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Polevaulter Donkeyman's rants, raves musings and flame wars

Bad policy begets bad policy

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An interesting post by Tim Harford on how the UK govt can boost house building and thereby stimulate the UK economy.

The chief obstacle to house building, according to Tim, is the planning system

The chief obstacle to house building in the UK is the planning system, which, 65 years ago, did away with the idea that if you owned land, you could build on it, and replaced it with a system where planning permission was required. Permission to build houses is severely rationed, and such rationing can be seen clearly in the gap between the value of agricultural land without planning permission (a few thousand pounds a hectare) and the value of such land once permission has been granted (a few million).

 

There are vested interests in keeping the planning system as it is:

  1. Parties who have already obtained planning permission (and who may have already built house on it) do not want more permits granted since the increased supply would lower the value of their assets. These parties are primarily also existing voters.
  2. The gain from obtaining planning permission is only enjoyed by the party who owns the land. Therefore other parties have no incentive to make the planning process easier, since they are not sharing in the gain.

Tim Harford points to work which attempts to get around this:

Tim Leunig, chief economist at CentreForum, a think-tank, has proposed a two-part system of land auctions to get around this problem. Local authorities would buy land at auction, grant planning permission on it and then sell the land on to developers — with some strings attached, if they so choose. The profits would be enormous, and enjoyed by existing residents in the form of lower taxes or better public services.

 

Off the top of my head:

  1. What is the guarantee that the profits made by the local authority will be used to fund general welfare programs benefiting everybody within the jurisdiction of the local authority equally? What is the guarantee that such profits will not be siphoned off to benefit local authority employees directly in the form of higher benefits which may become unsustainablein a less salubrious economic climate?
  2. Leunig’s proposal is essentially the 100%expropriation (taxation) of the increase in the value of the land due to the better use. One may argue that the increase in the value of the land enjoyed by the owner is primarily (solely?) because of the restrictions placed by the local authority. Therefore it does not belong to the owner in the first place. In other words bad policy (planning permission system and the rationing of permits) begets bad policy (100% taxation).
  3. As for the first auction, how seriously is competitive bidding envisaged, when the competitors to the local authority are at the mercies of the local authority for the granting of the planning permission? The first auction will have only one bidder, the local authority. Not really an auction then.

The solution in my opinion is:

  1. Let the local authority publicly draw up a set of guidelines and criteria, the fulfillment of which, will lead to automatic issue of the planning permission without discretion on part of the local authority. This criteria used could be the same as in the Leunig proposal where the local authority grants planning permission on land it sells to developers after buying it in a ‘rigged’ auction from the land owner (Interestingly Leunig and Harford are silent on the guidelines, if any, the local authority follows to grant planning permission on the land it buys)..
  2. Let the local authority impose a land value tax on the land or some sort of transaction tax on the transaction between the seller of the land and the buyer.

Of course my solution does not really address the vested interests of existing developers and house owners (and who are existing voters), the value of whose property will decrease with the increase in the supply of land. But the vested interest problem does not go away in the Leunig proposal. What is stopping the local authority from giving only a pittance to the land owner in the first auction, an amount so low that it does not meet the reserve price? And as I detailed above, who is going to bid against the local authority in the first auction?

Is the solution for this the breakup of the planning system at the parliamentary level? Or are there enough voters in the local authority level who can come together and force their local authorities to not ration planning permits?

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Written by Polevaulter Donkeyman

July 16, 2012 at 18:37

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