A real incentive for local development

By Tim Leunig, Chief Economist, CentreForum

The government has announced an amendment to the Localism Bill currently working its way through Parliament. It will amend Section 70 of the Town and Country Planning Act 1990 ('determination of applications for planning permission: general considerations'), in order to make 'local finance considerations' material when local planning authorities decide whether or not to grant planning permission.

This sounds arcane, but it isn't. The previous government instructed local authorities to grant planning permission, by forcing them to draw up plans that had to meet national criteria. Whether they liked it or not, local authorities had to give planning permission in some cases, or they would lose on appeal.

Localism sweeps this away, at least in theory. But the government knows that localism without incentives means nimbyism will triumph everywhere. That is why it has created the New Homes Bonus policy, which gives councils money to say yes to development. Top down targets would be replaced by real incentives. Many of us think the incentives too small, but the idea is surely right. It turned out, however, that councils were not legally allowed to consider the New Homes Bonus when deciding on whether to grant planning permission.

The government had created an incentive that local authorities were legally obliged to ignore. Hence the amendment: an incentive cannot work if it is illegal to be incentivised by it.

Not everyone is happy with the amendment. The Royal Town Planning Institute has described it as 'completely unacceptable', although in reality their members will surely accept it if it is passed into law. Civil disobedience has never been a feature of RTPI campaigns.

We need to understand why organisations like the RTPI oppose this amendment. The answer is that planners see the planning system as working very well. They do not see the localism and incentives agenda as a sensible way forward. Yet to any outsider the planning system has failed.

Housing in Britain is preposterously expensive by almost any benchmark. Relative to earnings, house prices and rents are very high in most parts of Britain. They are also high by almost any international standard. We are getting richer - at least in the medium term - and yet our houses are getting smaller. That makes no sense, and makes us almost unique in the developed world.

The top down planning-led system has not delivered enough land for housing, or given builders the incentive to build out the permissions that they have. The same is true for land for other uses. It costs more to rent an office in Birmingham than in San Francisco. Is it any wonder that Birmingham struggles to attract internationally footloose businesses?

The government's policies on housing and planning are confused in places. It is odd to have a minister for planning and a separate minister for housing. But the basic approach of localism with incentives is the right one.

Offering incentives, whether to people immediately affected by the development, or to the wider community, holds open the possibility that people will favour development, rather than oppose it. Then we will get more development, which means greater affordability and fewer people badly housed. Incentives have to be material, in every sense.

The only point of the New Homes Bonus is to persuade councils to say yes when they would otherwise say no. This amendment must pass.

This article appeared in the Local Government Chronicle on 2 June 2011.

Coalition's economic gamble still stands

By Julian Astle, Director, CentreForum

The coalition took a gamble in 2010 when it promised to eliminate the deficit over the course of this parliament. Its bet was that private-sector growth would outpace the planned public sector contraction. That gamble still stands. None of the measures announced in the Budget on Wednesday guarantee it will be won.

The hope, when chancellor George Osborne delivered his emergency Budget last June, was that the negative effects of fiscal tightening on growth would be offset by monetary loosening by the Bank of England. This was the Conservative-Liberal Democrat coalition's real Plan B. But with the Bank's monetary policy committee increasingly boxed in by fast rising inflation, this looks less sustainable.

The good news for Mr Osborne is that, despite the Office of Budget Responsibility downgrading its growth forecast, he is still, on balance, likely to win his bet. The bad news is that if growth stalls and inflation rises further there is not a great deal he can do about it, a fact Wednesday's Budget only served to underline.

The fact that inflation is rising means the onus is now back on the government to help hard-pressed families and to boost private-sector growth as the cuts begin to bite. On Wednesday Mr Osborne announced further steps to reduce corporation tax and income tax, both of which are welcome. Their effect will be to shift incentives to invest and to work, though hardly decisively.

Indeed, if Wednesday's steady-as-she-goes Budget achieved anything, it was to remind us of the limits of what governments can do to stimulate growth in the short term. That comes down to our ability, over time, to raise productivity, a task that falls not to the chancellor so much as to Vince Cable, the business secretary.

Mr Cable knows there are no short-cuts to success. Instead what is needed is the patient application of liberal economic principles. This means clearing the way for growth through labour market flexibility, liberalising our overly restrictive planning laws and protecting businesses (particularly small businesses) from unnecessary and burdensome regulation. The chancellor has sought to do exactly this today.

A liberal approach, however, is also about government intervening sparingly to address market failures: to promote investment in low-carbon technologies, to protect investment in high-return infrastructure projects, to nurture science, technology and innovation and to raise the skills base. Again, the chancellor made several welcome announcements on a single carbon price, the Green Investment Bank, on science funding and on apprenticeships but their benefits will only become apparent in 2020, not 2011.

The danger, however, comes when the coalition allows populism to trump its liberalism. It has done this, for instance, by imposing an unwise, arbitrary cap on immigration. Liberal Democrats have won important behind-the-scenes battles to reduce this (such as the decision not to scrap the post-study work routes for foreign graduates) but those victories only go to underline the main point: that in pursuit of growth, the coalition's best ideas are its liberal ideas.

This article appeared in the Financial Times on Wednesday 23 March 2011.