivity record.

On the face of it, therefore, the budget (when its policies are considered in isolation), over the medium term (essentially the five-year OBR forecast period) will not only increase taxes on working people in real outcome terms but will retard future growth: quite contrary, in effect, to the government’s avowed aims.

Labour had to win an election. Its tax self-denying ordinance and limited ambition costed fiscal pledges were made to neutralize Conservative attempts to paint it again as the ‘tax and spend’ party as happened to instructive effect in 1992, 2010, and 2015.

But it also constrained honest public debate on the fiscal situation and future choices concerning that and the state of the public realm, as well as boxing-in Labour’s own future policy maneuverability in government.

In retrospect, the public had realized intuitively that post-election tax increases were inevitable, regardless of the political complexion of the new government, and proceeded to punish successive incumbent Conservative governments for their incompetence, their poor behaviour, and their lack of delivery, while in office.

The second Conservative employee NIC cut, at least, could have been opposed as an obvious unsustainable electoral bribe. The Labour leadership, however, did not want to risk any suggestion that they would reverse any Conservative tax cut and thus increase direct tax rates; hence Labour’s self-denying ordinance and resort to alternative sources of revenue.

In short, the budget, compared to March 2024 budget plans, increased planned public spending by almost £70 billion annually (a little over two per cent of GDP) from 2025-26 to 2029-30,  split two-thirds on current and one-third on capital spending, paid for by increased taxes amounting to £36bn annually, requiring increased average annual borrowing of £32bn,  (see OBR Table 3.1 for more precise figures).

A not unsensible combination that provided a substantial real 3.3% increase in the NHS England budget (OBR Table 5.4) that when, hopefully, combined with the early beginnings of necessary embedded and continuing future productivity and efficiency gains, should provide at least a temporary respite to some of its structural funding and delivery challenges.

Yet, overall, the budget only kicked the real fiscal can down the road. In a muted reprise of Conservative fiscal dishonesty, most departments face limited increases or even real term cuts in their budgetary allocations beyond 2024-25 (subject to 2025 Comprehensive Spending Review decisions).

It yet again froze fuel duty during a period of falling fuel prices at the beginning of a government term when it can better ride out short-term negative reactions. If not now, when? Sure, an increase could have added to cost-of-living pressures (more especially in rural areas) but the new government lost an opportunity to introduce a wider narrative consistent with its decarbonization vision.

That could have included a pledge to adjust the duty with future fuel prices to smooth future net price volatility more conducive to consumer and business budgeting.  

Making the current budget balance will mean a combination of future cuts and/or further tax increases, unless future economic growth surprises on the upside (see section four).

The political risk for Starmer’s Labour government is that its own fiscal dissembling will come back to bite it, especially given the shallow popular base of its 2024 victory (its high majority was a product of the efficient distribution of its vote, not its relative volume) and the secular trend for greater electoral volatility and fragmentation.

It could have to paying a continuing and mounting economic and political price for becoming an increasing hostage to the RFCS, however much it twists and turns to escape its clutch.

The unfreezing of income tax thresholds in 2029-30 no doubt will be presented then as a tax cut pre-next election (it may also avoid the triple-lock pension being taxed when received as sole source of taxable income) amid, quite possibly, another proclaimed self-denying ordinance on future direct tax rates, thus repeating and in the process entrenching the fiscal circus cycle yet again, something that may or may not prove electorally successful.

At the end of the day, treating the electorate as children unable to grasp economic and financial realities is not sustainable in strategic political terms in either narrow party or national interest terms.

Sooner or later the music will stop, while the further embedding and entrenchment of popular distrust and cynicism pervading politics can only undermine and corrode the democratic process itself, risking destructive results.

There is no easy way of the RCFS in either political or policy terms. Few of us welcome political messengers telling us that we should pay more tax upfront or must accept reduced public service quality and coverage.

Better the pill sugared, disguised, or even better postponed, even though it might make the pain worse sometime in the future. After all, something might turn up; why put your head above parapet to be shot, until you must?

Council tax reform towards aligning payment to current housing values combined with the phasing out of housing stamp duty (see this Dan Neidle post for a clear and informed discussion) and getting the financially comfortable elderly to pay more towards their health and social care seem to provide the most obvious possible partial escape routes out of the RCFS but still involve considerable political management risk.

Certainly, at least some political groundwork should start to be laid to shift the tax burden away from productive activity towards wealth and to better link individual contribution to potential benefits received, where possible and appropriate.

Less politically challenging and more attainable sooner rather than later is making public spending more effective and productive. To that necessary but not sufficient route of the RCFS, the next section turns.  

2             Fiscal Institutional Reform to Make Public Investment Planning and Delivery More Efficient and Effective

The budget set out a two-pronged revised fiscal framework. The stability rule will require the current budget to be in forecast surplus in 2029-30 (as assessed by the OBR) until that year becomes the third year of the forecast period in 2026-27.

From 2027-28 onwards, the current budget must then remain in balance or in surplus from the third year of the rolling forecast period (for example, from 2030-31 in 2027-28).  Balance is defined as a range: in surplus; or in deficit of no more than 0.5% of GDP.

The second prong – the investment rule – will require net public debt, now defined as Public Sector Net Financial Liabilities (PSNFL), to fall as a share of the economy (GDP) by 2029-30, until, like the stability rule, 2029-30 becomes the third year of the forecast period in 2026-27.

Then to meet that rule, net financial debt (PSNFL) should fall as a share of GDP by the third year of the new rolling forecast period: 2030-31, if assessed in 2027-28.

In addition to the stock of debt that the Public Sector Net Debt (PSND) measure previously captured, the replacement PSNFL or net financial debt measure now includes financial liabilities, such as funded pensions obligations and government guarantees.

Crucially, however, it also nets off illiquid financial assets, such as equity holdings and loans, from total financial liabilities to calculate the headline net financial debt metric.

The Treasury in support of this change pointed out in its Red Book that by failing to count financial assets, the previous PSND metric could create an incentive for the government to forgo profitable and growth enhancing investments, such as that are expected to be made by the National Wealth Fund, despite any positive future impact upon the economy and their ability to yield a positive return for the taxpayer over their lifetime(s).

Yet PSNFL does not recognize the value of physical public assets, including road and railway networks, and public housing.

Its use, therefore, risks creating a new set of perverse incentives for government to make investments in financial rather than physical assets, making loans and issuing guarantees in preference to investing directly in productive assets, simply to accord with the investment rule rather than because of overall long-term value-for-money (vfm) grounds.  

Indeed, it does seem that PSNFL was made the primary debt metric for fiscal rule measurement purposes mainly because it provided the government with additional expenditure headroom in the desired format: the most expedient rather than necessarily the most optimal measure.

It did enable the budget to announce a total increase in planned public capital investment of around £100bn over the next five years over and above previously planned levels.

As the prequel to this post argued, it would, however, have been better for the chancellor to make the case for additional investment clearly, directly and transparently, according to its economic and thus fiscal sustainability merits, rather than tweaking fiscal second order rules that when political push comes to shove inevitably tend to be gamed or changed.

As way of historical context, Conservative governments in the early nineties tended to rely upon second order objectives, such as the exchange rate, to bear down on inflation rather than making low and stable inflation a first order objective supported by reformed institutional architecture as New Labour did to notable success in 1997.

Whether the new investment rule is met or not will depend upon a range of factors, including future inflation and interest rate trajectory, and growth and productivity outcomes. These the government can only at best partly influence by its own policy and other interventions.

It will then rely upon the OBR to adjudicate whether the rule is on track to be met according to that organisation’s forecasts.

At present, the OBR is only about 50% confident that its current assessment that the government post-budget has about £15.7bn fiscal headroom to meet the investment rule will prove accurate.

That headroom could vanish in a flash in the event of an external shock or be dissipated by lower than forecast growth – which the OBR has a history of over-estimating – leaving a lot to contingent hostage, including, for instance, that growth will even reach two per cent in 2025.

Whether the new investment rule is met or missed by a percentage point or so according to the chosen measurement metric of the day is unlikely to make much material macro-economic difference.

The clear and present danger rather is that investment projects that would generate returns over their cost of provision (including their capital opportunity or cost of capital costs) will be shelved, delayed, or pared back simply to keep within the investment rule target three to five years thence, according to forecasts and assumptions that may or may not be realised that invariably can shift with the short-term economic environment and its associated noise.

Undoubtedly the government must maintain wider market confidence that its fiscal position is sustainable. Otherwise, interest rates will rise, sap growth, and offset or dissolve the benefits of such productive public investments.

But the investment rule sidesteps the imperative to increase effectively selected and prioritised productive levels of public investment closer to economically optimal levels requiring chosen programmes and projects to be both efficiently selected and delivered.

The budget did announce some steps and “guardrails” to ensure improved investment outcomes, including:

  • publishing a 10-year infrastructure strategy alongside phase two of the forthcoming spring 2025 CRS, outlining the government’s long-term approach;
  • setting five-year capital budgets and extending them every two years at regular spending reviews, to “provide more certainty”;
  • increasing the transparency of investment decisions by publishing the business cases for major projects and programmes.

At a more substantive institutional level, the National Infrastructure and Service Transformation Authority (NISTA), combining the functions of the existing National Infrastructure Commission and the Infrastructure and Projects Authority, will be made operational by spring 2025.

NISTA will then become responsible for implementing the government’s infrastructure strategy, validating business cases, prior to HM Treasury funding approval.

The budget also finally announced the formal launch of the Office for Value for Money (OVM), with the appointment of an independent Chair, who as a first step, will advise the Chancellor and Chief Secretary to the Treasury on decisions relating to the multi-year spring 2025 CSR.

The wider remit of the OVM will include an assessment of where and how to root out waste and inefficiency; the undertaking of value for money studies across high-risk areas of cross-departmental spending; the scrutiny of investment proposals to ensure they offer value for money; as well as working with the National Audit Office (NAO) to benefit from that organisation’s scrutiny of capital projects to learn lessons for application to future projects.

Although these represent potential steps forward, the respective roles of NISTA and OVM are not clearly demarcated and appear to partly overlap.

A potentially more fundamental and possibly related possible shortcoming is that they are not statutorily defined as entities independent of the Treasury, even though their future effectiveness will depend on their own institutional clout and resourcing.

Their creation and development should have been and should now be made central and integral to the government’s overarching growth mission and commitment to economic and fiscal sustainability – not a subsidiary budget add-on.

The long-term impacts of public investment: social housing as a case study

The OBR has estimated that the additional public investment over and above the previous government’s plans as announced in the budget should directly increase the total potential output of the economy after five years by 0.1%.

That could increase to 0.3% after ten years if the planned increase is maintained, as the resulting output effects rise over time while implementation time lags recede.

If that increase further levers-in complementary private investment and human capital upskilling, the GDP uplift could reach 0.4% after ten years and 1.4% after fifty years.

However, the OBR believes that the economic benefit of the increased public investment will prove more muted due to the impact of higher public borrowing on interest rates and the associated limited complementarity crowding-in of private investment.

Although it should increase incentives for businesses to invest, that broader crowding out effect of the budget’s net fiscal loosening, driven by a sustained increase in real government spending as a share of GDP within a capacity-constrained economy, is forecast by the OBR to reduce business investment by the end of the five-year period.

Such conclusions, including the differential macro-economic impact of different categories of public spending, such as public investment and government spending on current services (consumption), are dependent on the econometric assumptions that the OBR applies, based on its interpretation of the empirical literature. 

Alternative interpretations of that literature, such as here, have queried whether the OBR’s assumptions on the impact of public investment through its fiscal multipliers on output, and on the future total supply capacity of the economy (and thus its ability to absorb increased output without inducing inflation), are too conservative.  

Moreover, public housing investment is singled out by the OBR as less growth enhancing than alternative investments in enhanced economic infrastructure, including on transport networks, on water supply, and on sewerage, implying that its net economic effects could be negative over the long term.

As way of contrast, an October New Economics Foundation paper argued that as public grant supported social housing would not otherwise be built, the socio-economic returns that it generates is higher than private housebuilding.

It cites the high construction multipliers associated with housebuilding (for every one pound generated directly, a further £1.43 is generated indirectly and through wider spending in the economy) on top of tenure-specific social returns linked to lower housing benefit expenditure, reduced homelessness and family dislocation, and through its employment-enhancing effects increasing taxation receipts and reducing social security expenditures,

In sum, according to the NEF, building 365,000 social homes – the minimum number it assesses are needed to deliver the government’s 1.5m housing delivery target – would yield, aggregating all the above gains, total gross economic and social benefits of around £365bn over 30 years.

Net of public investment costs – in terms of central government grant and local authority expenditure – its total net benefit is posited at £225bn over three decades, with every one pound of the up-front public investment required to deliver that volume of social housing generating more than £2.60 for the wider economy in return.

The paper links a rising proportion of that overall economic benefit exclusively to the social rent sub tenure (let at around 50% of market rents depending on location) with 43% (£158bn) of this total gross economic and social benefit attributed specifically to that sub tenure.

That final net benefit figure reflects proposed changes to the social discount rate (SDR) currently applied in accordance with Treasury Green Book methodology.

An SDR of two per cent applied to social housing investment, less than the Treasury’s current standard 3.5% – still above Germany’s SDR and in line with the general US government SDR, which was reduced to two per cent earlier this year – would result in the 365,000 social housing programme generating £50bn more in net present social value benefits compared to the current Treasury approach.

These results, of course, are like the OBR’s, predicated on organizational and study-specific assumptions applied, which likewise, are challengeable, especially when they are drilled down on.

No account is taken of the likely crowding-out effects of such a programme. Leaving aside, the possible impacts of resulting higher levels of borrowing on interest rates, its impact on a capacity constrained construction industry is almost certain to lead to material and skilled labour bottlenecks and resultant sector-specific inflation – at least in the absence of concerted and focused public interventions undertaken in partnership with industry suppliers in step with its scaling up. 

The NEF paper also assumes that the overwhelming demand for social housing will mean most of the economic benefit of investment in social housing is likely to be realized.

That, to say the least, is a heroic assumption. Based on past empirical experience of employment levels within the Social Rent (SR) sub-tenure, it is far from certain that, in practice, an expanded SR programme by itself will increase overall economic activity levels.

Although reduced levels of homelessness can be reasonably expected, social returns relating to family stability and improved health will prove more difficult to demonstrate rather than to state and assume.

An extended 30-year period is especially prone to uncertainty and confounding impacts, and so on.

The NEF study, did, however, clearly explain and define in plain English its underlying assumptions rather than rely, as the OBR tends to do, on econometric equation notation unintelligible to most lay audiences (the NEF paper’s appendix on social discounting is a commendable model for general replication).

What can be more safely concluded is that the economic and social impact of an expanded SR programme is a highly important and relevant issue that requires and needs further dedicated evidence-led and transparent scrutiny and assessment.

This is where both NISTA and the OVM could and should play pivotal and instrumental roles. 

 3           Labour’s Housing Delivery target

The chancellor in her budget speech termed Labour’s 1.5m housing delivery target as “a commitment”, which was worrying insofar that it rather suggests that she does not understand that it will not be achieved for the reasons explained here.

It risks becoming a distraction from the more sensible and realistic goal of laying the foundations of a sustainable 300,000 annual new supply level by the end of this parliament in 2029.

Most commentators consider that to meet the existing and future needs of those not able to afford market costs, an annual and sustained Social Rent (SR) programme level of at least 90,000 dwellings in England, plus another 30,000-50,000 of intermediate sub tenure, is required.

That roughly corresponds roughly with what is consistent with the achievement of a sustainable 300,000-plus annual new housing supply in England, assuming that annual private speculative market supply, going forwards from 2027-28, can be sustained at the 170,000-180,000 dwelling level (see previous link for more detail).

The budget did announce a £500 million uplift to the 2021-2026 Approved Development Programme (ADP) – from which public grants to support affordable housing provision are made – increasing its 2025-26 budget to £3.1 billion, while making the claim that is “the biggest annual budget for affordable housing in over a decade”.

It should, according to the budget announcement, enable 5,000 additional (SR + intermediate) affordable dwellings to be provided, over and above previous plans. An average unit public grant support of 100K is thereby implied, suggesting that most of these newly provided dwellings, if delivered, will be let at SR levels within high cost and high need metropolitan areas.

Putting that into context, recent annual levels of SR provision are running at around 14,000 , which even if increased by 5,000, will remain way below the above required 90,000 level.

Stepping up to that would require additional annual public grant support, phased up and then sustained in the £4bn to £10bn range. Precise future funding requirements will depend on the location and the provision outturn costs of the units provided, as well as on the future relative contribution of S106 affordable housing obligations to the 90,000 dwelling total.

The chancellor went on to confirm that “to deliver on the commitment to get Britain building”, the government in the spring 2025 CSR will set out further details of future grant investment allocations beyond the current ADP and that these will run for at least the duration of this parliament and support a mix of tenures, with a focus on delivering homes for SR.

Clearly, the spring 2025 CSR housing settlement will prove pivotably crucial to the government’s housing ambitions. The budget advised that the CSR will take a “mission-led, reform-driven, technology-enabled approach to funding public services, while investing in long-term growth”.

We can only wait and see the outcome of that late next spring, which should allow us to model more definitively expected levels of affordable provision and its contribution to the government’s delivery target to the end of this parliament and beyond.

In that light, it is unfortunate that the fiscal institutional reforms that the preceding section discussed are unlikely to be operative in time to comprehensively contribute within the forthcoming CSR to a more evidence-led and transparent consideration of the economic and social benefit of additional SR and intermediate provision relative to their up-front public investment costs.

Hopefully, however, that consideration is accorded sufficiently high priority within both the portals of the Treasury and the nascent NISTA and OVM, for a useful stab in that direction to be made.

Other housing fiscal measures that the budget announced included providing an additional £233m to prevent homelessness, taking total spending to one billion on that in 2025-26, an increase designed to prevent rises in the number of families in temporary accommodation and to reduce rough sleeping.

An additional £3bn was also announced to support for SMEs and the Build to Rent sector in the form of housing guarantee schemes, designed to help developers to access lower-cost loans and to support “the delivery of tens of thousands of new homes”.

At a more micro level, £10m of funding was assigned to enable the Cambridge Growth Company to develop an ambitious plan for the housing, transport, water and wider infrastructure to unlock and more fully realise the economic growth potential of that high value-added sub region.

Curiously, housing benefit housing allowances were frozen. Although that might offer central government a revenue saving, it can only be expected to add rather than reduce homelessness problems and their associated revenue costs that largely fall on cash strapped local authorities.

Perhaps, the freeze is a precursor to a wider strategic drive to shift low-income tenants out of insecure private rentals and into SR at a lower public HB cost, which the 2025 CSR will progress as part of a wider housing strategy. It is , however, rather suggestive of non-joined up thinking that will have arbitary results.  

This is another issue that could benefit from some future OVM scrutiny and NISTA consideration analysis of the longer-term cost-benefit consequences of such a shift from the PRS to SR.

4       Waiting for Mr Growth

The government has confirmed that this and future budgets will be a once-a-year fiscal event focused on tax, spending, and borrowing decisions only, separate to the government’s wider growth-enhancing strategy and decision making. 

The OBR forecasts that the economy to grow by 1.1% in 2024, increasing to two per cent and 1.8% in 2025 and 2026, before returning to around the OBR’s current estimate of its sustainable non-inflationary potential growth rate of around 1.5%, 1.5%, and 1.6% in 2027, 2028, and 2029, respectively, remaining below pre GFC levels. Such levels would generate insufficient resources to reset public services for a rising and ageing population onto a sustainable path.

Even these muted levels may not be realized. The OBR has a forecast track record of optimism bias. Evidence of private sector ‘animal spirits’ or even confidence is currently difficult to discern, as are drivers to uplift private consumption, investment, and productivity.

Trumpian trade tariffs and the risk of further international instability in the Middle East and Ukraine represent further downside risks.

The main expected contributor to growth, higher government consumption, unlikely by itself to materially improve productivity and sustainable growth, and will be dependent on 2025 CSR decisions and outturns.

As Section Two discussed, increased public investment, although expected to have a short-term positive impact on GDP will, according to the OBR, have a limited and slow impact on longer term growth outcome due to low or even negative complementarity (crowding-in private investment) and output/fiscal multiplier effects, although, as the preceding section discussed, the assumptions used in the in-house study that the OBR used, determining that result, appears pessimistic.    

Moreover, OBR forecasts take account only of already announced government policies and their expected impacts, not possible future policies, such as changes to the National Planning Policy Framework that the new government proposed in July 2024 that together with wider planning reform and future National Wealth Fund activity, the government is relying upon to catalyse an upward shift in the future growth trajectory.

The OBR did recognise in its budget outlook that future planning reform when finalized and implemented could result in its housing supply forecast proving pessimistic, providing an additional domestic growth driver.

However, planning reform alone (see previous link) will not result in the government’s flagship 1.5m delivery target being met.

Although it might succeed in pushing up the number of planning permissions granted above its current historically low levels, their translation into future housing construction activity will be uncertain and partial.

The current private speculative housing model is predicated on the secure prospect of rising house prices and the ability of dominant suppliers to dribble out supply to maximise margin not volume. On the public delivery side, it is unlikely that CSR 2025 will provide increased allocations anyway near consistent with a new annaul supply step increase to 300,000 dwellings in England.

The next generation of New Towns will not come on stream substantively until the next decade. Their funding and provision models will need to be developed over the next year or so in such a way that public investment inputs can be stretched and private investment levered in.

The National Wealth Fund as a source of pump-priming investment supported by pension fund reforms – if they prove effective and timely – could allow a shift to a partial public contracting partnership model – something the change to PSNFL measurement metric (see section two) could help to enable in public accounting terms.

But, in truth, the public action way forward to higher growth is currently hazy and undefined.    

Some minor editing changes ti improve clarity were made on 24th November to the orginally posted version.

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Filed Under: Economic policy, Housing, Real Fiscal Crisis of the State Tagged With: housing, planning, public finance and budgets

The 1.5m Delivery Target: Prospects and Issues

24th August 2024 by newtjoh

This is the first of three posts delving into the new government’s 1.5m housing target, its definition and measurement, its phasing and prospects of achievement, and its relationship to existing public and private delivery systems.

The second will focus on the ensuing implications for both public and private delivery system reform.  

The third will relate delivery of the target to the future definition and implementation of Labour’s fiscal rules.

1          Introduction, definitional and measurement issues.

Both the Conservative and Labour parties during the 2024 general election committed to deliver at least 1.5 million new homes in England during the lifetime of the next parliament – equivalent to 300,000 new homes each calendar year, 2025-29 inclusive.

Such a target in practice will need to be measured by the most comprehensive and accurate series available covering new build completions and total new supply – the Ministry of Housing, Communities and Local Government (MHCLG) net new supply series and its live Table 120.

This reports financial year (1 April to 31 March) outcomes more than 18 months in arrears, meaning that practically the period to be measured will be April 2024 to March 2029.

Let us put the vaunted ambition into perspective. According to that series between April 2021 to March 2023 about 212,000 new builds were completed each year during that most recent reported period (see Table One below).

Total annual net new supply (which includes dwelling gains from net conversions and change of use, minus demolitions, plus new builds) hovered just above 234,000 dwellings across both years.

Whether the new Labour’s government target concerns new build or new supply outcomes is unclear. For example, the first paragraph of the new government’s policy statement on New Towns confirmed that it is “determined to build 1.5 million new homes over the next parliament”.

Suffice to note that annual new build completions and total new supply will need to increase, respectively, by about 42% and 28% from the latest 2021-23 achieved annual levels to reach 300,000 dwellings.

Taking a longer and more pertinent view traversing economic and housing cycles, Table 1, instructively, reports that 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.

Is the delivery of 1.5 million homes an ambition, a target, or a commitment?

The first is clearly aspirational, a target can always be missed and when applied generally loses its value as a measure, while a commitment suggests that all necessary and possible steps will and are taken to achieve it, come what way.

This post will refer to it as a target for consistency. It also assumes that the delivery of 1.5m additional dwellings refers to new supply provided or completed, rather than just newly built properties built (about 90% of new supply), although it notes and concludes for that to have any realistic chance achievement that it will need to be treated as a priority commitment.

Its realisation will prove tricky to both track and measure. The more accurate MHCLG table 120 new supply (net additions) table does not cover starts and therefore is not a forward indicator.

As it reports for the financial year ending 18 months prior to its November publication date, it is also a lagged one. The 2028-29 new supply outcome will not be officially published until November 2030, meaning that definitive measurement of the target will be delayed beyond the next election, although forward indicators such as EPC certificates, discussed below, could provide a relatively reliable forward indicator.

Although another MHCLG table 213 does report new housebuilding starts and completion data on a timely quarterly and annual basis, that suffers from systemic undercounting (delineated in the next section).

More seriously, because of construction lags and the overlapping impact of previous policies and conditions straddling successive governments (2024-26 supply outcomes will largely be outside the policy control of the new government as they largely depend on 2022-24 start activity), a total production or supply target based on completions over the lifetime of a parliament didn’t and doesn’t make much sense, other than as a statement of political intent (hopefully) or of spun aspiration (more usually).

The new Labour government has made the target central to its overarching economic growth ‘mission’ and within a month of its election announced robust planning reforms consistent with its achievement, indicating a seriousness of political intent.

But planning reform is one of several necessary but not sufficient changes to the policy framework that the remainder of the post will show as collectively necessary for the target to be approached.

In that light, the next section examines more systematically what it will mean in practice to achieve or approach the 1.5m target by the 2029 end of this parliament, given certain under delivery over 2024-26.

2          Projecting future 2024-27 new build activity and new supply

Section Five of the MHCLG’s latest new indicators of housing supply release advised that its data on Energy Performance Certificates (EPS) lodged for new dwellings provide a very close estimate or proxy to net additions or new supply.

At time of writing, however, such available EPC data is relevant to the immediate past 2023-24 financial year to be reported in November 2024 – that is until sufficient EPC data is reported to allow an initial view on the expected 2024-25 net supply outturn to be taken, the first year that will be relevant to the measurement of the new government’s 1.5m delivery target.

Table 5 (table numbers  are out of sequence as they have been reproduced form Making Sense of the English Housing Statistics) compares the numberof EPC certificates lodged for new domestic properties (new build, conversions and change of use to domestic) with MHCLG Table 120 net new additions (new supply) outturns across the most recent 2018-23 period.

It indicates on an annual average basis that net supply was 0.98 below the reported number of EPCs granted on average across that period (although, that result was after a retrospective census adjustment was made for the 2018-21 new supply figures; the new supply figures also exclude demolitions).

Applying that 0.98 coefficient to the reported 232,473 new dwelling EPCs reported lodged during 2023-24, suggests a 2023-24 new net supply figure of about 227,000 dwellings, continuing a recent downward trend undoubtedly related to the recent housing market downturn amid wider economic uncertainty. 

Given that the new government was elected in July 2024, its target will need to be measured against 2024-29 financial year outcomes. We won’t have access – as was explained above – to accurate official new build completion and new supply outcome data, starting with 2024-25, until November 2026.

What can be predicted, however, as generally accepted both within and without government, is that annual new supply outcomes will seriously undershoot 300,000 dwellings until at least April 2027, resulting in an accumulating shortfall backlog against the total 1.5m delivery target.  

The projections reported below are based on MHCLG Table 213 housing starts data rolled forward two years to predict completions.

MHCLG new housebuilding and other indicator of new supply series source data, as customised in Tables 5A and 5B,  strongly suggests that the recent downward new supply trend reported above will not be reversed during the early 2024-26 period of the Starmer government.

Using that MHCLG data, Table 5A reports that 481,240 new build dwellings were started between 2021-24, an annual average of 160,400.

The key shortcoming of the MHCLG new housebuilding series is that it undercounts housing start and completion activity (primarily because of incomplete and fragmented building control source data)

The average difference between Table 213 reported completion totals and the later reported Table 120 net new supply across the 2018-23 period was 24%, as Annex Table Seven shows.

To compensate for that undercount bias, an adjustment multiplier of 1.24 was applied to the raw starts and completion data reported in Tables 5A and 5B to produce start and completion figures adjusted accordingly.

An adjustment coefficient of 1.415 was also applied on the raw Table 213 start and completion data, taking account of the average 41.5% annual 2018-23 disparity that Annex Table Seven reports between table 213 completions and table 120 new supply.

The final column of Table 5B reports projected future new net supply figures for 2024-26, adjusted accordingly.

Such rule of thumb projections are inherently tentative and indicative. Although yesterday starts are tomorrow’s completions, starts data provide a forward but imperfect indicator of future completions: they are subject to cyclical fluctuation related to the external economic and market environment and to funding programme profiles and associated delays.

In short, although there is no way of knowing precisely when reported starts will be converted into conversions, previous start levels provide a future indication of future completions around two years ahead, notwithstanding uncertainty over their precise phasing into particular financial years.

On that basis, Table 5B projects a 2024-25 and 2025-26 net new supply outturn of about 244,000 and 191,000 dwellings, respectively: a net new supply total of about 435,000 dwellings: an annual average approaching 220,000.

If so, this would generate a cumulative delivery shortfall by April 2026 of about 160,000 dwellings relative to the 300,000 annual target (2 *300,000) – (2*220,000) and the 1.5m delivery target.

Future 2024-26 private start prospects

The preceding sub-section projected total public and private 2024-26 (financial year) new build completions and new supply using adjusted MHCLG Table 213 new housebuilding start 2022-24 data.

We now turn to consider the prospects for unreported 2024-26 private starts activity that could then be expected to translate into post 2026 completions.

Future private speculative supply can be expected to prove sensitive to future market prospects as interpreted by housebuilder suppliers. These, in turn, are likely to be moulded by wider economic conditions and expectations, including interest rate movements.

Given the subdued nature of the private housing market in 2024 and the expected continuing impact of high (albeit hopefully their further softening after the July 2024 0.25% base rate cut) interest rates, few strong current grounds exist from a micro-economic standpoint that 2024-2026 start totals will materially increase from recent 2022-24 levels.

Recent omens have been unpromising. Barratt, example, in July 2024 announced a seven per cut in planned starts for the coming year into 2025 that can be expected to translate into future 2026 and 2027 completions. 

Research conducted earlier in the year by Savills included a chart that indicated – assuming no increase in government housing support (or other changes in policy and economic environment) – that annual (not adjusted as above) new build completions would not break through 160,000 throughout the remainder of this decade, which could mean that annual net new supply would undershoot 200,000, let alone reach 300,000 dwellings (less than 1m rather than 1.5m across the 2024-29 period).

Since then, however, the July 2024 election of the new Labour government committed to “build rather than block” has altered the planning policy environment.

The planning reforms announced by Angela Rayner – the incoming Housing and Communities Secretary – to parliament on the 30 July demonstrated the new government’s intent to remove blockages connected to local Nimbyism and other planning-related obstacles to new housebuilding and economically needed infrastructure and their linkage to its overarching growth agenda.

Nevertheless, the delivery shortfall projected to accumulate during 2024-26 means that for the 1.5m target to be achieved, new supply would have to substantially exceed 300,000 during the 2027-30 period.

And planning reform by itself, while necessary, will not be sufficient by itself to cause the current speculative private market-led system to deliver future housing volumes on the scale required.

Setting local delivery targets consistent with an annual supply level of 370,000 is not the same as securing their actual delivery on the ground.

Achieving such an unprecedented and sustained level requires not only sufficient planning permissions but crucially their implementation by profit-maximising private developers. It is they, not councils or housing associations, that primarily build dwellings at scale.

Their current business model, as the Letwin reports commissioned and published by the previous government so clearly showed, requires them to rather build and release dwellings for sale in step with that imperative, not government targets. Planning reform, as proposed, will not change that.

Another necessary condition, therefore, for the attainment of the 1.5m delivery target is reform of the current speculative private housing model in combination with supportive public policy changes.

Labour hitherto, however, has been quiet on the need for such reform and seems rather to treat private housebuilders as allied stakeholders and to rely on them to deliver increased supply at levels and timescales consistent with its 1.5m target.

The associated implication is that the new government is banking on or hoping for a house price recovery – led by falling interest rates amid recovered confidence that an era of prosperity and growth is round the corner – will induce private developers to build on such scale into a rising market.

Such a prospect on current indications to say the least seems optimistic on macro-economic grounds.

The Office of Budget Responsibility (OBR) in its March 2024 Economic and Fiscal Outlook (table 1.17: detailed forecast tables: economy) forecast that UK annual net additions on back of an in-house econometric model (predicated on assumed relationships between construction activity, past housing starts rolled forward on a two year moving average as completions, housing market turnover rates, and expected interest rate movements) would annually stagnate in the 235,100 to 244,800 range between April 2024 and March 2028, which would suggest annual net additions in England falling somewhere in the 211,000 to 225,000 dwelling range throughout that period.

That forecast no doubt will be revised this autumn to reflect the changed policy environment after the July election, but the UKs economic fundamentals taken a whole have not changed materially since save for the interest rate that month, which, however, was largely anticipated.

Planning reform will take time to work through and to overcome the opposition and reluctance of some local councils. Even if an increased volume of planning permissions did come on stream, macro-economic conditions and housebuilder profit prospects would have to be rosy enough to persuade developers to translate such permissions into starts on the ground on the promise that they could be sold speculatively in line with their expected 20% or thereabouts profit margins.

Even then, an uplift to 180,000 to 200,000 private speculative starts for completion by 2029 – exceeding levels fleetingly achieved (under 180,000) during the Lawson late eighties boom and at a lower level during the late New Labour period (around 165,000) before the Great Financial Crash – would seem a more realistic but still stretching and unlikely optimistic scenario as such a level has not been achieved since the late sixties.

Previous housing booms were accompanied by worsening affordability and access problems for potential first-time buyers, tightening further the English Housing Double Bind.

The recent downturn resulted in the haemorrhage of skilled labour from the construction industry presaging in the event of a future upturn future labour and material bottlenecks with consequent impacts on supply delivery, build costs and house prices, as well as possibly on general inflation, of a magnitude that could nip any such recovery in the bud, or, even reverse it.

A Bartlett professor and expert in this area, Noble Francis, has cautioned, in that light, that “skills shortages will be the biggest constraint to government’s ambitions of 1.5 million homes in this five-year parliament, the £700-775 billion infrastructure pipeline and the Net Zero transition (both the decarbonisation of the energy network and the energy-efficient retrofitting of the existing housing and non-housing stock)”.

Indeed, back in 2018, the final Letwin Report concluded (para 1.11)  “ that the only realistic method of filling the gap in the number of bricklayers required to raise annual production of new homes from about 220,000 to about 300,000 in the near[1]term, was for the Government and major house builders to work together on a five year “flash” programme of on-the-job training”. As Francis and other have pointed out the problem has worsened since then and there has been no concerted efforts to address it.

Another necessary but not sufficient condition for the 1.5m delivery target to be met thus therefore would be for the government in partnership with the industry to build up construction industry and its domestic skill base as a key component of its economic ‘mission’, which may also need to be supplemented by skilled worker migrant visa schemes.

Future 2024-26 public start prospects

Angela Rayner in her 31 July parliamentary statement also indicated “a once in a generation boost” to affordable, especially social rent housing.

That also won’t translate into delivery outcomes any time soon. On the contrary, a downtick in new affordable supply annual starts over the 2023-25 financial year period to an average 50,000 dwellings or less can be expected, translating into a similar level of affordable completions during 2025-27.

Affordable starts for the April 2018-23 period by sub-tenure (when known) reported in MHCLG Table 1011S, provide an indication of future short-term gross affordable completion levels.

Although about 71,800 affordable starts were recorded in 2022-23, the most recent data on affordable starts and completed funded by Homes England and the GLA, summarised in Table 3B, shows that in total such starts fell from around 55,000 dwellings in 2022-23 to about 31,000  in 2023-24. In London they plummeted even more dramatically by about 90% to about 2,300.

The precise reasons for this sudden and apparently calamitous drop are not totally clear or, at least, accepted by competing stakeholders, but programme profile and approval issues, market conditions and costs, and the impact of post Grenfell and other regulatory requirements on housing association capacity not only to build new affordable dwellings but to purchase such dwellings subject to Section 106 affordable housing agreements, all seem to have played a part.

Projecting such start activity into future completions, the 55,100 affordable starts reported by Homes England and the GLA for 2022-23 accounted for about three quarters of the 71,800 total affordable that the MHCLG later reported in Table 1011S.

Conducting another rough rule of thumb exercise, replicating that relationship would suggest about 42,000 affordable starts in 2023-24 based on the above reported Homes England and GLA data. The outcome figure that the MHCLG will report in December 2024 could be lower or higher than that, but the omens overall are to the downside.

Such a level in practice would require affordable starts to increase to about 58,000 in 2024-25 to get to an 2023-25 annual average of 50,000 dwellings, projecting a similar completions level into 2026-28.

Future affordable supply prospects beyond that are uncertain given its dependence on private cross-subsidy (less is available in a subdued private market), the future impact direction of building and labour costs, and the future ability of Private Registered Providers (housing associations) to use their reserves to finance new building or even to purchase S106 properties.

In such an environment, substantially increased grant funding would need to be made available to secure a future step change in affordable supply.

But Angela’s Rayner’s 30th July parliamentary statement on that score was vague, in terms of whether the forthcoming Comprehensive Spending Review (CSR) housing settlement would involve substantial additional resources in contrast a refocus of resources towards Social Rent (SR) provision, direct recycling of Right-to-Buy receipts into council direct provision, better targeting of available resources to high need areas, and efficiencies such as longer-term and more certain funding and rent settlements.   

Increased ADP resourcing before it translated into new build completions would generally involve a time lag of least two years, although increased funding for acquisitions could have a quicker effect. 

In short, therefore, any real upward step change in affordable housing supply will be contingent on both increases in public housing investment and, as discussed above, a resurgence in economic and private housing market conditions sufficient to secure increased private speculative supply (to provide increased cross subsidy).

3          Concluding comments

A 2024-27 cumulative new supply total of 750,000 (annual average 250,000) dwelling, on the evidence of the preceding section, is unlikely: if the preceding section’s 450,000 dwelling supply total projection proved reasonably accurate, new supply would need to increase to 300,000 by 2026-27.

Housing start activity would then have had to gear up to that level in calendar year 2025. That, in turn, presupposes a rapid and substantive economic and housing market turnaround next year impacting upon private start and completion levels following a generous autumn 2024 CSR housing public expenditure settlement that translated into a quick substantive step up in public start activity – all quite heroic assumptions.

More likely is a 2024-27 new supply total hovering around 700,000 dwellings. Even that would require net supply to recover to 250,000 dwellings during 2026-27, which on the evidence reported in in the preceding section also appears on the optimistic side although possible.

That would mean during the last two years of this parliament that annual new supply would need to exceed 375,000 dwellings – the level required if new supply reached 300,000 in 2026-27: an unprecedented post war level.

New build completions exceeded 350,000 dwellings in 1968, but because of accompanying large scale slum clearance demolition and redevelopment activity then, net supply was lower rather than higher than new build totals, as it was for much of post war period until the eighties.

Starmer and Labour’s target seemed to presuppose that several New Towns and urban extensions, at least in substantial part, are planned, land acquired, prepared, approved, funded and delivering dwellings by 2029, amid and alongside a wider step increase in both private speculative market and public affordable provision.

Most informed commentators, rule out the New Towns Programme delivering completions this parliament and caution that most existing identified new town/urban extensions/garden communities are at an early planning stage and that historically such settlements have been prone to a slow annual delivery rate not much better than the average for speculative private developments, as was deplored by Letwin in his .

That ‘spades in the ground’ from such sources cannot be expected on any scale during this parliament has been recently recognised by the incoming housing minister.   

The relationship between the revised annual aggregated 370,000 local planning dwelling target and the future contribution to be made by such existing schemes and the proposed New Towns is therefore unclear, which is likely to add to uncertainty and associated local opposition.  

Achieving, therefore, the delivery of more than 350,000 dwellings from 2027 onwards, on the face of it, seems unrealistic, if not fanciful, pure and simple, at least in the absence of wider reform and integration of public and private delivery systems.

A focused, co-ordinated, streamlined and effective public-private partnership approach to housing delivery on lines suggested by the 2017 Letwin reports, yet going further, in line with an overarching and primary political commitment to achieve a step change in housing, especially affordable, delivery accounting for a much larger than the current 27% share of total delivery is a clear necessary overarching condition. This the second post of this series will concentrate on.

To be met, it would also require sustained political overarching focus and institutional coordination and drive of a nature unprecedented and unexperienced for decades.

Public pump-priming infrastructure investment mid-decade rather than end-decade, enabled by a firm but flexible, rather than ironclad, interpretation of fiscal rules, focused on sustainable growth and best use of public resources over the medium term rather than mechanical and rigid calculations of future debt levels, would also provide another necessary but not sufficient condition.

In the absence of such reform, the most likely but uncertain and still optimistic scenario is that a muted macro-economic recovery and changes to the government funded Approved Development Programme involving greater long-term funding certainty and a refocus towards Social Rent will be associated with new supply levels reaching the 250,000 to 300,000 range by 2027-29.

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Filed Under: Housing Tagged With: housing supply, planning

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

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