The UK's planning pickle

Among the most basic economic activities of all is to build on vacant land. From the US railroad boom in the 1870s, to the concrete jungles that spread over China from the 1990s, economic development is reflected as much in physical capital as in technology or education. Both Maslow’s hierarchy of needs and Architectural Digest highlight how buildings span the most basic desire for shelter, as well as our need for individual expression.

Did the UK miss the memo? Anxieties about the UK’s inadequate stock of physical infrastructure, from housing to railways and energy, have permeated the political discourse. Looking at prices, policymakers are right to worry. Since 1970, real house prices have risen more in the UK than in any other rich country. Yet despite higher prices, the supply of new housing has fallen and the history of big UK infrastructure projects is littered with expensive boondoggles.

Is the UK planning system to blame?

Planning, the rules that govern building proposals, is largely controlled by local government and constrains the deployment of new physical capital and development in three ways.

Firstly, existing rules give a great deal of discretion for officials across the planning stage to deny building approval. Planning officials, local representatives, the national government and the judiciary can deny construction of something as trivial as a car wash or a block of flats.

Second, there’s little fiscal incentive for those making planning decisions (local governments) to encourage building. Roughly half of local government income must be either shared with other areas or comes out of grants from Whitehall, diluting the payoff from new properties acting as revenue streams.

Lastly, the planning system’s constraints are unevenly applied across the UK, something amplified by the Green Belt, areas of urban-adjacent land designated as protected. Official statistics indicate planning rules are applied more strictly in the south east of England. For example, in London, a project is about three times as likely to be rejected as in Newcastle.

The defects of this system have had profound economic effects. UK investment has long lagged developed country peers, in part because the process of getting planning approval is so arbitrary and uncertain. These barriers to the deployment of productive capital have likely also crimped productivity growth, and will make progress in other areas, including the energy transition and improving the fiscal situation, harder to achieve.

Has a new dawn broken?

The change of government gives reformers room for optimism. With little fiscal room to manoeuvre, Labour campaigned with planning reform “at the centre” of its economic argument, according to Rachael Reeves, the newly minted chancellor. Early planning approvals since Labour entered government, and the promise of more, has fueled optimism among reformers.

While the rhetoric is promising, planning reform has proved an intractable problem for many governments. In 2003, the Barker review advocated a dramatic shakeup of planning policy, with the government taking only modest action. In 2012, the coalition government passed reforms to infrastructure approval, only to have projects mired in administrative limbo for years afterwards. Further proposals for change were published in 2018, only to come to nothing.

Successful reform should encourage an upswing in housing investment, and have knock-on effects in other places such as high-end manufacturing which have also struggled to scale up production under burdensome rules. But increased supply will also constrain growth in house prices, dampening growth in household consumption, the traditional engine of UK growth.

Portfolio impacts

The size of the government’s electoral landslide could open the door for significant reforms in this space. Given the substantial shortfall in supply, even partial success could yield considerable upside for UK alternative assets (real estate, infrastructure), with investors, the state and the wider economy all reaping the benefits.