17 February 2006
Labour's plans for more housing depend on developers paying for the accompanying infrastructure with a new planning gain supplement. But there is opposition to this tax on building, as Mark Smulian explains
Bricks and mortar are the easy bits in the government's strategy for implementing Kate Barker's housing review, the latest attempt to tackle the acute housing shortage now affecting much of the country.
The difficult part is creating 'sustainable communities' – providing homes that buyers want, where communities will accept them and where there is enough infrastructure, from sufficient school places and road space to sewerage capacity.
Chancellor Gordon Brown's answer to the former Bank of England economist's report, given in his 2005 Pre-Budget Report, was an ambitious plan to increase the number of new homes built annually from 150,000 to 200,000 by 2016. But this will also require substantial investment in the development of local infrastructure.
To pay for this, the government has brought forward plans for a tax, called a planning gain supplement. It will be paid by developers, and will be based on the increase in land values generated by development plans.
According to the Treasury's consultation paper, the rate will be set at a level to 'capture a modest portion of the increase in land value that occurs when full planning permission is granted'.
Once the money has been collected, 'a significant majority would go back to the local level… with the remainder used to finance regional and strategic infrastructure'. But the criteria used to distribute the funds remain opaque. Phrases such as 'modest portion' and 'significant majority' have raised suspicions among builders that the tax will be too high, and among councils that they will not get enough money.
At present, infrastructure contributions are negotiated by project. This process is known as 'section 106', after the legal power in the Town and Country Planning Act that allows councils to require a developer to pay, for example, for a road or affordable housing.
Section 106 raises some £2.5bn a year for infrastructure. The PGS would raise more, the government has said, though no details have been given. The present system has its critics, but both planners and builders fear the PGS could be the worst of all worlds.
An immediate problem is that the PGS would be payable only when development work starts on the site, not when planning permission is granted, which could stymie efforts to put the necessary infrastructure in place before house building begins.
This is causing nervousness among councils in the Southeast, for example, which already have to accommodate the government's plans for a massive expansion of housing in four areas – Ashford, Milton Keynes, Stansted and the Thames Gateway.
Under the aegis of the South East England Development Agency, the Southeast County Leaders' Group commissioned a report last year that identified an extra £55.5bn of infrastructure that would be needed. It concluded that existing sources of funding left an £8bn shortfall.
Keith Mitchell, chair of the council leaders' group, has made it clear that the authorities will not co-operate with the housing expansion plans unless the government closes that funding gap.
'We are committed to ensuring no new houses are built without a firm government commitment to invest in the necessary infrastructure,' he says.
Local Government Association environment board chair David Sparks is similarly worried, and told Public Finance the result could be the collapse of the government's sustainable communities policy. 'I don't know if we will get enough money, but I do know it will take an immense sum to deliver sustainable communities,' he says. 'You cannot get them on the cheap.'
Councils, unsurprisingly, are annoyed by the prospect of a tax that would be collected nationally and redistributed according to decisions taken by central government.
Sparks says authorities would prefer to see locally set tariffs. The government has left the door ajar on this option in its consultation, which closes on February 27. Tariffs would allow councils to set a charge per new home, based on the area's infrastructure needs. The money would be paid when planning permission was granted, and, crucially, it would be spent locally.
'The problem with the PGS is that it is too centralised. The overriding factor is the ability of local authorities to raise finance locally for the benefit of their communities,' Sparks explains.
Councils have an unlikely ally in the developers. Builders fear the Treasury will treat the PGS as a cash cow, in much the same way that vehicle taxes long ago lost any relationship to spending on road maintenance.
As a result, says Stewart Baseley, executive chair of the Home Builders Federation, landowners will simply wait for the tax to fail. 'Landowners will sit back and wait for a Tory government to abolish PGS. They may be wrong about that, but they may wait.'
Baseley concedes that builders must contribute to infrastructure, but he favours tariffs. He says: 'Tariffs are transparent and locally spent so you know from day one what the tax on your development would be.'
However, there are concerns that the PGS might discriminate against areas that most need regeneration, mainly because of the government's new requirement that planners must also take the housing market into account when dealing with applications.
Chris Scrafton, policy officer at professional body the Royal Town Planning Institute, says that under the government's proposals, the provision of housing will be much more market-led and therefore the opportunity to marry new provision with community regeneration will be severely limited.
'The effect will be that we will only get houses built where the market dictates… There will be less regeneration because resources will go to areas of demand and growth, not those of regeneration and need,' he warns.
If Brown's PGS regime is to work, authorities will have to be persuaded that the financial benefits of granting planning permission will outweigh the potential political costs of allowing schemes to go ahead.
A requirement on authorities to find a five-year rolling supply of building land will force councils to make finely balanced judgements on these issues. The problem will no doubt be exacerbated because they will be expected to collaborate on this across housing markets – roughly urban travel-to-work areas – rather than merely stick within their own boundaries.
As ever, politics is involved. For councils, designating open space for building can be risky electorally, because they run the risk of attracting the wrath of residents and environmentalists.
Just as Labour's opponents scent advantage in opposing development, the government believes it will win support by tackling house prices. But the price it will have to pay is juggling conflicting demands from voters, buyers, residents, planners and builders.
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