03 September 2014
To whom it concerns,
Re: Independent commission on local government finance
Thank you for the opportunity to respond to the above consultation. The Royal Town Planning Institute (RTPI) is the largest professional institute for planners in Europe, representing over 23,000 spatial planners. The Institute seeks to advance the science and art of spatial planning for the benefit of the public. As well as promoting spatial planning, the RTPI develops and shapes policy affecting the built environment, works to raise professional standards and supports members through continuous education, training and development. In responding to consultations we draw upon the wide experience and expertise of our Members in both the public and private sectors.
As requested, our response (below) follows the questions as listed. Please do contact us if we can assist further in progressing these proposals.
Yours sincerely
Joseph Kilroy MSc
Policy Officer
Registered charity number 262865
Scottish registered charity number SC 037841
Our understanding is that this independent commission has been set up to probe how a reformed local government finance system could be used to deliver council services more effectively. The RTPI believes that fragmentation of funding and policy functions is having a detrimental effect on our profession’s ability to do its job, and any reforms that bring together areas such as housing and transport that are fundamentally relatedwould be welcome.
Ideally planners can integrate policies for the development and use of land with other policies and programmes which influence the nature of places and how they function, for example sectoral policies such as transport, regional policy, flood risk management and agriculture, to avoid unnecessary or unintended spatial impacts and encourage mutually beneficial ones . Different government departments understandably prioritise the function for which they are responsible, and have little or no incentive to work with other functions. This arrangement makes joined up planning difficult.
The problem for planning, and housing delivery in particular is that current arrangements make it difficult to put the entire infrastructure in place needed to deliver planned development. The siloed nature of financial arrangements is an impediment to place creation which requires coordination between policy functions and government departments. Coordination could be facilitated by decentralising power and finance of a range of areas to local authorities, so that a range of functions and their funding would sit in the one place, under the one authority. If all of the things required to create a place (healthcare, schools, transport, infrastructure, housing etc.) were funded by local governments rather than individual governmentdepartments it would be easier for planners to integrate policies and delver places where people want to live.
Housing
One of the biggest barriers to housing development is finance. However, the economic climate and government cut backs have made finding new financial resources an even greater priority. As finance, infrastructure investment, and housing planning need to work together, it is imperative to find practical ideas to access extra funding to de-riskdevelopment and unlock sites.
A focus on new investment and new measures can overshadow concern with spatial legacies of current/previous policies. Housing policies have become increasingly dislocated from space.
How does the local government finance system promote housing supply and what changes would be needed to make it more effective in doing so? What changes should there be to:
o borrowing
There is a missing agent in housing delivery nationally, and the public sector contribution to house building has been steadily decreasing since a high in the mid sixties. The house building capacity of local authorities has been held back by constraints on their borrowing. The RTPI’s roundtable discussions indicate that councils have welcomed the additional borrowing headroom afforded by the reforms to the Housing Revenue Account (HRA), having found the previous arrangements very restrictive. For example in Cornwall, where housing need is high, the council have used their HRA account to bring more affordable housing to the area.
Research commissioned by a coalition of housing organisations in 2012 found that councils could quadruple to up to 60,000 the number of new homes built over five years if the housing borrowing cap was removed completely[1]. Under the current rules, councils would be able to borrow no more than £2.8 billion to invest in housing – enough to build 15,000 homes. Without the cap, councils could borrow up to £7 billion to invest in housing over five years, under existing prudential borrowing rules.
Where possible, local authorities need to work across departmental budgets, with neighbouring authorities and upper tier authorities in order to pool resources to invest in large scale housing schemes. Any opportunity to switch from revenue expenditure to capital expenditure and use local authority prudential borrowing to invest in schemes will help de-risk schemes. If there is a way to de-risk development by front funding a proportion of initial houses built then this will give the developer and buyers more confidence. However local authorities do need the support from central government to do this.
Where funding isn’t available, central government should consider underwriting a certain proportion of the site investment. Part of the risk that comes with development is the funding for building the first houses on a site as these houses are more risky to sell than houses at the end as the site is further from completion. Another risk point comes at the agreed threshold of number of houses built where there is an infrastructure investment due. For example, there are agreements where after a certain number of houses are built a school or road is expected to be funded. However, because the risk of not selling enough houses afterwards to help cover this cost is high, there is a potential for house building to stall just before the threshold, in these situations it might be beneficial if central government underwrote the house building – which doesn’t put all of the cost onto the balance sheet – which will allow development to continue[2].
This might be preferable to shoring up demand with preferential mortgages as it actually addresses supply problems.
o receipts from sales (including homes and land)
At present almost all receipts collected are paid to central government and spent and/or redistributed according to its priorities.[3] Given that we are in the midst of a housing crisis allowing part or even the whole of receipts from sales of assets to be used for housing delivery would increase the ability of local government to deliver housing. The current system is highly centralised, and constrains local government’s ability to respond to local housing needs, and is a factor in the public sector no longer being a major player in housing delivery.
o accounting treatment and rules
The Statement of Recommended Practice( SORP) is currently being developed by a working party and the National Housing Federation is the secretariat.
When assessing social homes for impairment purposes, housing associations are currently allowed to take internal subsidy into account to reduce the level of impairment
The new rules (part of an international move to unify accounting standards), as currently drafted, will prevent associations doing this, increasing the amount of impairments across the sector
o housing benefit
An overt spatial frame of reference also required to examine impacts of Housing Benefit reform – a spatial map of the sort proposed in the RTPI’s ‘Thinking Spatially’ planning horizons paper[4].
One issue is that a lot of housing benefit is being used to pay private landlords. This is public money that could go towards something more substantial like new houses. A staggering statistic that is quoted by the IPPR is that 95% of government spending on housing goes on subsidising rents through the benefits system, with only 5% invested in building new homes[5].
o local council tax support
A more devolved system of tax would allow local government to raise some (or all) of its own tax revenues, delivering accountability and removing dependence on grant.
Local tax assignment is where a proportion of a national tax collected in a local area is assigned to the relevant tier of sub-national government, in place of some (or all) of its grant. Benefits of assignment are that it is more transparent than a grant settlement, and that it can generally provide a buoyant form of revenue. If growth in the yield of any assigned revenues can be held locally they can have an incentive effect because of the link between the taxes raised and the revenues available to the area concerned. Assignment does not introduce economic distortions because central government still controls tax rates.
o central government and Homes and Communities Agency funding
In the most recent round of funding, funds shifted to councils and smaller providers. There is a greater diversity of bidders, which is a good thing. The big players are continuing to deliver, but are maybe using different methods of funding their schemes.
More still needs to be done to invite Small and Medium Enterprises (SMEs) into the house building sector and central government and HCA (Homes and Communities Agency) funding has a key role to play. Having more active SMEs involved in house building would increase the flexibility of the sector and it’s ability to react to fluctuations in demand.
70% of all private sector housing output is now being produced by the largest house builders. This lack of competition means housing supply in the UK is quite rigid, not responsive when demand increases, and ultimately leaves the sector vulnerable to a crisis of the current kind. New actors are needed in the sector, and policy can play a key role in coaxing new small to medium sized builders and other construction companies not currently involved in house building into action. A study of housing markets in OECD[6] countries found that in countries where the construction industry is characterised by a few large constructors, competition policy hindering collusive behaviour in the construction sector is important for a flexible supply. A more responsive supply would help to avoid excessive increases and volatility in house prices and low residential mobility
Lack of finance is the major stumbling block for SMEs and their involvement in the sector is crucial to increased competition. Setting up a national investment bank to channel low cost, long-term loans into the provision of local infrastructure and affordable housing, working alongside SMEs, local authorities, and housing associations is a possible means to increasing output and competition within the sector. The IPPR North has suggested setting up a ‘British Investment Bank[7], to deal with the long-term inability of SMEs to get loans. Apart from benefitting local businesses, resuscitatingthe involvement of SMEs would allow growth that is less dependent on a small number of firms thereby making the sector less susceptible to crises and more responsive to demand.
o the new homes bonus
The New Homes Bonus (NHB) was intended to incentivise local authorities to accommodate more housing.It should also be aimed atenabling investment in sub-regional infrastructure that unlocks barriers to major housing in sustainable locations.
As it stands Local Enterprise Partnerships (LEPs) have not had any of the NHB transferred to them. Given the range of responsibilities granted to them in recent years, transferring some of the NHB would be a sensible thing to do[8].
Governance arrangements are crucial in ensuring best use of NHB. As it stands many LEPs governance bodies do not include all District Councils on them and yet, as key service providers this presents an issue. If NHB is to be shared between the local authorities and the LEPs then it is crucial that the District Councils have parity of esteem in the governance of the LEPs.
o council tax
Council Tax is designed to tax a higher proportion of the value of lower priced homes compared to more expensive ones. This leads to accusations of its being both unfair and inconsistent between different places, and between people.
The uneven geography of the impacts of changes to housing benefits is captured in recent research by the Joseph Rowntree Foundation (JRF) which suggests the council tax system needs to be 'restored to fairness'.
Additional income created by any reform to the system should be spent on affordable housing in areas in which it is raised. This synchronisation between raising and spending money would help areas to meet affordable housing needs and maintain a level of diversity. Figures, based on a hypothetical revaluation in 2012, show that although council tax revaluation would lead to some net gainers and losers, 70% of households would see only a negligible change to their bill. There would be 17.3% net gainers in the north of England, compared to 22.9% net losers in the south. In London, which has seen the most significant increases in house prices over the past 23 years, about half of residents would see bills remain broadly the same, a further quarter of Londoners would see their bill rise by £25-50, and only 4% would see an increase in their bills of over 50%.[9]
o rents and other fees and charges
Last year’s English Housing Survey[10] revealed that the number of private tenants had outstripped those in social housing for the first time in its history. There were an estimated 22.0 million households in England. Overall, 65% or 14.3 million were owner occupiers, 18% (4.0 million) were private renters and 17% (3.7 million) were social renters.
The disparity between those tenures is a big one. Council tenants get security of tenure and controlled rents; short hold tenants pay up to four times as much and under most contracts are only ever two months’ notice from getting evicted. Yet the impossibility of first-time buying, and the scarcity of public housing, means the private rental market has taken off.
One way of lowering rents to affordable levels is to build more homes. There are councils testing a new model for the construction of public housing, which would provide private and social homes, on council-owned vacant development land. Unlike previous housing schemes, the emphasis would be put on providing accommodation for rent, rather than for sale.[11]
The UK is going through a generational shift towards private renting amid rising property prices and the dwindling stock of council houses. This needs to be acknowledged in policy, and have already raised calls for a properly regulated, professional private rental sector in a market dominated by informal buy-to-let investors.
Growth
The RTPI has developed a policy paper[12] focused on understanding and strengthening the economic benefits of planning. The purpose is to explore what Fostering Growth Cover proponents and sceptics have been saying about the impact of planning and how planning can more effectively facilitate economic growth.
Planning fosters growth by adding certainty and creating communities people and businesses want to locate in. Key ingredients for successful places including transportation and infrastructure, housing, education, skills and innovation, and place combined with the certainty all developers seek, make a strong planning system essential to achieving long-term growth.
o business rates
Recent changes to the financing of local authorities include those made in the Local Government Finance Act 2012, which introduced the local retention of business rates. As a result of this reform, from April 2013 councils will retain 50 per cent of their business rate yield
Business rates are a good starting point for reform because a well-designed system under local control would introduce potential local incentive effects and could promote growth.
The new business rates retention system is a positive step in so far as it offers the prospect of growth in business rates providing some additional funds for local government. However central government still determines what growth (physical growth) is and what isn’t (revaluation growth) and leaves local government with half of the former and none of the latter[13].
Ideally more of the business rates generated locally would be used to fund local services, such as transport, skills, and housing. If local government were to take full control of business rates, it could provide local businesses with a greater opportunity to be involved in decision making about the use of the resources raised through their operations, and would allow for locally planned growth.
Fully devolving business rates would increase local government’s autonomy to invest, and it would make local government more accountable to its residents and businesses and in this way promote local economic growth and provide other benefits. Passing business rates to central government and then have them redistributed to local government through grants, as is currently the case, is inefficient, over complex and too centralised
o responsibility for and use of national taxes