Planning liberalisation is the closest thing there is to an economic silver bullet

 
Ryan Bourne
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Cramped UK shops lower retail productivity

WITH low productivity, high inflation and terrible industrial relations, in 1977, Britain was a basket case. So that year, businessman John Hoskyns decided to dedicate substantial effort to analysing the UK’s economic problems. The result was a flow diagram, which sought to trace out the fundamental causes of the malaise.

Hoskyns’s work pinned the blame firmly at the door of two issues: macroeconomic mismanagement and the political power of trade unions. His diagram impressed a politician called Margaret Thatcher, and formed the basis of Stepping Stones – a report which, in retrospect, provides a fundamental insight into the thinking of the Thatcher governments.

What would a Hoskyns diagram look like today? While it would be erroneous to equate our current economic plight with that of the late 1970s, a range of challenges exercise our political leaders, including (but not limited to): a high and rising cost of living, a poor productivity performance and low wages, and entrenched discrepancies in the economic performance of the UK regions.

There’s unlikely to be a silver bullet to these challenges. But there is one area where policy change could have a profoundly positive impact in dealing with them: land use planning reform.

The case for a liberalised planning regime for housing has been made extensively on these pages. Constraining development through artificial boundaries such as green belt restrictions is acknowledged to be a key driver of high price inflation. As our incomes rise, we demand more space. Rationing this space pushes up prices directly, and over time leads to a host of other negative consequences. To highlight the national scale of this challenge, a recent report by Demographia showed how the ratio of median house prices in an area to median incomes is lower in Washington, DC and Chicago than in Swansea or Stoke-on-Trent and Staffordshire.

Liberalisation of planning could therefore lower house prices and rents directly, and there would be a direct boost to building growth. But the real gains would come through a fall in the cost burden associated with property. For sectors like childcare, social care, restaurants and even many office-based industries, high rents and property prices raise prices for consumers, with a dynamic strain on our growth prospects brought about by a reduction in competition and innovation.

This is especially true in the retail sector, where planning laws, supplemented with “town centre first” policies, have led to much smaller stores than in countries like the US. On conservative assumptions, Paul Cheshire from the LSE has estimated that the effects of these self-induced policies may have lowered productivity in the retail sector by as much as 20 per cent – raising the cost of our shopping directly, while depressing the wages of the often low-skilled employees in the sector.

The huge discrepancies in the cost of living across the country, induced by binding development restrictions, also have a substantial drag on labour mobility and productivity. Failure to allow more development in successful areas like London and the South East increases living costs and means that, other things equal, individuals are less willing or able to move to productive regions. The wage gap has to be that bit higher before individuals are willing to uproot – meaning foregone opportunities, a less flexible labour market, and individuals missing out on potentially higher productivity and wages.

The potential gains from planning liberalisation are therefore clear: lower housing costs, a reduced cost of many goods and services, a better functioning labour market, and higher productivity and wages. The question is whether there is any appetite among our politicians to take on the vested interests opposed to reform.

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